Continued… “What is measured, improves.”
An introduction to Sales Metrics for High Growth Companies , Part 2
In addition to the foundational sales metrics described in What is Measured Improves Part 1, there are several additional sales operations ratios that can provide valuable insights about product lines, individual sales reps, clients, and opportunities.
Advanced Metrics
1. Pipeline Conversion Rate by Stage
Pipeline Conversion Rate is the percentage of transactions that have moved from one stage of the pipeline to another across periods, typically quarters. For example, if a company has 100 potential deals in “Qualified Lead” category in Q1, and 20 move from that category to the “In Process” category in Q2, then the Pipeline Conversion Rate for that Stage is 20%. Pipeline Conversion Rate avoids the trap of relying simply on pipeline size or sales estimates and guesstimates of the likelihood of closing. It is useful to look at the ratio from a number of deals and dollar volume perspective so that a single large transaction does not skew the reporting.
2. Sales Effectiveness Over Time
Sales Effectiveness Over Time provides a performance-based — versus projections-based — answer to how many months it takes a sales person to be productive and reach certain targets. It shows the amount of sales by salesperson over a fixed amount of time, e.g. sales closed over a twelve or twenty four month period.
Some companies will take the average monthly productivity of the overall sales team, and use that to determine the point of productivity. For example, if a company has a $1.2 million average annual quota and the average sales person sells $100,000 in month nine with the company, then, the thinking goes, a typical sales person will be fully productive in nine months. By using historical data, the trailing twelve months of actual sales, a head of sales or CFO can better gauge true productivity and determine the actual point at which a sales person achieves quota.
These last two metrics are critical in analyzing the return on investment in sales and can prevent costly mistakes. For example, if a sales team fails to hit quota the usual reaction is to consider restructuring sales. However, if a lack of Sales Qualified Leads is the real issue, or the business faces a longer sales cycle than forecast, then the decision to restructure will be very costly as it will drive sales attrition, force new hiring, lose account relationships, and fail to address the underlying issues.
3. Sales Cycle by Salesperson
At the next level of granularity, particularly at a company’s growth stage, it is important to review the sales cycle — described above — for each individual sales representative in order to identify the strengths and weaknesses of individuals, fine-tune the sales hiring profile, and put in place corrective actions (coaching, training, reassignment, transition).
4. Sales Cycle by Stage
The goal of every sales effort is a shorter sales cycle, and it is critical to examine the amount of days spent in each phase of the sales process to understand where efficiencies can be gained or bottlenecks are occurring.
5. Sales Cycle by Won / Lost Deals
Won deals and lost deals typically exhibit different characteristics, with winning deals correlating with less time at each stage of the funnel. An excited, motivated prospect will progress through the pipeline faster. If you know the lengths of different opportunity stages in the sales cycle, the leadership team can identify and prioritize those transactions most likely to close, based on pacing and thereby avoid wasting time and resources on prospects that are unlikely to ever convert.
6. Sales Adoption by Vertical
A vertical strategy has been proven successful at accelerating sales adoption in many growth stage companies. This is due to the fact that salespeople become more attuned to customer challenges in a specific industry. As validation points and references are developed amongst peer companies, prospects in that vertical are more easily converted. Equally valuable, the network effects within a vertical can help spread the good word about a new solution faster and more convincingly than any amount of marketing spend. Although growth companies may be reluctant to limit themselves with a vertical strategy, it is helpful to track sales success by industry to identify a naturally emerging vertical opportunity.
7. Marginal Sales Contribution Threshold (“MSCT”)
MCST is the dollar figure above which a salesperson is covering all of his or her total employee costs. At and above this threshold, a salesperson is contributing sales dollars to the rest of the business. It is important for a CFO to monitor this figure to ensure that quotas are set at the right level and gauge whether and when it is appropriate to hire more sales resources. MSCT includes a salesperson’s base compensation and target bonus. It also includes T&E, benefits, and allocated overheard — or “fringe.” It should account for the time and cost of others who directly drive sales — sales engineers, sales support — and those who spend time directly managing the salesperson — the regional VP or sales vice president or sales operations. If sales regularly involve significant time from senior executives — CEO or CTO involvement — then an allocation for that time and expense also needs to be factored in. Without understanding the true cost of sales personnel, a company will risk hiring more salespeople who will burn more money than they bring in.
Conclusion
Good managers know they must strike the right balance between decisions based on data and decisions based on people and talent. Operating a high-growth business is not like flying an airplane, where most everything can be automated, but good data and metrics can provide insight to support better planning and decision-making. There are few areas in growth company operations where this can have more impact than sales.
