“I’m sorry, we missed the quarter. Big Company Deal didn’t close. If it had, we would absolutely have hit our target, but we just can’t make up the delta without it closing. Top Account Executive was so sure it would. They have such a great relationship with our champion.”
Questions start unfolding: Why didn’t we know this? Where are our other deals? How are there no other deals?
Well…we put too many eggs in one basket and were wedded to this one path to success. Sellers and leaders who felt they had a singular path to success found it difficult to vocalize risk in that deal early and often. And because the team didn’t know about that risk until too late, they weren’t building alternative courses of action via other deals. Now it’s too late and too artificial to make more deals materialize.
Ever see this happen?
There are cases where this outcome is inevitable. The team’s done all the work they possibly can to work pipeline coverage ratios, pull deals forward, source new deals, and it still came down to a deal or two. But, in many of those cases, the outcome is avoidable and the gap to success often falls in the practice of the game of ratios.
We know that not every customer we talk to can (or should) result in a closed won deal. The funnel is shaped as a funnel for a reason – at each stage, we’re qualifying deals so that we can be confident we’re only closing deals with customers whose needs align with how we can help and who will truly find value in what they purchased.
Sales teams look at stage-to-stage conversion rates (CRs) every week to see how they are progressing. But even at the last stage in a sales process just before Closed Won the conversion rate is never, ever 100% – even at the best companies with the highest stage-to-stage CRs, nothing is 100% until it's signed!
Yet, we still sometimes place our bets on specific deals closing, when rather, we want to match our approach to the funnel that drives our business: in other words, playing a game of ratios.
The game of ratios enables us to:
- Avoid single deal dependance (e.g. we will hit our number but only IF Big Company Deal closes)
- Build confidence, predictability and accuracy in our team or business-wide forecasts
- Empower and uplevel our sellers so that they are masters of their own forecasts or professional commits
Executing the game of ratios comes in two sequential parts: the theory and the practice. It seems to be more often in the practice and operationalization that teams stumble.
The Theory Behind The Game of Ratios
In the theory, and most businesses do this, we’re identifying what pipeline coverage is required in our business to be successful:
- What is our win rate today and averaged over the last 4 quarters?
- Based on that win rate, what pipeline coverage model do we need?
- What amount and percent of our closed won ARR over the prior 4 quarters came from pipeline that was created in that same quarter? What percent came from deals that were sitting in the pipe on day 1?
- How does that look different by segment, team or rep?
Here’s a sample scenario:
- Let’s say a team has a 25% win rate from Stage 1 to Closed Won. Let’s say the same team closed $1M in ARR in Q3.
- Of that $1M, $700k in closed won ARR came from deals that were already in the pipeline on day 1 of Q3, i.e. created in Q2 or earlier. $300k in closed won ARR came from deals that were created in Q3, i.e. in that same quarter.
- These patterns have been consistent for several quarters, and for the sake of our example, we will assume all reps average the same win rates (never true, but we’ll come back to that later).
In terms of the game of ratios theory for this business, we can now say:
- On this team, 70% of closed won ARR for a quarter comes from deals they have in the pipeline on day 1 of that quarter. And 30% from in-quarter pipeline build.
- At a 25% win rate, they need a minimum of 4x pipeline coverage, but to de-risk the outcome, 5x would be even better.
Putting The Game of Ratios into Practice
This is a powerful and necessary insight. But all of this is useless unless we put it into practice, down to the rep level. And this step is where many of us get stuck.
Let’s assume the same team is ready to plan for a future quarter, only now their target is $1.2M. The team has $1.5M of quota in the field across 6 reps ($250k/rep). They can now apply their theory to practical planning:
- Of that $1.2M the team needs to win, $840k (70%) of it will come from deals in pipeline on day 1 of the quarter and $360k will come from pipeline created in quarter.
- Because a 4-5x pipeline coverage ratio is the recipe for success in this business, the team leader knows her team needs to have $3.36M-$4.2M (4-5x $840k) worth of deals in Stage 1 or later in pipeline on DAY ONE of this quarter. (Yes, we need to nuance the model to account for deal stages, but we’ll stick with a more simplistic version for this blog…)
- She also knows she needs to see $1.4M-$1.8M in total pipeline creation from all sources over the course of the quarter.
Next, she can use these practical guideposts to adapt how she operates with her team, her peers, and her leaders:
Coaching her team
- The team leader can now coach each rep. She can give them very quantitative goal posts, because she knows that assuming they hit their target, ~$175k in closed won ARR will likely come from winning deals they have in their pipeline on day 1, and $75K will come from winning deals created in quarter.
- She can also guide them that to play the game of ratios, and avoid hopecasting or singular deal dependencies, each AE should have $700k-$875k in their pipeline on day 1 of the quarter (4-5x $175K).
- Now, she can coach them weekly about their pacing. If they are on track for a $600k pipeline on day 1 of a quarter, and they see this coming with 4 weeks still to go in the current quarter, she’s now equipped to galvanize her sellers around an expectation of a minimum of $25k in pipeline build/week to hit $700k on day 1.
- She’s then employing this continual future-looking technique to build preparedness and planning for future quarters. Note: In our simply illustrative model, we’re assuming reps are all performing relatively equally. In reality, you’d nuance this data down to rep level wins rates and trends.
Work with her peers and leaders
- This ratios game not only equips the sellers to diversify their paths to success, but it also lets this team leader work laterally to achieve her goals.
- Now, she’s talking to her peers and leaders and rallying them around the key question: does the collective pipeline creation plan across all channels, e.g. Marketing, Partner, Sales, and Customer sSuccess get them to $1.4-$1.8M of pipeline build (the required in quarter pipeline build for this quarter)?
- Where are the biggest risks? What are the biggest opportunities to continue to enable ratio management rather than single deal dependencies?
A lot of businesses think this process is already happening because they made a plan! The plan and forecast was detailed. It had everything covered for each segment, team, channel, etc. Therefore, the operationalization must be occurring.
It’s often not. But how do you know where you fall?
Here’s a simple barometer. Next time your sellers have a territory review or QBR for an upcoming quarter, ask yourself if you hear these things:
- The data in the formula above (exactly how much pipeline they have built for the next quarter already, compared to how much they need on day 1, factoring in both out and in quarter pipeline, build trends and pipeline coverage ratios) AND
- Their plan to cover the delta between what they need and what they have in pipeline by day 1 of the quarter AND
- Their top deals wherein they have multiple strong deals and a path to target achievement by closing a portion of them
If you do, then it’s likely you’ve not only done the game of ratios in theory but also in practice! Congratulations – share your success! Evangelize the approach!
If your sellers are not talking about this (and many are not coached to do so) then it’s likely this process has not been applied fully in practice, and that’s an opportunity for the leaders to bridge theory to practice.
Because, back to our opening, this type of foresight is what gives the rep, the team, the leaders, and the business, the opportunity to act proactively and to continue managing a game of ratios through the end of the quarter.
Then, the EOQ conversation starts to look a lot different. Instead of the hung heads because that big deal didn’t close, it looks like this, and much earlier in the quarter:
“Big Company Deal fell through. But we saw that risk coming, Mr. AE told us early, and we always knew that was one of several paths to our goal. Team, let’s rally: now we need to close at least 1 of these 3 Medium Company Deals and 2 Small Company Deals to get our goal. We still have runway left – let’s go do it!”
And yes, in the presence of a goal, and an achievable path to that goal, the team will rally.