What is a sales pipeline and how can it be used for revenue predictability?
A company’s pipeline shows where each prospective customer opportunity is in the sales cycle. A well-defined sales pipeline process enables a company to establish a realistic pipeline and better visibility into bookings forecasts. It also provides insight into which segments it wins or loses the most and why, the average customer type, competition, as well as who are they replacing. By leveraging historical trends, a company can also set realistic forecasts based off sales quotas, historical win rates, sales pipeline coverage ratio, and weighted pipeline. This blog outlines how to effectively use a sales pipeline for ARR / revenue predictability.
Sales Pipeline Stages:
The sales pipeline typically consists of the following stages: Prospect, Qualified, Demo, Pricing, Closed (Won / Lost).
- Prospect: In this stage the company identifies prospects which are typically marketing qualified leads (MQLs) and enters them into the pipeline.
- Qualified: In this stage the company identifies its sales qualified leads (SQLs).
- Demo: In this stage the sales team would present a product demo to its SQLs.
- Pricing: After a product demo, the sales team would enter into pricing discussions with its SQLs.
- Closed: This is the final stage where the SQL is either closed won or closed lost.
How to Effectively Use a Sales Pipeline:
A couple ways to effectively use a sales pipeline include looking at the weighted sales pipeline and measuring the sales pipeline coverage.
1. Sales Pipeline Coverage Ratio:
Pipeline coverage is a ratio used by the sales team to measure how much ARR is covered in the unweighted pipeline compared to the target new ARR they need to hit. This is calculated by dividing the pipeline ARR over a certain period by the target new ARR for the same period.
Pipeline Coverage = Pipeline ARR / Target New ARR
Using historical data of weighted pipeline and target new ARR for the same period helps companies understand how their coverage ratios change over time. This will also help companies set realistic coverage ratios for current and future pipelines, resulting in better visibility into what their projected target ARR should be.
Generally, with enterprise SaaS companies, Software Equity Group often sees anywhere between 3x – 5x pipeline coverage.
If a company has the following pipeline ARR and has a target new ARR of $810,000. Coverage ratio is $2,430,000 / $810,000 = 3.0x.
|Pipeline Stage||Potential ARR|
2. Weighted Sales Pipeline:
A weighted sales pipeline can be calculated by applying a probability percentage for each stage in the pipeline multiplied by the respective ARR in each stage.
Using the same company pipeline and target new ARR from the example above, if a company has the following probability percentages and ARR allocated for each stage in its sales pipeline for the quarter, then its weighted pipeline is $909,000. If the company has a target new ARR for the quarter of $810,000, then the sales team is likely to meet, and potentially exceed, the target new ARR based on the current sales pipeline.
|Pipeline Stage||Potential ARR||Probability Closing||Weighted Potential ARR|
Tracking the sales pipeline gives a company more visibility into its sales process. Most importantly, this analysis will enable the company to set a realistic forecast and sales quota for the sales team to meet. If you have any questions about the sales pipeline and how to use it for revenue predictability, please don’t hesitate to reach out.