A well-run business is a predictable sales equation: marketing efforts generate leads for the top of the businesses sales funnel, and closed deals should drop out of the bottom. The more streamlined and predictable a business’s sales equation becomes, the easier it is to manage the business and explain the value to others.
In any business, and in particular, in a startup or high-growth business, it is critical to establish sales KPIs (key-performance-indicators) early in the business lifecycle. Setting sales KPIs allows the company’s leadership to track and measure sales progress as the company develops. As the sales team grows, KPIs provide guidance, allowing management to identify areas for improvement across the salesforce.
Many sales leaders are familiar with well-known sales KPIs, for instance, average sales cycle (how long it takes to close a deal on average from start to finish) and average deal size (or average contract value). However, there are additional critical metrics that many sales leaders are not tracking. Here are three:
- Longest duration pipeline stage: this is the stage of your sales pipeline where deals spend the longest time historically. This stage is what an operations expert would refer to as your bottleneck. Close your eyes and picture this stage with a big red flashing “unclog me!” sign. Sales managers should understand the longest duration stage in their pipeline and work diligently to identify the root of the issue. For example, if deals spend the longest time in legal negotiation, what improvements can you make to your contracts to improve deal flow and limit redlines? If deals spend the longest time in the proposal stage waiting for customer feedback, perhaps your sales team is not following up diligently. Understand and fix your sales pipeline bottleneck or suffer reduced sales efficiency!
- MCV (Median Contract Value, or Median Deal Size): the median contract value is the most common deal size closed by your salesforce. It is the most accurate way to measure the size of a typical deal for your business. Most businesses use average contract value (or deal size), which is heavily impacted by outliers (i.e., atypical, one-off big deals). For example, if your salesforce closes 9x$50K deals and a single $2M deal, your average deal size is $245K, while your median is $50K. The median is always the more accurate indicator of a typical deal size for your business. It is often more fruitful for managers to work on increasing the median contract value (or deal size) across the company than hunting the large and elusive “whale” deals that close once in a blue moon.
- Conversion rate from qualified leads to closed deals: conversion rate from qualified leads to closed deals measures the overall efficiency of your sales efforts. It is essential to benchmark your current conversion rate and strive to improve it through refinements to your companies sales process, sales materials, additional rep training, or more stringent qualification at the top of your sales funnel. It is also an excellent way to benchmark individual reps against each other. For example, when I was head of sales at my last startup, my conversion rate from qualified customers to closed deals was ~40%. As new salespeople came on the team, they would start lower, and as they improved, we all eventually converged on ~40%, which was the best we could consistently achieve.
Every business is unique and needs to build a repeatable, scalable sales process through continual improvement. By establishing clear sales KPIs, leadership can measure the progress of sales companywide and develop targeted improvement plans. Remember, you cannot improve what you cannot measure!