It's time-honored folklore: if your pipeline coverage ratio (PCR) is greater than 3x you should make your number. Following this advice, companies spend a lot of time measuring and managing to their target PCR.
I can't stress enough how much better things can be if you stop fixating on your PCR. So let’s back up and take a look at the biggest—and simplest—reasons you should not use PCR to predict if you will make your number, or to plan how much new pipeline you need to add to meet your plan.
But first let’s see why PCR is so popular. The appeal of PCR is the idea that you can predict your quarterly sales by taking your total pipeline with a close date in the quarter (typically at week three) and dividing it by your target PCR.
Predicted sales = Pipeline / PCR
If your predicted sales figure is greater than your sales goal then you are well positioned.
I get it. This sounds great. But does this work? Or is it a Potemkin Village? A mirage?
You decide.
Here are our top five reasons to ignore Pipeline Coverage Ratio:
Weak Empirical Correlation: Historical data shows that PCR often poorly correlates with actual sales, making it an unreliable predictor. The only way to know this is to measure actual PCR on your data. Do that. Then decide. But keep in mind that you will have...
Limited Testing Validity: PCR’s effectiveness is difficult to verify due to the small number of observations in quarterly data. How far back can you go and still have relevant data? This makes conclusions unreliable.
Misspecified Model: PCR incorrectly assumes that existing pipeline alone can reasonably predict sales. This fails to account for a major factor—new deals that may be sourced and closed within the quarter. This limits the model's relevance and accuracy.
PCR Gaming: “When a measure becomes a target, it ceases to be a good measure.” (Goodhart’s law.) When you manage to a coverage ratio, people manipulate the pipeline to meet the ratio. They inflate deal values, add low-quality or overvalued deals, and retain dead deals. This makes PCR an unreliable predictor.
Limited Insight: PCR provides no guidance on which types of pipeline to prioritize. You already know you need more. But not all pipeline is equal. For instance, adding expansion deals is typically best when time is limited. With a longer horizon, prioritizing new logos may be better. Without understanding when to focus on different pipeline types, you will waste resources and achieve suboptimal results. You can do better.
If you don't have an alternative, the simplicity of using PCR to predict what will happen is appealing. But it can be misleading. So we advise to just ignore it and keep adding pipeline. That's right. More pipeline is great, it's just not predictive.
If you want to know how to meet your plan or how to do so efficiently, you need to look to better models. Look beyond simple ratios. Explore models that reflect different types of pipeline and your planning horizon. WIth that, you can optimize resource allocation and maximize sales.
Looking for an application that all does that for you? Painlessly? With mathematical rigor? That gives you specific concrete advice on how to sell more?
I know a great vendor.
See how to sell more. Try Funnelcast. |
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