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How sales cycle expansion hurts revenue

sales cycle

We all know that sales cycles lengthening isn't a good thing, however the real dynamics at play can often be misunderstood, and the signs of it happening missed. The opposite of sales cycle contraction (which can be dangerous also), the expansion of sales cycles is something that can have a dramatic impact on revenue.

It's worth pointing out that the below takes a reasonably simplified view of deal metrics, assuming that the average is seen by the majority of deals, with a tight distribution. Whilst there's always outliers, you can typically find that with enough volume you can use averages fairly reliably to understand & predict what is going on.

What is happening when sales cycles get longer?

At it's core, sales cycles are simply deals taking longer to close than they did previously, and this can be due to many different factors that are totally out of your control:

  • Slow down in spending

  • Seasonality

  • Increased competition

And whilst these are things that are outside of your control, there are also factors that are inside it that can in turn cause changes to sales cycles:

  • Changes to your product (and how it's bought)

  • Changes to the effectiveness of your sales teams

  • Changes to who you're targeting (i.e. moving upmarket)

There are lots of other factors that can also affect it, but of the most self inflicted that I hear leaders tell me about is the move upmarket into enterprise, which as businesses try to become more profitable and efficient becomes more attractive, despite its risks and costs - We'll revisit this shortly.

The maths of longer sales cycles

If we are too look at an example in its most simplistic form, we can look at revenue on a monthly basis. Revenue was supposed to be landing into each month equal to the target, however the sales cycle has extended an extra month, pushing that revenue out into the following.

Without a contraction of sales cycle in later months, it can be assumed that every month is now pushed backwards, essentially offsetting the planned revenue in each month by a month.

sales cycle model

Not only does this leave a lower revenue figure in each month compared to the target, but where the contraction first happens across the pipeline businesses are left with a drought. This drought is not only dangerous because of the obvious lack of revenue, but as the drought ends it can lead to a false sense of safety as it feels like things are "speeding back up".

In reality the end of the drought is the just first half of it stabilising, and the first point at which you can really get a measure of the new sales cycle length - for the entire duration that sales are not concluding, they are extending by a day each day, and so could theoretically be infinite.

Only once you see the end of the drought can you be sure that you've found the end of the sales cycle, and with enough deals closed you can start to build confidence in the new sales cycle length.

Contraction can be dangerous

So now you're seeing the fluctuation of sales cycles as either speeding up so slowing down until they reach a steady state, it's worth highlighting what happens as sales speeds up.

When sales speeds up, you can get an overlap of the older slower sales cycles and the newer faster deals, giving the impression of a higher run rate that you're actually able to sustain due to effectively the business end of two pipelines sitting on top of each other. Until this pipeline is washed through, it can give the impression of a higher run rate of revenue that will actually be sustained.

Theoretically, you could have your slower pipeline generated in months 1-3 of a year and your faster pipeline in months 4-6, with it all materialising in Q3 across months 7-9. This would mean that based on the new sales cycle, you would have only month 7-9 of lead generating efforts close in Q4, whereas before you had both Q1 & Q2 close in Q3.

What this does is it can skew thinking, especially when it comes to targets and planning, and can effectively lull businesses into a false sense of progress - Whilst there is good progress, it's just not quite as good as the numbers might make out.

How to avoid falling in the trap

Avoiding the dangers simply comes down to how you use data - If you're too eager to use the positive progress without caveat, or you cherry pick the numbers that you want to present to the board and investors, you run the risk of being encouraged to write checks you can cash. The absolute best way to keep clear is to ensure that you always have a bottom up model of revenue from lead generation, as opposed to a top down view that then simply forecasts a future trend line.

By bottom up modelling from lead generation, a quickening sales cycle can show greater immediate revenue, but can keep you grounded to what is really driving it - Opportunity.

This means that as you're committing to greater revenue goals, your expectations are attached more firmly to pipeline creation, rather than continuations of current run rate.

How do you get started?

A good starting point is with a model, and luckily we have a template to get you started, simply download it and get filling in your data.


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