Many PE portfolio company CROs (and Sales Leaders across the sales organization) track their Sales Pipeline Coverage ratio as a KPI internally and use it for reporting to the Board of Directors. They consider 3x to be a good coverage ratio.
These CROs also set a goal for their global sales teams (quota-carrying reps) to maintain the 3x (or 4x) as Sales Pipeline Coverage to “make the number” (i.e. below I am referring to the $ amount of open Opportunities in the Sales Pipeline as the Pipeline Ratio – a 3x ratio of your pipeline to your total bookings target, or quota targets for any quota-carrying reps on the team).
Quick Note: Tangentially, see the Pipeline Coverage* footnote below about the $ of Opps vs. # of Opps and why this distinction is very important for Tier-1 CROs in PE-backed SaaS. Also, the 3x is a classic rule of thumb but it is also an over-simplified (and, honestly, a misleading) approach to managing your company’s Sales Pipeline.**
It is important to understand that Pipeline Management and pipeline composition will depend on the % Win Rate, and the quality of active open Opportunities (i.e. your Pipeline Integrity) while ensuring that all the Opportunities are in the right stage with the right expected close dates (i.e. when your team is following an optimized and well-defined Sales Process).
Let’s do the math – having 3x Pipeline Coverage means that your Win Rate is 33% (1/3) – and that’s almost never the case. If your Sales Process is well-engineered, you typically won’t win 33% of your Opportunities. If your Sales Process is designed well then it will be intentionally engineered to produce a Win Rate of 15%-20% (note: I discuss the reason behind this in a different article).
Instead of simply making your reps have a Pipeline that is 3x of their quota, the Sales Leader should focus on maintaining Pipeline Hygiene & Pipeline Integrity with an optimized Sales Process.
In fact, there are 5 key limitations of the Pipeline Coverage Ratio:
- Close date agnostic – even if you add 100 new Opportunities to your Pipeline, you won’t be able to close them immediately, so you need to adjust your coverage based on the close date for these Opportunities, not just their presence in the Pipeline.
- Stage agnostic – in the eyes of the Pipeline Coverage Ratio, all Opportunities have the same likelihood of closing. Of course, this isn’t the case – early-stage/upstream Opportunities are significantly less likely to close than their late-stage counterparts. Your Pipeline coverage should account for this, but a rigid 3x coverage ratio does not.
- Deal size agnostic – very large deals are different from small deals – they can skew your Pipeline value up and they typically convert at a lower Win Rate – but the Pipeline Coverage Ratio treats all sizes of opportunities the same.
- Dependent on your company’s unique Sales Process (plus: how your Sales Process is engineered, as well as effectively applied by your global sales team). Does the sales team have a clear “exit criteria” from stage to stage and know the inspectable thresholds when they can move an Opportunity from one sales stage to the next (i.e. many sales teams don’t have a good Sales Process and don’t even follow it – thus much of it is based on gut feel, and this makes the Pipeline Coverage ratio ineffective and mostly useless). Also, when does your process require the AEs to set to “close-lost” their opportunities – do you close deals when your solution is not a priority when your champion doesn’t commit to bringing in the Economic Buyer, when there are no defined next steps or when the deal has been stuck in the pipeline for longer than your typical Win Cycle? Do you cohort the Pipeline by Opportunity sizes (i.e. your Mid-Market deals vs. smaller Enterprise Deals vs. Strategic Enterprise Deals? The answers to these and a few other questions will affect the amount of coverage you need and yet these questions are not considered by CROs or PE Boards when a 3x Pipeline Coverage Ratio is tracked or discussed.
- Pipeline Coverage is not reliable for Sales Forecasting accuracy – many sales leaders use the 3x Pipeline Coverage Ratio as a proxy for forecasting. But this is inaccurate, ineffective and complacent. The forecast should be approached thoughtfully and analytically and, when it is rolled up, every rep’s and front-line or regional sales manager’s forecast should take into account the specific Opportunities in the Pipeline and the context from each specific reps working them.
What about using a “Weighted Pipeline” approach?
Using a Weighted Pipeline method is also very limited and will likely be misleading & inaccurate.
There are similar and additional reasons for that:
- Many of the limitations above – e.g. “close date agnostic” – if you are weighing open and active opportunities in the pipeline with an expected close date beyond your current sales cycle then it skews your weighted result and will mislead the CEO, the CRO, and the Board of Directors. Another example is “deal size agnostic” – e.g. larger deal sizes will likely have lower weights or % Win Rate and this affect the result of your Weighted Pipeline.
- Even a well-defined, well-engineered and optimized Sales Process might not be used effectively and consistently by your sales team.
- Your stage weights (% Win Rates from any stage to Closed-Won) were likely set manually and do not accurately represent nor measured your actual stage % Win Rates during your sales cycle, etc.
So what should SaaS CROs do?
Here are a few tips (and how CROs should report Pipeline Coverage to the Board):
- First of all, you must engineer (or optimize) your Sales Process so it is truly effective and followed carefully by your entire sales team. If that is the case then a Pipeline Coverage Ratio (when used correctly) is perfectly fine to track and report on.
- Secondly, ensure clarity in tracking and reporting. For your Board of Directors meetings, report both the # of Opportunities (the number or quantity of units of the Opps in the pipeline) as well as the $ amount of the Opportunities. Most Sales execs incorrectly report Pipeline Coverage based only on $ amounts but this can be very misleading for many reasons (i.e. one example is the old adage “it ain’t over till it’s over” – the expected $ of the deal is not always the final $ACV or $ booked amount when the deal is won). Showing both the # and the $ is better – I always recommend to start with the # of Opps first as that normalizes the reporting.
- Thirdly, always discern and report clearly the following – “Pipeline Coverage – New Logos” vs. “Pipeline Coverage – Expansion Sales” (cross-sell & upsell). Also, CROs at many PE-backed SaaS platform companies should also report based on different acquired add-ons (and needless to say, assess the differences in the Sales Process that will affect Pipeline Coverage differently).
- Then, the CRO/Head of Sales must understand and discern between Pipeline and Forecasting. For example, 1.5x – 2x Forecast Coverage might be fine while a 5x Pipeline Coverage is necessary (it depends on your Sales Process and other variables).
- Also, only report on the Opportunities in the pipeline that are within a sales cycle (within a month or a quarter, depending on the reporting period) – only these must be included for the coverage ratio to make sense.
- The CRO should also track the Pipeline Coverage for the next sales cycle (or quarter) by analyzing only those Opportunities in the pipeline that have an expected close date (i.e. and make sure those are inspectable and follow tight Sales Process guidelines) of the next quarter.
- Finally, to make it meaningful, the CRO must add context to the summary & high-level Pipeline Coverage ratio with these 3 critical Pipeline reports to make it meaningful: a) Pipeline Inflow Trend (Opp Creation), b) Pipeline History Trend (Open/Active Opps) and both a/b must be categorized by New Logos vs. Expansions; and c) Pipeline Bridge (to show how and for what reasons the pipeline changed during the sales cycle).
What else? What are your thoughts on the use of the 3x Pipe Coverage ratio when leading global sales teams?
CROs / Sales Leaders should avoid using the 3x Pipeline Coverage ratio without understanding the context and without analyzing the Sales Funnel at a deeper level – otherwise, it’s ineffective and it increases the risk of missing your number.
* Sales Pipeline in the Pipeline Coverage calculation is typically used as the $ amount of all of the Opportunities (in this case, not the # count of Opportunities). An Opportunity is a live and active deal-in-the-making that will go through various gated stages before its closed-won (or closed-lost). My typical criteria for when an Opportunity is well-qualified and can be created in the CRM is “I.F.” – Interest + Fit (in some cases it can be an even tighter criteria: CH.I.F from the
CHAMP – PE SaaS Enterprise Sales System” – the SaaS AE first has to qualify for 3 key factors before creating an Opportunity: Challenges + Interest + Fit).
** Also, note that the “3x Pipeline Coverage” approach is misleading to the Sales Leader and the front-line sales managers – for example, this method can hide issues such as low-probability aging Opportunities that keep slipping while being rolled by AEs from quarter to quarter in hopes of eventually winning them later (which typically fails). It can also mask unqualified Opportunities in the early sales stages making these upstream stages just placeholders for low-quality landfills which exaggerates and distorts your pipeline coverage ratio while making your forecasts inaccurate (and thus complicating sales management across the organization).