There is perhaps a no more dangerous and unfounded sales management myth than the 3X pipeline rule. I’ve been on quota for more than 120 quarters. That’s a lot. I have made a lot of quarters, I have missed some quarters, and yes, I have had some very large misses. Every quarter that I have missed can be traced back to one fundamental issue: I did not have enough pipeline. Neither I, nor my team, had prospected enough, we had not worked closely enough with marketing to generate demand. I have blamed missed quarters on slipped deals, poor rep execution, or just plain bad luck.
We all understand that closing any one deal (or even a group of deals) is outside our direct control. When we miss a quarter, the fault is not that deals are lost. The fault lies in the fact that we did not have enough deals in pipe to backfill the ones that we lost. Yet, reps and managers relentlessly live by the 3X rule and focus on deals in the later stage of pipeline rather than on getting more deals into pipeline.
In my view, the 3X pipeline myth is the most dangerous of all sales myths for two reasons. First, it values each dollar of pipeline as an equal dollar, and second, it is too static.
First, how stupid is it that we treat all pipeline dollars the same? We know that deals that are in later stages of the sales cycle are more valuable than deals at the beginning of the sales cycle. We know that deals in later stages of the forecast are more valuable than those in initial stages. Most sales organizations do some sophisticated pipeline calculations to try to account for this, but in the end, they often underestimate how much pipeline is really needed. Why? There is a lot of variability in each forecast stage. Deals for existing customers close faster than those for new customers. Deals for more established products tend to close at higher rates than those for newly introduced products. Domestic deals often act differently than international deals, etc. Weighted pipeline methodologies try to accommodate for these differences, and are generally more accurate than unweighted pipelines. But, even weighted pipelines are unlikely to tell you if you have enough pipe to make the quarter.
Secondly, the 3X pipeline rule isn’t dynamic. It can give you an estimate of how much pipeline you need on day one of the quarter, but it can’t tell you what you need on day 15, or day 30, or day 45. The 3X pipeline rule doesn’t consider the pace at which we need to build pipeline, or the value of “run rate” deals. So, even though the 3X pipeline rule is among the most commonly used in sales, it can’t determine how much pipeline we actually need. This is ironic because the pipeline number is the most important piece of data we need to ensure our success.
Better data science gives us visibility and insight into the true value of our pipeline. Knowing the true value gives us more control and increases our ability to make changes that positively affect the quarter. Data science also reveals whether we are building enough new pipeline, and whether our pipeline is developing at a pace that is sufficient to meet the number.
Every day on Wall-Street, quantification analysts, or “quants”, use algorithms to determine the value of a large groups of stocks. They do this in a larger and more unpredictable environment than we in sales must contend with. Yet, as sales professionals, we’re not going to tell our bosses that accurately valuing pipeline, determining development pacing, and building new pipeline is too complex. Instead, we use a rule that grade school kids would reject–the 3X rule.
We must do better.