“What is Measured, Improves.”
Sales Metrics for Growth Businesses — Part 1
Anyone who has gone on a diet, knows the truth of Peter Drucker’s quote. The simple act of recording everything you eat, calorie by calorie, can get you halfway to your fitness goals. Sales metrics operate much the same way. They will not solve underlying sales problems, but they are an important step in achieving sales goals. There is a library full of literature on sales improvement with many excellent ideas covering topics from targeting to training to tactics. This article focuses on the narrow topic of sales metrics (ways to measure the inputs and outputs of sales effort and resources) and covers how that information may be used by sales operations teams and senior managers to make better business decisions. Part 1 covers “basic” metrics and Part 2 will cover “advanced” metrics.
Basic Sales Operations Metrics
1. Total Number of Marketing Qualified Leads (MQLs)
This measure is simply the total number of customer leads generated by marketing over a particular period. To make the figure meaningful it should be compared over time — are we generating more or fewer marketing leads? It will also be most useful to disaggregate leads by source, e.g., webinar, downloaded product, email nurture campaign, trade show, special event responses… to gauge the effectiveness of different marketing campaigns and tactics.
2. Ratio of Sales Qualified Leads (SQLs) to Total MQLs
This ratio is the total number of leads over a period divided by the number of leads that have been qualified (or accepted) by sales. For example, if marketing generates 500 leads and 100 of these are qualified by sales, then the ratio is 500/100 or 5/1. The metric shows the effectiveness of the marketing programs, and it provides a target for the total number of MQLs needed to generate future business. If marketing is producing very few leads, or lots of leads but few of them end up as sales qualified, then marketing will need to refine its approach.
3. SQLs to Close Ratio
This ratio is calculated by taking the number of Sales Qualified Leads in the prior quarter and comparing it to the number of deals closed in the current quarter. For example, if there were 200 SQLs in Q1 and 20 deals closed in Q2, then the ratio is 200/20 or 10/1. While the ratio is not exact — as some deals may have begun in even earlier quarters, it broadly illustrates the number of SQLs that are required to support a given sales goal.
4. Sales Cycle Length
Sales Cycle Length is the average number of days it takes to close a deal, starting from the date the opportunity is first qualified by sales. Sales Cycle should decrease over time as salespeople become more effective and leads are better qualified. An increasing Sales Cycle may be a sign of increasing competition in the marketplace, a receding market opportunity, or the need for better training of new sales hires.
5. Average New Deal Size
Average deal size is the total value of new contracts signed in a period of time divided by the total number of new contracts signed in that period. The average new deal size is important to monitor over time as it is an indicator of the health of a business or market. An increasing average deal size typically signifies an expanding market or a product that is growing in value to the end customer. An expanding deal size also suggests higher profitability as sales efforts and spending are yielding larger sized payoffs.
With the metrics above you now have a much greater ability to forecast. For example, if you have a Q4 goal of closing $2,000,000 in sales with an average deal size of $50,000 you will need to close 40 deals. Is that consistent with the pipeline data? Are there enough sales personnel to handle that workload? Taking things one step further, if your Sales Qualified Leads to Close Ratio is 10%, then you will need 400 Sales Qualified Leads to hit that target. And if your Sales Cycle Length is 180 days, you will need those 400 Sales Qualified Leads at least two quarters prior. Finally, if your MQLs to SQLs ratio is 5:1, then Marketing will need to generate 2,000 Inquiries to support the sales goal. If these figures are not lining up, you can take action before it is too late by increasing marketing spending — if there is time to have an impact — or decreasing the forecast and curtailing spending.
6. Win / Loss Ratio or Close Rate
This ratio is the total number of won deals compared with the total number of lost deals during a period. For example, if 100 opportunities went to the final stage of the pipeline and 40 closed and 60 were lost during the period, the win/loss ratio would be 4/6 and the close rate would be 40%. Over time, an increasing ratio illustrates more effective sales or decreasing competition, while a decreasing ratio signals the opposite. A small change in the win/loss ratio has enormous impact on sales and, for that reason, good management teams spend significant time interviewing won and lost clients and prospects to better understand how to improve the process.
These additional metrics provide a more fine-tuned analysis of pipeline and additional tools to gauge the accuracy and achievability of a sales forecast. They also provide insight to address bottlenecks or invest in tactics to move transactions from one stage to another to meet sales objectives. In the example above, a Q4 goal of closing $2,000,000 in sales with an average deal size of $50,000 will require closing 40 deals. If the win/loss ratio is 4/6, you will need 100 transactions in the final stage of the pipeline to meet the goal. Likewise, if the conversion ratio to the last stage is 25%, you would target 400 transactions in the pre-final stage to meet the target.
7. Sales Productivity
Sales Productivity is the actual contract value delivered over a period of time, typically a quarter, divided by the number of full-time equivalent salespeople. To gain insight into the sales team, Sales Productivity should be reviewed on an aggregate and individual salesperson basis.
Sales Productivity should be compared to the Sales Quotas set by the sales managers. A gap between Sales Productivity and Sales Quota may signal a poorly performing organization or individual or it may reflect an unrealistic Sales Quota. Often, Sales Quotas are based on peer performance or a sales leader’s experience at a previous employer, or what an early hire at the company was able to achieve, rather than a granular analysis of the number of transactions a salesperson can process in a period of time, the available sales pipeline, or the historical amount of time required to nurture and close a new deal.
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.
