Volatility is my favorite way of looking at funnel metrics over time. It’s an immediate way to identity where your funnel is predictable and where you have blockage points. Volatility is easy to see. Plot any metric you want over time — conversion rates, deal velocity by campaign, size of deals by industry, or volume by rep.
Measuring volatility is a great way to see how new processes are improving your funnel. Moving from a lead-based model to an Account Based Marketing and Account Based Everything model is a great time to take stock of your metrics and evaluate how your new ABM/ABE strategy is improving the quality of your deal flow.
There are four types of of volatility to look for:
- High volatility
- Decreasing volatility
- Low volatility
True volatility represents chaos in your funnel: imagine this chart is about the average deal size for Closed Won opportunities over time — with such wild swings in deal size, you’d have a challenge predicting how many deals you need to hit a future bookings target.
The same could be true for conversion rates by opportunity stage. If you have a volatile stage, you’re not going to be able to rely on it for your forecast. Volatility is telling you there’s something you need to solve.
Volatility tells a story
There are three possible reasons for volatility: new segments are emerging in your funnel, there’s seasonality to your business, or there’s a real problem in your funnel.
Identifying where your funnel has a blockage point is imperative to optimizing your operations. When you see a volatile metric, your first step is to rule out if new segments or seasonality are the cause. If neither are the cause, drill in to figure out the problem. Below are some ways to look at the data to see what you’re dealing with.
1. New segments are emerging in your funnel
Volatility can tell you when your business has forked and you need to think about it differently. This requires you to break out each data point, such as plotting Closed Won opportunities by deal size. Box plots are a great tool that can help you visualize segments easily.
Imagine the illustration below is about price point — low MRR on the left, high MRR on the right. You can see a few different stories:
You have distinct segments.
You can see distinct low-MRR and high-MRR segments, with a big gap between them. Your price point looks volatile because it oscillates between these two extremes, but really you have two main prices. This could be an SMB and Enterprise offering, a split by industry, or even approaches in discounting. You’ll need to explore the data to determine what causes the segmentation.
You have a niche.
This is great! You’re unlikely to see volatility unless there is a real problem, like the niche moves every month. In our pricing example, a niche could be a firmly mid-market deal.
You have no pattern.
Here it looks like the Sales team is throwing price against the wall to see what sticks. You likely have a problem in your funnel.
You’re beyond the known range.
Imagine we’re looking at this for total deal age: what happens if an open opportunity is older than all previous Closed Won deals? Sure, it could be anomaly, but it’s probably just clogging your pipeline.
2. There’s seasonality to your business
Volatility can tell you when there is seasonality to your business. An example of seasonality is EdTech where sales are driven by the school year budget cycle. But seasonality can be more subtle and have a huge impact on your growth.
The best way to identify seasonality is a year-over-year comparison to look for the same peaks and valleys. Here are a few examples:
- Does your deal velocity change based on the time of year? This is important for building a workback from bookings targets to marketing requirements.
- Does lead or opportunity volume change based on time of year? This is important for campaign planning.
Combine velocity and volume metrics and your team can build plans that ensure you have coverage to hit your targets.
3. There’s a problem in your funnel
Image your conversion rates for a specific deal stage vary wildly month over month. How do you know what the root cause is?
Here, you can slice-and-dice the data to determine if the problem is global or local. Global problems will show up across all filters, like all reps have a problem in this stage, or all campaign sources create inconsistent lead quality. This could mean you need to work on your ICP and messaging.
A local problem is confined, like when a specific rep is floundering, or a specific campaign channel is bringing in tire kickers. These can be easier to solve, the rep could use training and the budget for that campaign channel can be reutilized.
There are a multitude of factors that influence your funnel, and using volatility helps identify where the problem exists. More than that, you can come up with strategies to close the gap. David Skok’s excellent SaaStr presentation covers how break down your funnel into micro funnels to deeper analysis.
As you identify gaps in your funnel and begin to solve them, you can start measuring for early signs of predictability. Your goal is to get the wild swings under control, and once that happens you can focus on moving performance consistently up. Measuring how volatility changes tells you whether your new efforts are making an impact.
Creating a predictable funnel
Predictable revenue requires you know the patterns throughout your funnel mechanics. On top of your core ABM metrics, measuring key metrics like average deal size, opportunity volume, deal velocity, and conversion rates are core to this.
Achieving stability in one or two metrics enables you to focus on improving the rest of your funnel. Achieving stability across all four metrics gives you the opportunity to scale your business faster.
Volatility will help you prioritize and focus your Sales and Marketing efforts by knowing where your opportunities for impact are, especially when taking an account based approach.
And, as G.I. Joe taught us in the 80s, knowing is half the battle.