The 3x Sales Pipeline Coverage Ratio Is Wrong

Some CROs / VPs of Sales (typically with lack of experience) tell their teams that to have 3x in the Pipeline (in terms of $ value) or 3x of the quota target / sales bookings goal.

But this is a mistake.

It’s not only a generalized way of looking at the Pipeline and it’s also dangerous and won’t help you.

What I recommend is that the Pipeline Coverage ratio will depend on the “% Win Rate” and the quality and current stage of open Opportunities.

Let’s do the Math.

Saying 3x here means that your Win Rate is 33% (1/3) – and that’s almost never the case.  You typically don’t get 33% of your pipeline as Won Customers.  If your Sales Process is designed well then you should typically win 15%-20% (I will explain why this is the way you want to design your Sales Process in a different article).

Instead of simply making your Pipeline 3x your quota, you should focus on maintaining Pipeline integrity and honing your sales process.

In fact, there are 5 major limitations of the Pipeline Coverage Ratio:

  1. It’s 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.
  2. It’s 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 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.
  3. It’s 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 rate – but the Pipeline Coverage Ratio treats all sizes of opportunities the same.
  4. It’s dependent on your sales process. Do you close deals when timing is an issue? Do you cohort your Pipeline by opportunity size? The answers to these questions affect the amount of coverage you need but are not considered for a 3x Pipeline Ratio.
  5. It’s an unreliable forecast. Many Sales Managers use Pipeline Coverage Ratio as a proxy for forecasting, but the truth is that it is inaccurate and lazy. Your forecast should be metrics-driven and take into account the specific opportunities in your Pipeline and the specific reps working them.

What else?  What are your thoughts on the erroneous use of 3x Pipe Coverage ratio when leading global sales teams?

 
 
 


Original is posted at Revenue-Inc.com: The 3x Sales Pipeline Coverage Ratio Is Wrong.