This is a companion piece to my previous post about ways to improve your Forecasting accuracy. When meeting with business leaders, I also like to ask the question: “ “What is your pipeline coverage for this and next quarter?” I find this to be a key metric to track, but not everyone knows what the current values are and in some cases may not even know what the term means.
Pipeline coverage is a generally reliable indicator of the health of the company and how likely it is to succeed against current and future goals. Pipeline coverage means the amount of standing (open) deals you have in the pipeline that is in excess of your Quota or Plan. It’s nearly impossible to close every single deal you have in any given time frame, so excess pipeline is needed in order to achieve your goals.
Therefore I am HUGE believer in setting Pipeline Coverage Goals for future quarters & building business plans based on making sure we have funding in the right places to generate the needed pipeline.
Pipeline coverage is generally expressed as a multiplier, like: We have 3X pipeline coverage for this quarter. So if your quota for Q4 is $1MM and you have $3MM in pipeline set to close in Q4 you have three times the pipeline of your quota. What I love about this metric is it can be looked at all levels of the business, from top line all the way down to the per rep level.
In the current economic environment You likely need more pipeline coverage than you did in prior quarters and your forecasts should account for this reality. The amount of pipeline coverage you need is directly related to your overall win rate & how much revenue you open and close in the time period with high velocity aka short sales cycles.
- If you have any portion of your business that is of higher velocity, it means you will open and close a deal in a shorter period of time. If you can get a good handle on forecasting this revenue you can then subtract it from the overall quota and then calculate your true Pipeline Coverage needed.
- Win rate is the % of deals you win vs lose. If we win 25 out of 100 deals we have a 25% win rate. Another way to look at it would be; we need 4X deals to get to 100 closed deals.
If I want to know what coverage goal to set I can take my Quota Goal, subtract anticipated in period bookings and then divide that number by win rate. Here is the the basic formula
Pipeline Coverage Needed = (ARR Goal – Projected In Quarter Bookings) / Win Rate
So if our Quota Goal for Q4 is $1MM and we expect $200K from in quarter Bookings we need to start Q4 with coverage for $800K. If our win rate is 25% we need 4 times $800K. Meaning we need to start Q4 with $3.2MM in open pipeline set to close in Q4.
Here is an example of a rep by rep comparison of where we should be on coverage vs where we are at currently (In this example Win Rate is 33%).
If this was your entire AE team then you can see:
- Overall your company ARR goal is at risk of succeeding because your team collectively has less coverage than you may need. Standing pipeline is ~ $2.4MM vs goal of ~ $2.7MM.
- AE 1, AE 2, AE 3 and AE 4 are in great shape to achieve quota
- AE 5 and AE 6 have some pipeline building to do
- AE 7 is in for a rough quarter
The sooner you can see these trends the more time you have to address them. If Isaw this data 6 weeks before Q4 starts, we can work with individuals to build pipeline. However if I see this data 1 week before Q4 starts, I know we will have a tougher time hitting the goal and will need to try to pull deals forward, have a higher contribution form In quarter Bookings OR have a higher win rate to succeed. The good news is data is power and then it helps you decide what levers to pull at that time.
I encourage folks at whatever level in the business to do these calculations and see where they are at! As always hit me up with any questions you have!
* You can learn more about me on my Bio or my Linkedin page *
** If you see an acronym or word anywhere on the site that you haven’t seen before, I might have posted an explanation on my glossary of terms. If not, tell me and I’ll add it!*
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