Generating pipeline is obviously the key to your sales reps being able to work enough deals to hit their own quota and contribute to company revenue targets. But, it is an absolute must that you understand how much pipeline you need to create. Tracking pipeline KPIs and then discussing them during weekly cadences are actions that are as important as tracking any other sales execution and revenue KPIs.

What are Coverage Ratios?

Let’s start with Coverage Ratios (CR). These are important indicators into how much pipeline you have and how much you need at any point prior to and in the current quarter in order to achieve your revenue targets. 

CRs are calculated by taking the total amount of open pipeline and dividing it by the remaining amount of revenue that needs to be closed to hit your target. For example:

• Revenue target for the quarter is $2,000,000
• $500,000 has been closed-won to date
• There is $3,000,000 in open pipeline remaining for the quarter
• THEN... Your CR = $3,000,000 / ($2,000,000 - $500,000), or equal to 2.0 

Analyzing historical coverage ratios to closed-won determines, by sales stage, how much coverage you need in order to hit your remaining revenue targets. These CRs then translate into your pipeline targets.  It is important to do this analysis by both stage and timing in a quarter, given deal velocity, as CRs will be variable throughout the quarter. The later you are in a quarter, the less likely early-stage deals will be won, so their CRs will be much higher. 

Connecting Coverage with Your GTM Motion

Many revenue operators start with the statement “we should have 3x coverage.” This is a fallacy. The amount depends on your sales motion. If you have a high-velocity business, you will have a lower CR since many of the opportunities that end up closing in the quarter haven’t been created yet and you will need to steadily create new pipeline within the quarter to close in the quarter. 

In contrast, an upmarket enterprise company with high average selling prices and long sales cycles may in fact have the majority of the deals that end up closing in a quarter in their initial pipeline for the quarter and a CR target of greater than 3x.

From the example that follows, you can see that CRs for each sales stage at three different points in the quarter have been historically calculated: 

By analyzing this by stage and timing in a quarter, CRs can be used to set pipeline targets for the quarter or at any point in the quarter for the remainder of the quarter as seen in the above table on the right.  For example, on day 1, if you have $0 revenue closed-won, the amount of pipeline you should have in each stage and total pipeline is shown in the table on the right. Assume that on day 30 of the quarter, you have closed $800,000 in revenue, leaving $3,700,000 remaining to hit your revenue targets. Again, using historical CRs for day 30, the amount of pipeline that you should have, or target on day 30, for each stage can be determined. 

The gap between the actual pipeline and the targets is a measure of risk and opportunity and should drive action to close the gap or take advantage of the upside.  

Remember that both the CR and pipeline projections exclude revenue that has been closed-won. So if you close more revenue earlier in the quarter, the pipeline targets will decrease against the same CRs.

In future posts, we will discuss Create and Close pipeline in more detail.  

For more resources on many of the KPIs you may want to track against your revenue targets and plan performance, don't miss our free ebook, Revenue Growth: The Metrics You Can't Ignore.

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