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Why Subscribing to this is Dangerous
For starters, it’s important to clarify that having a 3x sales pipeline coverage isn’t necessarily wrong – in fact, for your organization a 3x sales pipeline coverage could very well be right on the nose! The point isn’t that 3x is a falsely wrong number; no, the real danger is that when it comes to sales pipeline coverage, there should not be a blanket, one-size-fits-all mentality. Every sales team in their own industry is different, so why should they all subscribe to the same pipeline principles?
The real danger is that a dogged belief in having a 3x sales pipeline coverage leads sales leaders to make decisions geared toward that specific target. If a sales rep’s pipeline looks light in a given month, their manager might get on them to generate enough pipeline to provide a 3x coverage on their monthly number.
Similarly, if the team has generated enough pipeline to reach this 3x coverage ratio for the month, their sales manager might instruct them to put a temporary pause on pipeline creation for the time being. But what about generating pipeline for the next month, and down the road? Or what if – shockingly – that 3x pipeline isn’t enough? You have to get your sales metrics right if you’re going to make decisions based on them.
That’s the problem with following a maxim that proves to be erroneous. The sales manager will gear his entire team and their strategy and process toward achieving this 3x sales pipeline coverage target – whether it’s right for their team or not.
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If 3x isn’t right…then what is?!
Well, hold on a second there; as we mentioned earlier, we’re not suggesting that the 3x pipeline coverage isn’t right for you. In fact, it could very well be the perfect pipeline coverage metric for you and your sales team. What we are suggesting is that it’s worth your time to dig into the data and figure out what your true pipeline coverage ratio should be, instead of just blindly following this industry-wide maxim.
How should you go about figuring out your own sales pipeline coverage ratio? By looking into the past:
- Dig into your historical sales pipeline, sorted by value (instead of count), over the past 12 months. This will tell you the value of the opportunities in your pipeline for each given month.
- Look at your won-loss report for each month. How much new business did you close? How many of the opportunities in your pipeline for that month were you able to win? What was your team’s win rate?
- If you have $3 million worth of opportunities in your sales pipeline in month 1 and you had a 33% win rate, closing $1 million of those opportunities, you had a pipeline coverage ratio of 3x that month. However, if you worked $4 million worth of opportunities in order to close that same $1 million, that means your actual pipeline coverage ratio is 4x.
- Some months might see a higher pipeline coverage ratio than others, but unless you’re changing something drastic in your sales process – how you sell, what opportunities you target, etc. – it should be fairly consistent. Calculate your average across the 12 months and there you have it, your true sales pipeline coverage.
You want to know what your actual ratio is so that you can plan accordingly. If you have a complicated sales process, a long sales cycle or an exceptionally high average sale price, your overall win rate is probably on the low side. This means that you need even more pipeline than 3x in order to hit your goals – simply put, you’re not going to win that many of the opportunities you work, so you better make sure you have more at-bats to get the same number of hits, so to speak.
By looking at your historical sales pipeline and your overall win rate over time, you will be able to more accurately determine what your true sales pipeline coverage ratio is. Don’t just blindly subscribe to the 3x sales-pipeline-to-quota metric that is pervasive industry-wide; figure out what is truly right for YOU!.