Since many startups are far too optimistic when it comes to their sales assumptions and since most startups fail due to a lack of sales (according to a St. Thomas University entrepreneurship professor’s research), it is critical that you make good sales assumptions for your business plan. My recommendation is to think of your sales process as a pipeline.
A typical pipeline might look like the diagram below, where the Universe is the total addressable market and the Targets are the segment of the market you are targeting to win (perhaps a geographic subset or a demographic subset of the entire Universe.) The Suspects are those Targets that have the highest likelihood of turning into customers based upon their response to your marketing and the Prospects are those that have been qualified in some way (fit, timing, pricing, etc.). The Proposals are those Prospects that advance to the stage of actually getting a proposal and the Wins are those Proposals that became customers.
The three critical measures of the sales pipeline are as follows:
- Win rate: The percentage of potential customers that pass from one stage to the next stage. Think of this as the pipeline friction. For example, if you only win half of your proposals, then your win rate is 50%. You will want to measure win rates for each stage to get a sense for the overall rates.
- Sales cycle time: The rate at which wins can be produced from one end to the other. Think of this as the pipeline velocity. For example, if it normally takes two months on average to turn a Prospect into a Proposal and one additional month to turn a Proposal into a Win, then the cycle time from Prospect to Win is three months. You will want to measure cycle time for each stage to get a sense for the overall cycle time from beginning to end.
- Sales plan: The number of wins needed to meet plan. Think of this as the pipeline flow rate. How many leads need to be pumped into the front end of the pipeline in order to get the needed number of wins out of the back end of the pipeline? If your plan is 10 wins each month and your win rate is 50%, then you need to make 20 proposals per month and if only 25% of your Prospects ever progress to the Proposal stage, then you need to add 80 Prospects each month.
Overall, it should become clear that based upon the example above that the 80 Prospects needed in order to win the 10 customers, needed to be generated three months in advance. Therefore, if the plan for January is to win 10 customers, then the sales and marketing activity has to be ramped up so that the 80 Prospects are added in September so that there is sufficient time (October, November and December) for the leads to work their way through the system. (This obviously means that your financial model should reflect those marketing expenses ahead of experiencing any of the associated sales revenue.)
What happens if you don’t pay enough attention to this? If you don’t get a good handle on your sales pipeline, it will be impossible to do a good job of sales forecasting. And if you can’t do a good job of sales forecasting, it will very difficult to do any operational planning, especially around capacity.
The bottom line is that the sales forecast has to drive the growth of the business. If you are investing in capability and production and distribution and customer service, etc. at a rate different than your sales pipeline is bringing customers in, that’s a real problem.