Pipeline Coverage

Pipeline coverage is one of the key metrics you should be looking at in your new business (and ideally expansion) funnels. ? It will align your sales and marketing, drive rapid improvement in your funnel and improve forecast accuracy.

This article will outline the power of pipeline coverage and how to leverage it. ? Operationalizing pipeline coverage isn’t easy.? Because salesforce only shows you the current value of each opportunity, you can’t simply build a salesforce report.? Instead you’ll have to master snapshotting (either saving numbers from prior periods manually in a spreadsheet or much better leveraging…. your data infrastructure).? Here is where the power of your RevOps and data teams is so important.? I’ve been lucky to work with great teams at prior companies and have been inspired at how fast we’ve been able to operationalize this at Carta.

What is pipeline coverage?

Pipeline coverage is defined as the ratio between your pipeline and target revenue:

• NUMERATOR (Pipeline Value)?Open pipeline due to close in a specific quarter (I suggest only looking at “sales qualified pipeline”)
• DENOMINATOR (Revenue Target) ?The target revenue (or actual in the case of past periods) you have for a specific quarter

For example, if you enter Q1 with $5M in open Q1 pipeline and a target of $1M in new ARR, you have a pipeline coverage of 5x.??

Why is looking at pipeline coverage valuable?

Pipeline coverage is a powerful metric as it helps you:

• Align marketing and sales on the importance of pipeline, the key driver of sales success.
• Better value pipeline.? If pipeline is created a few quarters out and is lost before the quarter arrives, was it really ever valid pipeline??
• Forecast future quarters.? Understand not just how you are doing on the current quarter but how future quarters are building pipeline.
• Better forecast.? Analyze the coverage ratios compared to previous periods to assess early if you are going to hit your targets

How do you read a pipeline coverage chart?

The chart below is a little different than your typical time-series because you are showing pipeline by the quarter it is scheduled to close in (each line represents pipeline scheduled to close in a specific quarter).? On this chart

• The X axis is the specific date in past / future that the data was snapshotted
• The Y axis shows the amount of $ OPEN pipeline for a specific quarter (If you want to get really fancy, the Y Axis can represent Open Pipeline / Target to show coverage)

So for example on the graph below on July 1 (the day this chart was produced for example purpose), you can see that open pipeline was as follows for each quarter (Q2 BLUE, Q3 RED, Q4 YELLOW)

This chart gives us a ton of insights including:

1. Pipeline is increasing in each quarter.? This is good and shows that future quarters should have higher revenue, holding win rate… constant. ? Q4 should be very good
2. Pipeline peaks just after the quarter start which is generally the trend, although with SMB segments sometimes pipeline won’t peak until 1-2 months into the quarter
3. We can observe in ~October how Q2 open pipeline is fully closed out, a good sign of quality pipeline management
4. We notice that pipeline dropped much more sharply at the end of Q3 than Q2 indicating the team is better at closing out stale pipeline.
5. We can also observe in ~October where Q3 pipeline drops at the same time Q4 increases - a sign that pipeline was pushed out

How much pipeline coverage do you need?

The general rule of thumb is 3-5x coverage at the start of a quarter, but your pipeline coverage ratio is essentially an inverse of your win rate w. ? If you have good pipeline management (article coming on that soon), then while some deals will push out to future quarters, you are also starting with pipeline which doesn’t include deals that have already been lost + deals for future quarters that may never materialize.?

For example, if you have a win rate of 25%, 1/.25 = 4x target pipeline coverage.? So, if you have a Q1 new business ARR target of $1m, you should have $4M of pipeline scheduled to close in Q1 on the first day of the quarter.

As you learn from data, you can refine your pipeline targets by segment ….? And as you improve your win rate and sales cycle you can (hopefully) reduce the coverage you need to hit a given target.