Learn how to calculate and optimize your sales pipeline coverage ratio for greater revenue predictability

Knowing your pipeline coverage ratio can help you quickly evaluate your pipeline so you adjust when needed to execute winning sales strategies and meet your revenue targets. 

In this article, we’ll explain what pipeline coverage ratio is and how to calculate it with formulas and examples. We’ll also help you understand some of the common pitfalls you might encounter in using pipeline coverage ratio and give you some valuable tips on how to improve it to grow your business.  

How to Calculate Your Sales Pipeline Coverage Ratio

Determining your pipeline coverage ratio begins with a well-defined sales process. Generally, the more complicated your product or service, the more drawn-out your sales cycle will be – and the more stages you'll have.

A typical SaaS sales pipeline contains 5-7 steps, which can be illustrated as a sales funnel. Here's what that process might look like if your company follows a normal B2B sales approach:

You can get all your pipeline information from your CRM. Because sales pipeline coverage is a basic ratio, calculating it is relatively simple: 

Companies can analyze how their coverage ratios vary over time by using historical data for a weighted pipeline and target new ARR for the same period. 

Understanding what causes these shifts can help businesses develop realistic coverage ratios for current and future pipelines. This improves the visibility of predicted target ARR (and the possibility of meeting those targets).

Here’s an example of how you can calculate the sales pipeline coverage ratio for a SaaS company: 

Now that we have the total pipeline ARR, we can divide that by our target new ARR to get our pipeline coverage ratio:  

In this example, the company’s sales pipeline coverage ratio would appear sufficient to meet its ARR target. However, this may or may not be the case. 

Calculating a weighted pipeline coverage

The sales pipeline formula is a useful way to quickly calculate your pipeline's health. However, because of the above mentioned difficulties, adopting the ratio alone can create a false sense of security. 

A weighted pipeline coverage overcomes some of the above issues by requiring you to assess your deals at a more detailed level, considering their different  stages to determine expected revenue.

This also makes it easy to identify agreements that may be expanding the pipeline artificially. Using a weighted pipeline can help sales managers and marketing teams better understand which stages they should focus on to boost their win rates. 

To use the pipeline coverage ratio formula, you must first understand the probability of closure for each stage in your pipeline. 

The weighted prospective ARR is determined using the formula below. The total weighted pipeline ARR is calculated by adding the weighted potential ARR for each stage.

Let’s look at an example of a weighted pipeline coverage calculation:

In this example, our company appears to have more than enough pipeline to achieve its target, assuming its pipeline isn’t suffering from any of the pitfalls described below.  

What is a “Good” Pipeline Coverage Ratio?

Pipeline coverage ratio is one of the few leading indicators in a SaaS business that provides information we can use to predict our performance in the current quarter, next quarter, and the one after. So, if you’re wondering what is a good ratio, let’s find out.

The typical pipeline coverage ratio, according to a widely used sales maxim, is 3:1. Depending on your business, product, and sales cycle, this may vary from between 3x or 4x pipeline value. Generally, you should aim to keep your pipeline at least twice as high as your overall sales target at all times. You always need the extra opportunities in your pipeline in order to hit your sales goals because it’s impossible to convert every potential deal.

Generally, a "good" pipeline is determined by your sales efficiency as assessed by your closure rate. For example, if your sales team closes a large percentage of their agreements, a 3x pipeline coverage ratio may not be necessary. In contrast, if your sales team closes very few deals, you may want to focus on increasing your qualified pipeline to ensure a healthy sales pipeline to meet your targets.

Pipeline coverage ratio can be determined at the company level, by regions, and individual account executive (AE). If your business has more than one sales team or you operate across multiple regions, you’ll find that tracking your pipeline coverage using spreadsheets quickly becomes highly complex, not to mention enormously time-consuming. 

This is why many companies use random numbers or industry benchmarks such as the "3x" rule of thumb. However, the ability to understand your current pipeline based on your own historical pipeline coverage ratio gives you some powerful benefits. With this information, you can make more data-driven decisions in your planning and insights into how much pipeline coverage you need and how to improve your pipeline ratio to grow your business. 

As your business becomes more complex, you’ll find that a technology like Drivetrain can be a game-changer because you can track and review your data in any dimension, such as historical data (actuals), to inform your "qualified opportunity" to closed-won conversion rates.  With Drivetrain, you can gather the data to generate a very granular view of your pipeline, rolling the estimations across reps, regions, product lines, segments, and new or expanding pipelines.

Pipeline coverage vs forecast coverage

Forecast coverage is similar to pipeline coverage but more sophisticated.  

Pipeline coverage measures all open pipelines against the total quota and is expressed as a ratio. 

In contrast, forecast coverage considers your forecast categories to provide a weighted pipeline number compared to quota. Forecast categories are based on the level of confidence that a sales opportunity can be closed in a given timeframe and are typically expressed as a percentage. 

Weighing your possibilities depending on stage/forecast type can be more beneficial when you’re more than halfway through the measurement period because at this point, you’ll know more about the opportunities in your pipeline, how many sales you'll need to close, and the likelihood of closing them. 

However, pipeline coverage can be more valuable early in the period or when looking ahead (such as next quarter) because it provides a bigger picture of your overall pipeline. It can also help inform your marketing activities by giving you a sense of the number of leads your marketing team will need to generate for the sales teams to hit their numbers.  

Pipeline coverage can also be more valuable for looking at future periods (such as the next quarter) because it offers a general sense of whether or not you’ve been building an adequate pipeline.

Ideally, monitoring both pipeline and forecast coverage is the best strategy. This is because pipeline coverage informs you more about how much pipeline you've been producing, whereas forecast coverage tells you how far along your pipeline is.  

Common pitfalls in using pipeline coverage ratio in SaaS businesses

The frequent measurement of the pipeline coverage ratio can help you identify various concerns. It allows you to keep the sales and marketing departments in control and on the same page. However, there are some challenges when companies use pipeline coverage ratios to determine whether they have enough flow to meet revenue targets.

• Analyzing steps in the opportunity process or the purchasing cycle is insufficient. For example, a large pipeline may contain many early-stage opportunities with a low possibility of success. In this case, a high pipeline coverage ratio can instill false confidence.
  
  
• The pipeline's possible leads grew due to optimism rather than true client interest or contact. The sales team is pressured to grow the pipeline size at that point since they aim for a specified pipeline coverage ratio.
  
  
• The pipeline is frequently filled with projects that have previously failed and have a poor chance of succeeding. Each time, the pipeline is mistakenly made larger.
  
  
• The overall size of the pipeline doesn’t account for differences between different types of opportunities. For example, it's realistic to assume varying win rates for new and existing clients, different business lines, and different geographic territories. Furthermore, there may be opportunities in the pipeline that do not already exist. As a result, the pipeline coverage ratio metric seeks to account for all of these variables.

6 Tips to help you maintain a healthy pipeline in the SaaS Industry

Monitoring your pipeline coverage  will help you keep a close eye  on the health of your sales pipeline. However, there are a number of things you can do proactively to meet your pipeline coverage ratio KPI. Here are a few tips that will help you maintain a healthy pipeline for your business: 

• Simply telling your salespeople to keep a particular percentage of pipeline coverage isn't helpful. Give them weekly or monthly action items to complete to continue generating new opportunities.
• Train your AEs to seek prospects based on carefully established pipeline coverage ratios and goals so they concentrate their efforts on the most profitable stages of the pipeline stages.
• Using past data, you should be able to determine exactly how much pipeline revenue you require for the following quarter at any point this quarter. Set specific pipeline coverage goals for future quarters for your sales personnel.
• Develop some criteria for improving sales and marketing operations to maintain a strong sales pipeline, such as the number of transactions under consideration, typical transaction size, the average percentage of completed transactions, and average time to close a deal.
• Perform a quarterly sales pipeline analysis so you can operate with the goal of continuous improvement and optimize your activities in real-time rather than reactively. This will enable you to examine the overall health of your pipeline while also identifying individual techniques, procedures, and approaches that require improvement.
• Track your sales team's performance by measuring pipeline quality, quantity, maturity, and coverage gaps. This requires two things: a properly implemented CRM and an automated sales execution platform that combines transparency, real-time access, and up-to-date data in a single, user-friendly location.

Consistent monitoring and accurate pipeline coverage ratio calculation is critical for developing winning sales and marketing strategies, recognizing prospects, and completing agreements. 

The more complex your business is and as the number of pipelines your managing grows, the more you need technology to leverage the power of always knowing the true value in your pipeline.  

Get full visibility into your pipeline coverage ratio for more revenue predictability with Drivetrain

Deciding to pursue strategic pipeline coverage is critical in a company's growth journey. Drivetrain makes consolidating the data your sales team needs from multiple source systems is easy.

If you’re looking at how to calculate pipeline coverage, Drivetrain can break down the factors that impact your pipeline in any dimension, such as regions, market segments, products, etc., to provide a detailed understanding of what is driving your sales and how to improve them. 

With unrestricted visibility into pipeline coverage, you can help your team understand, properly forecast, and smoothly execute their sales funnel.