"The nice thing about metrics is that there are so many to choose from."
— Grace Hopper (adapted)
In a world where many executives are overwhelmed with sales and marketing metrics — from MQL generation to pipeline analysis to close rates and everything in between — I am writing this post in the spirit of raising things up to the CXO-level and answering the question: when it comes to sales, what do you really need to worry about?
(A previous version of this article originally appeared on Dave's blog, Kellblog.)
Pipeline coverage is the dollar value of the pipeline with a close date in a period divided by the new ARR target for that period.
Pipeline coverage is the sum of the dollar values for each opportunity in the pipeline with a close date in a period divided by the new ARR target for that period. For in-depth material on understanding, managing, and analyzing the pipeline, see here.
Who owns pipeline conversion? Sales.
Unlike pipeline coverage, which is usually a joint production of four different teams, pipeline conversion is typically the exclusive domain of sales. So, who owns pipeline conversion? Sales.
My favorite way to measure pipeline conversion is to take a snapshot of the pipeline at the start of week 3 of the quarter (to give sales management time to clean it up) and then divide the actual quarterly sales by the week 3 pipeline. For example, if you had $10M in pipeline at the start of week 3, and closed the quarter out with $2.7M in new ARR, then you'd have a 27% week 3 pipeline conversion rate
What’s a good rate? Generally, it’s the inverse of your desired pipeline coverage ratio. That is, if your CRO wants a 3.0x week 3 pipeline coverage ratio, they're saying they expect a 33% week 3 pipeline conversation rate. If they want 3.5x, they're saying they expect 28%.
Two important details: this should be analyzed on a to-go basis to account for any sales made before week 3 and you should be careful when the CRO wants more than about 3.5x coverage; it's often a sign of a low-quality pipeline or a desire to overburden marketing as a form of insurance for sales.
There is a related rate that many companies measure, the SAL-to-close rate (STC), which in turn depends on their definition of SAL. To avoid confusion with the pipeline conversion rate, remember these two differences:
While I think the STC rate is a better, more accurate measure of the percentage of opportunities that close, it is not the same thing as a week 3 pipeline conversion rate and can only actually be calculated on a lagging basis, maybe 1.5 times longer than the average sales cycle length.
There are numerous ways to improve pipeline conversion rates, and they generally fall into these buckets:
In conclusion, if you have a problem with sales performance, there are really only two questions on which you need to focus:
The first is about pipeline generation and coverage. The second is about pipeline conversion. Get them both right and you'll grow like a weed.
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