Sales Pipeline

What is a sales pipeline?

Sales pipeline denotes the totality of a company's open sales opportunities on a reporting date, each with the customer, expected order value, stage in the sales process, expected closing date and responsible person. A sales opportunity (opportunity for short) is a concrete purchasing project of a prospect whose need, decision-making authority, budget range and time frame sales has confirmed in conversation. The pipeline is used to derive what revenue is to be expected in the coming months from ongoing sales processes.

The pipeline is a stock variable, a snapshot on a reporting date. In this it differs from the sales funnel, which measures flow and conversion rates over a period. It is maintained in the CRM, the system for customer and sales data (customer relationship management). Sales is responsible for it; management uses it for forecasting and capacity planning. In funding rounds and company sales, it supports the short-term revenue plan. Investors and buyers regularly request it as an export in their due diligence, the review before signing a contract.

Weighted and unweighted pipeline

The unweighted pipeline is the sum of the expected order values of all open opportunities. It overstates the revenue that can be expected, because a considerable share of the opportunities is lost. For planning, each opportunity is therefore multiplied by the closing probability of its stage. The sum is the weighted pipeline, statistically an expected value: the amount that results on average with many similar opportunities. A single opportunity of EUR 100,000 with a 25% probability therefore counts as EUR 25,000, although in the end it is either won in full or not at all.

The probabilities per stage should come from the company's own closed opportunities, measured as the share of opportunities that had reached a stage and were won in the end. Default values from software templates are a makeshift for as long as own data are lacking. Because an expected value becomes reliable only with many opportunities, companies with few large orders supplement the weighting with an individual assessment. Forecast categories such as "committed", "probable" and "possible" are common for this.

Pipeline metrics

• Coverage (pipeline coverage): open pipeline with a closing date in the target period in relation to the revenue target of that period. The necessary coverage follows from the company's own win rate; a common rule of thumb is three to four times the target, calculated unweighted.
• Win rate: the share of won opportunities among all closed opportunities, that is, won and lost, by stage, segment and channel.
• Inflow: number and value of newly created opportunities per month. A weak inflow shows in revenue only after the duration of a sales cycle and is therefore an early warning signal.
• Dwell time: how long opportunities remain in a stage. Opportunities that have been open for much longer than the usual cycle generally have lower closing prospects.
• Slippage: how often the expected closing date has been postponed. Opportunities postponed several times point to a lack of readiness to decide on the customer's side.

Maintenance and stage definition

The informative value of the pipeline depends on the discipline with which it is maintained. Each stage needs a verifiable entry criterion, such as "decision-maker named and budget range confirmed" or "written proposal submitted". Where such criteria are missing, opportunities accumulate in the middle stages, and the weighting loses its meaning.

A weekly review within sales and a monthly review by management are common. Opportunities with no activity over a defined period are closed and recorded with a reason for loss. On fixed reporting dates, the state of the pipeline is saved so that it can later be traced how stock, forecast and actual revenue developed.

Significance in a funding round, valuation and company sale

Investors and buyers compare the revenue plan for the next quarters with the weighted pipeline. What counts is not only the size but the quality of the pipeline. Typical points of review in due diligence are:

• Substantiated weighting: whether the probabilities per stage correspond to the historical win rates and whether the stages are assigned by verifiable criteria.
• Age and slippage: how long the opportunities have been open and how often their closing date has been postponed.
• Concentration: what share of the weighted value falls on the largest individual opportunities. If a quarterly target depends on two or three orders, the risk of a deviation from plan rises.
• Origin: whether the opportunities come from the target segment, that is, the ideal customer profile (ICP), and from repeatable channels, or predominantly from the founders' personal network.
• Forecast accuracy: how well earlier pipeline snapshots predicted the revenue actually achieved later.

If the pipeline does not support the plan, investors and buyers base their valuation on lower revenue.

In valuations based on a revenue multiple (revenue multiple), a robust pipeline has a direct effect on value, because it supports the expected growth. Where buyer and seller are far apart in their assessment of the pipeline, part of the purchase price is often tied to later revenue (earn-out).

Worked example

A software provider plans EUR 400,000 of new business for the current quarter, measured as the annual contract value (ACV) of the new contracts. The pipeline with expected closing in the quarter comprises 32 opportunities:

• Qualified, probability 10%: 14 opportunities, EUR 700,000, weighted EUR 70,000
• Solution presented, 25%: 9 opportunities, EUR 450,000, weighted EUR 112,500
• Proposal, 50%: 6 opportunities, EUR 330,000, weighted EUR 165,000
• Negotiation, 75%: 3 opportunities, EUR 180,000, weighted EUR 135,000
• Total unweighted: EUR 1,660,000; coverage EUR 1,660,000 divided by EUR 400,000 = 4.15
• Total weighted: EUR 482,500, that is, about 121% of the target

A review by the standards of a due diligence yields two corrections. Five of the qualified opportunities, together EUR 250,000, have shown no activity for more than 90 days and are closed; the weighted value falls by EUR 25,000. The analysis of the last four quarters also shows that from the "Proposal" stage only 35% rather than the assumed 50% were won. The weighted value of this stage falls to EUR 330,000 × 35% = EUR 115,500, that is, by EUR 49,500.

• Adjusted weighted pipeline: EUR 482,500 minus EUR 25,000 minus EUR 49,500 = EUR 408,000
• Adjusted coverage of the target: EUR 408,000 divided by EUR 400,000 = 102%
• Adjusted unweighted pipeline: EUR 1,660,000 minus EUR 250,000 = EUR 1,410,000, coverage about 3.5

The quarterly target is still covered arithmetically, but without a reserve. If one of the three opportunities in the negotiation stage, averaging EUR 60,000, slips into the next quarter, EUR 45,000 weighted is missing, and coverage falls to about 91%. For planning the following quarters, the inflow of new opportunities must therefore rise before they can be regarded as covered.

Distinction from related terms

• Sales funnel: measures flow and conversion rates over a period. The pipeline is the stock of individual opportunities on a reporting date and covers only the later stages of the funnel, from the qualified sales opportunity onwards.
• Order backlog: comprises services already contracted but not yet performed or invoiced. The pipeline contains only opportunities that have not yet been won.
• Forecast: the regularly updated projection that combines actual values up to the reporting date with the expectation for the remaining months. For revenue, it relies on the weighted pipeline, supplemented by individual assessments of large opportunities and by closings from leads not yet in the pipeline.
• ARR: the annual recurring revenue from existing contracts. Won opportunities from the pipeline increase it from contract start.

Common mistakes

• Only the unweighted total reported. Without weighting, the pipeline is a list of possibilities and not a planning variable.
• Probabilities by judgement. If each responsible person sets their own probabilities, the weighting is not comparable. The values should be tied to the stage and substantiated with historical win rates.
• Outdated opportunities in the stock. Opportunities with no activity for months inflate the pipeline and coverage without contributing to revenue.
• Inflow not monitored. Anyone who looks only at the stock notices a decline in new opportunities only when it becomes visible in revenue.
• No reporting-date snapshots saved. Without historical snapshots, forecast accuracy cannot be demonstrated in due diligence.
• Closing dates not maintained. If the expected closing date lies in the past or is repeatedly postponed, the time allocation to the plan loses its basis.

Frequently asked questions

What is the difference between a weighted and an unweighted pipeline?

The unweighted pipeline adds up the order values of all open opportunities; the weighted one first multiplies each value by the closing probability of its stage. The weighted pipeline is decisive for planning; for assessing coverage, it is usually the unweighted pipeline in relation to the win rate.

Which closing probabilities are right?

The company's own historical values per stage. They become reliable when enough closed opportunities are available, won and lost. Until then, cautious values are preferable, regularly compared with the actual results.

How high should the coverage be?

That depends on the win rate. If on average one in four opportunities is won, at least four times the target in unweighted pipeline is needed. The common rule of thumb of three to four times presupposes win rates of about 25% to 33%.

Do sellers warrant the pipeline in the company purchase agreement?

As a rule not. For plans and forecasts, sellers usually give no warranty; whether the accuracy of the information provided is warranted is a matter of negotiation. Differing expectations of how the pipeline will be realised are more likely to be balanced through the purchase price or an earn-out.

How is the pipeline presented in the data room?

In the data room as an export per opportunity with stage, value, opening date, expected closing date, source and responsible person, supplemented by snapshots from several earlier reporting dates. In early process phases, customer names are often anonymised and disclosed only later.

The Roemer Capital view

Before a process starts, Roemer Capital sets the revenue plan of the first plan quarters against the weighted pipeline and corrects the weighting with the company's historical win rates. If the pipeline does not support the plan, the base case is adjusted before an investor or buyer finds the gap.

For the data room, Roemer Capital prepares pipeline snapshots for several reporting dates so that the forecast accuracy of the past can be demonstrated. In sales processes, it classifies large individual opportunities separately, because they in particular play a role in the purchase price negotiation and in the design of a possible earn-out.