Marketing generates prospects, and sales turn them into clients. A motivated sales and marketing crew is always a plus. However, that does not guarantee the fulfilment of the goal. Multiple methods to improve your sales performance include analytics, projections, AI tools and machine learning.
Despite that, there is no guarantee that sales goals will be met. But a fail-safe analytical model — Sales Pipeline Coverage Ratio — exists. Sales managers use the coverage ratio as a health metric for the company to ensure revenue goals are met.
What is sales pipeline coverage ratio
Sales Pipeline Coverage Ratio is the ratio of the revenue in your funnel and the expectation of future sales.
For instance, a sales pipeline coverage ratio of three indicates your overall pipeline is three times your quota. Therefore, to reach your sales target, you must close 33 per cent of the pipeline’s worth.
Keep in mind that not all deals fall into that third. It represents one-third of the pipeline’s price. So win contracts larger than usual, and you must close fewer of them successfully.
How to calculate your sales pipeline coverage ratio
Calculate your pipeline-to-quota ratio using this formula:
Total Pipeline / Sales Quota = Sales Pipeline Coverage Ratio
The pipeline to quota ratio is 4:1 if the average sale closes in 90 days and the closing rate is 25%. It indicates that to meet the sales quota, the opportunities in the pipeline must be worth four times the quarterly sales projection.
How much pipeline coverage should you have?
People rely on common sense to measure this. Most sales leaders advise you to aim for a 3x or 4x pipeline to quota ratio. Most of those suggestions are practical. Is there another way to determine your sales pipeline coverage ratio that’s more precise?
Let’s first consider what pipeline coverage entails. It is a ratio of the number of open pipelines to the number of quotas that need to be closed. Knowing you won’t close every sale in the channel, you need enough to meet your quota. You can’t have a 1x as your coverage ratio to meet the quota. That would mean closing all deals in your pipeline, which is next to impossible. As a rule of thumb, you need to have a pipeline-to-quota ratio of 3:1 or 4:1.
You must know your typical win rate to calculate what your pipeline coverage ratio ought to be. Simply put, this is the total number of reservations you close for every buck of the pipeline you open. Alternatively, you may calculate the ratio of closed deals to opportunities created.
How to ensure a healthy sales pipeline
Four essential criteria enhance sales and marketing operations to manage a healthy sales pipeline.
- The number of deals under consideration
- Typical deal size
- The average percentage of closed deals
- Average deal closure time
These indicators can inform marketers of the number of leads their sales pipeline has to contain to satisfy sales projections.
Challenges with a Pipeline coverage ratio
Here are four issues frequently observed when businesses use pipeline coverage ratios to determine whether they have a sufficient flow to fulfil revenue targets.
- The opportunity stages, or the buying cycle, are not considered. For instance, an extensive pipeline may include many early-stage possibilities with a low likelihood of closing effectively. A high pipeline-to-quota ratio can inspire false confidence in this situation.
- The funnel size is inflated by hope rather than customer intention or activity. The sales team gets pressured to increase funnel size due to focusing on the ideal pipeline-to-quota ratio.
- Similarly, deals that have fallen previously and have no chance of concluding successfully are frequently seen in the pipeline. In each instance, the pipeline is inflated.
- The size of the overall pipeline ignores differences across opportunity types. For instance, it makes sense to anticipate that new and existing clients, business lines, and territories have different win rates. There could also be run-rate chances for which there aren’t any right now. The pipeline coverage ratio is, therefore, a somewhat all-encompassing figure.
Only at the beginning of a period does the metric have any value. For instance, halfway through the year, when you’ve already closed several sales, you should carefully compare your remaining quota with the deals already far in the purchasing process to determine how certain you are of reaching your goal.
Keep track of your sales pipeline coverage ratio
You can use pipeline coverage to figure out where to spend your time. As a result, it’s important to keep an eye on pipeline coverage on an ongoing basis. At least once a week, it would help if you looked at how much coverage you have for the current and upcoming periods. Managers should be aware of their coverage daily as the best practice.
