Effective use of metrics in sales management

In this article, based on an Audio Learning session that I recently recorded for Bookboon, I’m going to cover some basic, essential information about sales metrics. If you have any experience in sales, you might think that this is too basic for you. Yet over the past 20 years, the one consistent problem that I’ve seen in businesses and sales teams is a complete lack of focus on sales measurement, replaced with a focus on other activities or outcomes which seem more immediate and compelling, but which actually don’t result in money in the bank which ultimately is what every business needs in order to continue operating, paying its staff and serving its customers.

Therefore, it’s always a good time to revisit the basics of sales metrics and consider what you can do to improve your focus on the activities that really make a difference.

Sales Data

Good sales people are organised, methodical and their decisions about what to do are driven by sales data. Most of all, they know that their most valuable asset is their own time.

In turn, sales data is part of the information required to run a business. Understanding sales data is critical in managing a business, because sales data represents all of the income that a business earns in order to pay its employees and suppliers. A business exists to sell products and services, and the reality of life is that customers don’t turn up on your doorstep with their cheque books in their hands; you have to go and find them. It’s therefore very important to know which activities lead to sales so that you can focus your efforts for maximum returns.

You’ll also need to know when to expect that income. An employee knows when it’s pay-day and plans accordingly for important purchases such as takeaway pizza and beer. Thus, the last Friday of the month is generally the busiest in the pubs and bars of your local town centre.

By understanding how much it costs to make a profit, you know how to work out the minimum that you can sell a product or service for. A business owner will understand all of the hidden running costs of a business which will contribute to their cost of sale. In larger corporates, the supply chain is so complex that only very few people will really understand the hidden costs in the business. It’s more likely that budgets and targets will be allocated to divisions and teams in order to deliver the right results and manage costs. Therefore, sales targets are important in maintaining the right cashflow for a business. The biggest mistake that salespeople, and sales managers, make is to think that more sales is a good thing. Those targets - in an ideal world at least - are there to support cashflow, and therefore sales results that are hugely over target can be as harmful as results that are under the target.

In a business, costs for different things work in different ways. There are some ‘fixed costs’ which don’t change with usage or demand, so we have to make sure that our total sales income will be high enough to cover those to begin with. We have to be confident that we’re going to sell enough to cover those fixed costs. Then we have ‘variable costs’. These increase as we sell or produce more, so we have to make sure that our sales margin on each sale covers those costs. If sales people sell too much, we then have the problem of maintaining customer service. For example, can we actually manufacture and deliver and service what we’ve sold? Often, the attitude of the sales manager is, “Well, that’s a nice problem to have” and that’s not exactly fair. The money is nice to have, but a problem is still a problem.

Business owners or sales leaders often try to control this over-selling tendency by limiting bonus payments, but if sales teams don’t understand the reasons, this can be discouraging.

I often see business owners, usually small business owners, hiring sales people and telling them to just sell as much as they can, because lots of sales is good. Actually, lots of sales is not good. Predictable sales is good. Predictable sales let you know when to expect pay-day, how fast to grow your business, and what you need to do to weather a storm such as the COVID pandemic or an economic recession.

Conversion Ratios

One of the most important measurements in sales is your conversion ratio.

At each stage of the process, you will reduce the number of customers that you are dealing with. You could say that each stage of the sales cycle serves to focus your time and effort onto the people most likely to buy from you.

If you send out 1,000 prospecting emails and receive 10 replies then your conversion rate at that stage is 1%. By identifying the points in your sales cycle at which potential customers make decisions, and by calculating the conversion ratios at each point, you can target your time and effort, thereby increasing your conversion rates. Because higher conversion rates lead to either more orders or fewer prospects, your cost of sale reduces and your profits increase.

Sales people often talk about a ‘pipeline’ or ‘funnel’, meaning that you’re talking to more people at the wide end, with lower levels of commitment, and fewer people at the narrow end where their commitment converts into signed contracts.

When you know your conversion ratios, you can calculate how many prospects will generate the income needed for the business, and you can target your lead generation to attract the types of people who are more likely to buy from you.

You will also know, from experience, the length of time it takes for a prospect to enter this ‘pipeline’ and then pop out the other end as a customer. You’ll know this because you’ve understood the sequence of decisions taken by your prospects and the time that it takes them to progress through those decisions. You’ll know, for example, how long it takes your customers to use a pint of milk or update their car.

Let’s say that for every 100 enquiries you receive, you win 10 orders, and that the average order value is ￡500. The total order value is ￡5,000, but to earn that ￡5,000, you have to deal with 90 enquiries which don’t result in orders. Speaking to 100 people takes a lot of time, and the very best sales people I’ve ever worked with see time as their single most valuable asset. While you’re talking to 90 people who aren’t going to buy from you, you can’t be talking to the 10 who will.

If the business requires an income of ￡3,000,000 per year, that means you have to bring in 6,000 orders per year, which is 500 orders per month, roughly 25 per working day. To win 25 orders a day, you have to deal with 250 enquiries. To do that, you need a big enough sales team, which increases your fixed and variable costs to the point where your profits decline.

It’s not as easy as it looks. Certainly it’s not as easy as just selling as much as you can.

Knowing your conversion ratios means that you know exactly what to focus on now to deliver the right income for the business tomorrow.

If your overall conversion rate is 10% then your focus needs to be on removing those 90% of prospects from the pipeline as quickly as possible.

Because the best sales people value their time, their most important behaviour or activity is qualifying.

You’ll know, for example, that if you don’t have 100 people looking at your advert today, you won’t be delivering products to 10 customers in a month’s time. Therefore, your focus should never be on chasing customers who might place an order, it should be on engaging with new prospects and then staying engaged with those prospects as they move along their decision process.

The time it takes a prospect to shuffle through your sales cycle is called the average sales cycle time, which is the time from the first point of contact with a prospect to the receipt of their order. In some businesses, this can be as long as 6 to 12 months, perhaps even longer, so if your income is falling, there’s little that you can do that will impact it in the short term.

When income declines, every sales manager I’ve ever met wants the sales team to focus on the ‘low hanging fruit’, as in, the deals which are due to close shortly, or which can be closed shortly with a bit of pressure. You now know that the deals which are due to close shortly will close anyway, one way or the other, and if a deal is easy to win then it’s also easy for your competitors to win, therefore the logical course of action is to sit tight and increase prospecting activities. No-one does that, though.

Knowing your conversion rates means that you can manage your activity now to deliver the right revenue in the future. It’s the same in manufacturing; if something goes wrong at the start of the process, it’s too late to do a quality check only at the end. You have to check quality at every stage of the production process, and in sales, we need to check quality, or conversions, at every stage too.

Decision Points

List the decision points in your sales cycle, a point at which you have some form of contact with a prospect, at which that prospect makes a decision to move to the next stage or not.

Just selling more is not a good way to increase profits. Because British Leyland miscalculated the production cost of the Mini in the 1970s, they made a small loss on each car sold. The Mini was very successful, so those small losses turned into big losses.

Once you know your decision points and conversion ratios, you know exactly what you need to do today to bring in orders tomorrow, next month and next year.

Good sales people spread the risk of the projects they are working on, so that they have a balance of short, medium and long sales cycles. Long sales cycles tend to mean that you’re talking to the prospect before they are ready to buy, however that is useful because it ‘locks out’ your competitors and enables you to influence the buyer’s decision. It’s not going to pay the bills today, though, hence a balance is needed.

A decision point in your sales cycle is a point at which both the sales person and the prospect make a decision to either move forwards or walk away. I’ll share some examples.

The prospect sees an advert and decides to either call you or ignore the advert.

The sales person makes a cold call and both the sales person and the prospect agree to meet.

The prospect asks for detailed pricing and the sales person agrees to commit the design resources.

At every decision point in the sales process, some prospects will move forwards and some won’t. The ratio between the two is your conversion rate. If you only look at your overall conversion rate from the start to the end of the entire sales process, that’s too long a time, with too many steps, to give you any meaningful information. For the percentage of prospects who dropped out, you have no idea when and why they dropped out. This means that you don’t know what to do to either increase your conversion rate or decrease the time you waste on poorly qualified prospects.

For example, if your overall conversion rate is 10%, it’s very difficult to know where to look to improve that. However, if you know that your sales process typically has 3 or 4 decision points and at each decision point your conversion rate is 50% then your overall conversion rate will be around 10%. At each decision point you can then find out what happens to the 50% of prospects who don’t move forwards and then do one of two things. You can either try something new in order to increase conversions, or you can look for criteria to identify those prospects early on, so that you can ask better qualification questions at the start of the process to save time and invest that time in more productive activities.

The most common symptom of a lack of measurement is a focus on winning deals, rather than a focus on moving conversations forward.

The sales manager who focuses on winning asks their team, “What did you win this month?”

The sales manager who focuses on progress asks their team, “Show me your forecast and tell me how each conversation has moved forwards this month”

The difference is that qualifying out is progress and is just as valuable as winning.

A side effect of a lack of measurement is a reliance on superstition. Because sales people don’t know why they win, they are more likely to attribute success to either luck or to their irresistible personality. If you’re hiring sales people, my advice is to hire the candidates who can explain to you exactly how they do what they do. The sales people who think that they were born with a gift are unable to adapt when the environment changes. The sales people who apply a consistent and scientific method will adapt that method when the market environment changes.

A sales manager is likely to feel under pressure to deliver results, as in money in the bank. However, what is actually a more valuable result for the sales manager to deliver is information. Promises of success next month don’t help the business owner. Information that helps to shape strategy and navigate through times of change is the most valuable, and the sales team is best positioned to deliver that because of the real time customer and market feedback that is available to them.

As a general rule, the question, “What did you win” won’t change anything. A far better question for a sales manager, or any manager, to ask is, “What did you learn?”

Activity and Focus

When you know your average order value, you can calculate how many prospects you need to be engaging with each day to generate the level of income that you need. If you then understand what prospecting activities are available to you then you can work out how long your sales people need to spend each day making phone calls, knocking on doors and so on.

I’m sure you’ve heard of the idea of social selling, and the promise that you can sell through social media without any of the pain and heartache of actually speaking to another human being. This is of course nonsense. If you’re selling a commodity product that you can sell without any human interaction then your marketing spend has to be huge, and your competitors can beat you simply by spending more on marketing or by lowering their selling prices. If you want to build high value customer relationships, you have to sell on value, not price, and you can only create value by talking to someone and understanding what it is that they value.

You cannot communicate benefits or value to a general audience. A feature of a product or service only becomes a benefit when it confers value in the perception of a specific prospect. Until you’re speaking to that prospect, you don’t know what their specific application is, nor what experiences they’ve had that allow them to make comparisons and perceive value.

The importance of using sales data to improve sales performance is the way in which data can influence the focus on short term activities. For example, when you arrived in the office this morning, or first switched on your computer at home, or you opened up your phone and checked your schedule for the day, what was the first sales activity that you prioritised? Did you spend an hour making cold calls? Did you check your emails? Did you spend some time chatting to your colleagues about last night’s television? None of these activities is inherently more or less productive than the others, because if you don’t know why you’re making calls or chatting to your colleagues, you don’t know what you can expect to happen as a result of doing those things. Let’s say you spend an hour making cold calls. Why? Because that’s what good sales people do? So that your boss can see how committed you are? How many calls did you make? How did you decide who to call? How did you track the outcome of each call? What is the follow up action for each call? Without measurement, any activity can be a complete waste of time. With measurement, any activity can be a productive sales activity.

The important point, of course, is knowing what to measure. In most of the businesses I’ve worked with, the only outcome that gets measured is sales order value, because that’s what sales people are paid for achieving. However, it’s probably the least important measure, because it tells you absolutely nothing about what you can do to achieve it.

What if you were to measure the number of new leads generated? A lead is a named contact with a known need for your product or service. How many leads did you generate today? How many did you contact? How many did you qualify in? What’s the next action for each of them? These are measures which are relevant today, and they will lead to sales revenue in the future. If you only focus on revenue, there is nothing that you can do to increase that today, unless a prospect is on the verge of signing a contract, in which case they were most likely going to sign it anyway, and you have achieved nothing. Sales people who don’t measure their results, and don’t focus on the right activities often develop a talent for being in the right place at the right time when a contract is being signed. Some have even turned it into an art form.

When I worked in the telecoms industry, I had a colleague who figured out a neat trick. We worked in a specialist sales team, where we sold services which were technically complex. Usually, the account teams responded to customer enquiries, who then referred to us. One service which is now commonplace was very popular for a period of time when it was first launched, and the customers generally knew what they needed to order. The account teams only needed an order template, but were confused by some of the technical terms. My smart colleague went to as many account teams as he could and said that he would take care of the headache of the order forms for them. They were very happy to not deal with the orders, they got paid for them anyway, and my colleague got to write his name on every order form, so he got paid for them too. He developed a reputation as the expert for the particular service, but in reality all he was doing was taking information from the customers and writing it on the order forms. He achieved way over his target every quarter, and everybody was happy. The bonus system was designed to reduce internal competition by rewarding everyone who might be involved in a deal. He wasn’t actually selling anything, but nobody cared, because it at least looked like he was. I imagine you’re thinking that you’d like a job like that. Well, don’t be so sure. When everyone gets paid for the deal, no-one gets individual recognition, and ultimately, isn’t that more important to you? To know that you made the difference?

I’m sure this will be a common story in large corporates. In fact, one of my global corporate clients only measure quarterly sales figures because their strategy is heavily influenced by their stock market valuation, which depends on them reporting amazing quarterly sales figures to the markets. However, their complex solutions easily take more than six months to sell, and in some cases, up to 2 years. The sales people want to win the big deals, but those big deals take a long time to sell and don’t help with the quarterly sales targets. One sales manager solved the problem in a way which is surprisingly common. What’s most surprising is not that he used this method, but that his managers probably knew about it and didn’t care as long as their figures looked good. His method was simply to lie. When the gap between what he said he was closing and what he was actually closing became too big to hide, his managers suddenly ‘discovered’ the problem and he left the company soon after with a glowing reference and bonus cheque, and in return, his managers could blame a rogue sales manager for their problems. His LinkedIn profile still portrays him as an amazing sales professional who always over-delivers against his targets.

Detailed measurement will tell you what activities lead to what results. Sudden changes become obvious. Things that don’t make sense become obvious. Choosing to do something different is often the more difficult part.

I was asked to deliver some sales coaching for a company that sold services to the health and fitness industry. They had one salesperson who only had to answer the phone because their events and online marketing generated incoming sales leads.

The owner of the business told me that they used to have a saleswoman who was fantastic, always on the phone, laughing and chatting with callers and, critically, winning lots of orders. She left, and the new guy just wasn’t living up to their expectations. The owner’s inclination was to fire him, but thought it only fair to give him some support first.

The salesman was making some obvious mistakes, but nothing really serious. For example, if a caller didn’t decide to go ahead, he’d then ask for their contact details so that he could follow up. Of course, they made their excuses and said they’d call him, and he never heard from most of them again.

I got him to take their details as soon as they called on the pretence of being able to call them if they got cut off. At this point, the caller hasn’t received the information they want, so they are more willing to trade their contact details in order to meet their particular needs. From a psychological point of view, the transaction takes place from the very first point of interaction, where information is traded long before any money changes hands. The message from the salesman was, “Yes I will help you but first you have to give me something”.

This meant that he could then follow up, and of the people who he followed up with, some said no and some said, “I was just talking to my friend about you last night. You know, if I carry on procrastinating I’m never going to do this. Let’s do it, I’ll go ahead.” so his overall conversion rate improved. We made some other changes to the questions that he asked and the solutions that he offered which improved their cashflow. So overall, the business was in a much better shape, with more orders, shorter sales cycles and improved payment terms.

This brings us to the fundamental problem in this story – the business owners only knew that they had a sales problem when they checked their bank balance. They had no idea how enquiries turned into money in the bank. By putting in place some very simple metrics and using those to tweak the salesman’s behaviour, his performance steadily improved. After two weeks, we discovered something very interesting – he was outselling the ‘fantastic’ saleswoman by a considerable margin. He was by far a better salesperson than she had been. What this revealed was something the owners didn’t know – the number of incoming leads had halved over the previous year. The new guy was getting close to her sales order value with half the number of leads. The owners realised they had to change their marketing in order to increase the number of leads. A specific issue that this highlighted was the activity of a new competitor who were taking market share from my client – again, something the owners hadn’t noticed.

You can see that, if you only measure sales results, you’re ignoring the majority of the information that you’re gathering from all of those sales conversations that don’t result in an order. If you only measure sales revenue, the sales cycle is long enough that by the time you see a problem, it’s too late to act on it. If you’re measuring what you can achieve today, and focusing on progress, then you can react very quickly when the world changes around you.

The instinct of the business owners in my story, to look at the sales guy, wasn’t necessarily misplaced, but their belief in his failure was. When I started working with him, his performance was just average. At the end of the series of coaching sessions, his performance was outstanding. Yes, of course that was thanks to my brilliant coaching and considerable sales expertise. Alternatively, it was thanks to some simple metrics which showed us where the gaps were and what to do about them. The salesperson was just an average guy, which means that he was smart and efficient, a fast learner and able to focus on results. He could hold a conversation, and by asking the right questions at the right times, he could turn that conversation into a sales conversation. The difference is in where you focus, and measuring the right results helps you to continually refine that focus.

Remember, you can’t improve what you don’t measure, simply because if you can’t measure it then you won’t know whether you’ve improved it or not.

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Peter Freeth is a talent, leadership and sales expert, coach and author. Learn more at genius.coach

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