What a Pipeline Coverage Target of >3x Says To Me

I’m working with a lot of different companies these days and one of the perennial topics is pipeline.

One pattern I’m seeing is CROs increasingly saying that they need more than the proverbial 3x pipeline coverage ratio to hit their numbers [2] [3].  I’m hearing 3.5x, 4x, or even 5x.  Heck — and I’m not exaggerating here — I even met one company that said they needed 100x.  Proof that once you start down the >3x slippery slope that you can slide all the way into patent absurdity.

Here’s what I think when a company tells me they need >3x pipeline coverage [4]:

  • The pipeline isn’t scrubbed.  If you can’t convert 33% of your week 3 pipeline, you likely have a pipeline that’s full of junk opportunities (oppties). Rough math, if 1/3rd slips or derails [5] [6] and you go 50-50 on the remaining 2/3rds, you convert 33%.
  • You lose too much.  If you need 5x pipeline coverage because you convert only 20% of it, maybe the problem isn’t lack of pipeline but lack of winning [7].  Perhaps you are better off investing in sales training, improved messaging, win/loss research, and competitive analysis than simply generating more pipeline, only to have it leak out of the funnel.
  • The pipeline is of low quality.  If the pipeline is scrubbed and your deal execution is good, then perhaps the problem is the quality of pipeline itself.  Maybe you’re better off rethinking your ideal customer profile and/or better targeting your marketing programs than simply generating more bad pipeline [8].
  • Sales is more powerful than marketing.  By (usually arbitrarily) setting an unusually high bar on required coverage, sales tees up lack-of-pipeline as an excuse for missing numbers.  Since marketing is commonly the majority pipeline source, this often puts the problem squarely on the back of marketing.
  • There’s no nurture program.  Particularly when you’re looking at annual pipeline (which I generally don’t recommend), if you’re looking three or four quarters out, you’ll often find “fake opportunities” that aren’t actually sales opportunities, but are really just attractive prospects who said they might start an evaluation later.  Are these valid sales opportunities?  No.  Should they be in the pipeline?  No.  Do they warrant special treatment?  Yes.   That should ideally be accomplished by a sophisticated nurture program. But lacking that, reps can and should nurture accounts.  But they shouldn’t use the opportunity management system to do so; it creates “rolling hairballs” in the pipeline.
  • Salesreps are squatting.  The less altruistic interpretation of fake long-term oppties is squatting.  In this case, a rep does not create a fake Q+3 opportunity as a self-reminder to nurture, but instead to stake a claim on the account to protect against its loss in a territory reorganization [9].   In reality, this is simply a sub-case of the first bullet (the pipeline isn’t scrubbed), but I break it out both to highlight it as a frequent problem and to emphasize that pipeline scrubbing shouldn’t just mean this- and next-quarter pipeline, but all-quarter pipeline as well [10].

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Notes

[1] e.g., from marketing, sales, SDRs, alliances.  I haven’t yet blogged on this, and I really need to.  It’s on the list!

[2] Pipeline coverage is ARR pipeline divided by the new ARR target.  For example, if your new ARR target for a given quarter is $3,000K and you have $9,000K in that-quarter pipeline covering it, then you have a 3x pipeline coverage ratio.  My primary coverage metric is snapshotted in week 3, so week 3 pipeline coverage of 3x implies a 33% week three pipeline conversion rate.

[3] Note that it’s often useful to segment pipeline coverage.  For example, new logo pipeline tends to convert at a lower rate (and require higher coverage) than expansion pipeline which often converts at a rate near or even over 100% (as the reps sometimes don’t enter the oppties until the close date — an atrocious habit!)  So when you’re looking at aggregate pipeline coverage, as I often do, you must remember that it works best when the mix of pipeline by segment and the conversion rate of each segment is relatively stable.  The more that’s not true, the more you must do segmented pipeline analysis.

[4] See note 2.  Note also the ambiguity in simply saying “pipeline coverage” as I’m not sure when you snapshotted it (it’s constantly changing) or what time period it’s covering.  Hence, my tendency is to say “week 3 current-quarter pipeline coverage” in order to be precise.  In this case, I’m being a little vague on purpose because that’s how most folks express it to me.

[5] In my parlance, slip means the close date changes and derail means the project was cancelled (or delayed outside your valid opportunity timeframe).  In a win, we win; in a loss, someone else wins; in a derail, no one wins.  Note that — pet peeve alert — not making the short list is not a derail, but a loss to as-yet-known (so don’t require losses to fill in a single competitor and ensure missed-short-list is a possible lost-to selection).

[6] Where sales management should be scrubbing the close date as well as other fields like stage, forecast category, and value.

[7] To paraphrase James Mason in The Verdict, salesreps “aren’t paid to do their best, they’re paid to win.”  Not just to have a 33% odds of winning a deal with a three-vendor short list.  If we’re really good we’re winning half or more of those.

[8] The nuance here is that sales did accept the pipeline so it’s presumably objectively always above some quality standard.  The reality is that pipeline acceptance bar is not fixed but floating and the more / better quality oppties a rep has the higher the acceptance bar.  And conversely:  even junk oppties look great to a starving rep who’s being flogged by their manager to increase their pipeline.  This is one reason why clear written definitions are so important:  the bar will always float around somewhat, but you can get some control with clear definitions.

[9] In such cases, companies will often “grandfather” the oppty into the rep’s new territory even if it ordinarily would not have been included.

[10] Which it all too often doesn’t.

5 responses to “What a Pipeline Coverage Target of >3x Says To Me

  1. What pipeline coverage ratio do you feel is appropriate for future quarters? For example, what coverage would you expect for Q+1, Q+2, R4Q (rolling four quarters)?

    • Well, it changes every week and we want to end the quarter with it at 3, so I’d generally like to see it converging to 3.0. Note that a lot of that convergence happens at the end of the quarter (last 2 weeks) as deals tend to slip then. One reason why I think people should examine their historical patterns and get marketing to forecast next-quarter day-one pipeline. I generally don’t look at rolling 4 quarters (see here).

  2. Thanks Dave, I appreciate it. Does your opinion on that change if the sales cycle for the business is greater than one quarter? 6 months, 12 months, etc. P.s. please don’t stop writing. I take a lot away from what you write.

    • Thanks Nick. Short answer is no because pipeline is always for a period and “quarterly pipeline” is pipeline defined as having a “close date” within the current quarter. So in some sense, I don’t care if it’s 2 days, 2 weeks, 2 months, or 2 quarters old, if sales is saying it’s got a close date in this month (and sales mgmt scrubs the pipe to ensure that’s reasonably accurate), then well, it doesn’t matter.

  3. I loved the point about segmenting pipeline coverage and about sales reps not updating the expansion pipeline as meticulously as the new logo pipeline – this is so true! I know what I’m going to push for as of Monday in my sales team…

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