GTM Metric #1: Will I make the quarter? Do we have enough pipeline coverage?
At every board meeting, we wonder — is the company going to make the quarter?
To answer that question at every board meeting, the VP Sales reports the obligatory pipeline coverage ratio to help parse guidance for the quarter. We then wonder if the pipeline coverage ratio is sufficient. We normally hear that 3x is a good rule of thumb. But, is 3x the right number for us?
What is the Pipeline Coverage Formula?
The pipeline coverage ratio is shown above, assuming flat sequential quarterly growth. For example, if Ave Sales Days is 90 and Close Rate is 20%, then the desired pipeline coverage is 5x.
After discussing the formula with others, one question immediately comes up — does the formula still work if companies define pipeline differently (some after SQL, opportunity, etc). The nice attribute of the formula is that the formula adjusts for the pipeline definition — using a later stage definition reduces the ave sales days and improves the close rate, but lowers the overall pipeline number.
The desired (necessary?) pipeline coverage ratio ranges considerably based on three variables:
- Average days in pipeline. Pipeline consists of deals from Sales Qualified Lead to near Wins. For example, if the average days increases from 90 days to 180 days, the company will need to double the pipeline coverage ratio to hit the same sales target — assuming no change in the other two variables. With sales cycles of 180 days, the company needs to build pipeline for next quarter too.
- Average close rate from SQL to Win. Similarly, doubling the pipeline close rate reduces the desired pipeline coverage ratio in half.
- Desired sequential quarter growth rate. For simplicity, let’s assume no sequential quarterly growth and consistent pipeline generation — just be flat.
How to visualize the formula?
The chart below visualizes the desired pipeline coverage ratio for the first two variables: pipeline days ranging from 30 days to 270 days, and pipeline close rate ranging from 20% to 40% with 30% being “normal.” As background, Aberdeen reported an average SQL to win business close rate of 29.0% and best in class close rate at 45%.
The same analysis is shown in the table below.
The desired pipeline coverage ratio ranges from 0.83x to 15.0x!
A pipeline coverage ratio of 3x works with a 33% close rate for 90 day deals. Coincidentally, 33% close rate for 90 day deals are fairly common. That explains the rule of thumb.
But, the rule of thumb obviously does not apply in all scenarios. Companies should use the pipeline coverage formula with their own numbers.