Sales is a Numbers Game, Right?
Understanding sales as a numbers game involves understanding the sales funnel concept. Starting with a pool of leads, a percentage of these will evolve into prospects. From these prospects, a further percentage will be qualified to receive a proposal. Finally, a portion of these proposals will be accepted and converted into sales. As leads progress through the sales stages, the quantity gets 'funneled' down from larger to smaller numbers, a concept that enlightens us about the sales process.
This is highly simplified, and sales leaders (and CRM software applications) have complicated it by arguing that more granular data is better for analysis and data-driven decision-making. Leads are too broad a definition. We need to start with targeted leads, which then get funneled down to marketing-qualified leads (MQLs) and sales-qualified leads (SQLs) to understand better how we are doing at generating leads.
A lead generally becomes a prospect once an opportunity is identified, and a prospect may have one or more opportunities, so we need to track opportunities and, or maybe even instead of, prospects.? However, just because a prospect has an identified opportunity does not mean that the opportunity is qualified.? Besides a qualification step after identification, additional sales steps or stages could or should be identified in the process, such as a demo or technical discovery to gather the required data to generate a proposal.? Then, after the proposal is generated and presented, there could or should be a verbal approval stage followed by contract negotiation and legal review before actual signatures are obtained.
With a CRM system configured to align with your specific sales stages, you have a wealth of data at your disposal. Salespeople and leaders can use this data to analyze individual, team, or company performance. By leveraging this data, they can reverse engineer a plan from a goal, turning sales into a numbers game.
Let's walk through a simple example to illustrate this process. Imagine an IT-managed service provider (MSP) or a SaaS company that needs a new salesperson to generate $1M in contracted annual recurring revenue (ARR) per year after a quarter of ramping up. The average contract for the company, excluding the 10% largest and smallest deals, is $100,000. This means the salesperson needs to close ten deals to meet the company’s goal. Let’s set the quota at $1.2M or twelve deals to account for potential misses.?
How does the salesperson get to twelve deals?? Let’s work backward up the sales funnel.? The win ratio for deals that reach the company's proposal stage is 31.8%.? Let’s round it down to an even 30%, which means this salesperson needs 12/30% or 40 opportunities to get to the proposal stage.? Forty proposals at $100K each is a $4M pipeline, which is 3.3x the salesperson’s quota and 4x the company’s financial goal.? These are generally considered healthy pipeline-to-production ratios.? Good!? So, how do we get to 40 opportunities in the proposal stage?
We see that 67.4% of all identified opportunities for an initial prospect advance to the proposal stage.? Rounding down to even two-thirds tells us the salesperson needs to find 40/66.6% or 60 prospects for an initial opportunity.? That is five new prospective opportunities per month.? How do we find those?
Let’s assume all of them need to come from the salesperson's outbound outreach efforts, and any marketing leads or prospects found through personal networks or referrals are “gravy.”? To find a qualified prospect with an identified opportunity, the company’s data shows the salesperson needs to communicate with ten targeted leads, which requires reaching out to fifty targeted leads an average of ten times each.? That is 500 outreaches per month or 25 per day for twenty days.? This is doable in two to three hours, leaving plenty of time for all related sales activities to move the identified opportunities through the sales funnel.? Great!!? This numbers game seems easy enough.? Let’s get started…
The salesperson is an excellent hard worker (see “Who are you?”) and hits the top-of-funnel numbers. The sales manager diligently tracks the salesperson’s activities, closely watches these key performance indicators (KPIs), and swoops in to help the salesperson correct course whenever he is about to fall short on the numbers.? What ends up happening at the bottom of the funnel?? Here is a common outcome I hear, read about, and see on other teams.?
In the first quarter, the salesperson successfully opened five opportunities per month, leading to ten proposals for the first quarter – right on target.? He is ramped up and forecasts three opportunities to close next quarter.
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In the second quarter, he again opened five opportunities per month and generated ten proposals, forecasting three to close in the third quarter. However, only two of the first quarter’s proposals closed as won, and he missed his straight-line quarterly quota.? Three of the remaining eight proposals from Q1 were closed as lost, leaving five still open.? He decides to forecast two of them for Q3, hoping not only to make up the deficit from Q1 but to get ahead of quota heading into the end of the year.
In the third quarter, coming in with fifteen open proposals and five forecasted to close, the salesperson focused more on those, only opened four new opportunities per month, and generated only eight proposals in Q3. The sales manager wasn’t watching the top of the funnel as closely because he was also focused on closing the bottom of the funnel. ?Of the five forecasted to close, only three came through.? But hey, that’s hitting the quarterly quota, right?? Hooray!!? Of the remaining twelve proposed opportunities coming into Q3, another three were closed as lost, leaving nine open plus eight new ones in Q3 for a total of seventeen open proposed opportunities.? The salesperson decided to forecast five to close in Q4.
Last quarter, in this example, the salesperson was once again more focused on the bottom of the funnel in the fourth quarter and opened four new opportunities per month but managed to generate nine proposals.? Of the five forecasted to close, he again hit his quarterly quota by closing three as won.? Of the remaining fourteen coming into the quarter, three were closed as lost.? This leaves eleven plus the nine new ones for twenty open proposed opportunities: a $2M pipeline against a remaining $400K quota (5x) and a remaining $200K company goal (10x).
What do you think will happen in the next quarter?? Will he hit the company goal?? Probably this time.? Will he hit his quota?? Maybe, or maybe not.? But that’s ok.? That’s why we inflated his quota over the company goal, right?? But what about the fact that he missed his quarterly forecasts three quarters in a row?? Most do.? That’s why sales managers commit less than salespeople’s forecasts.? What about next year and our multi-year growth plan?? Are you kidding?? We barely squeaked by this past quarter…? we can only focus on one quarter at a time.? Sound familiar?? That’s all just part of the numbers game - no problems, right?
Well…? There are multiple potential and common problems in this example and with many sales teams.? Salespeople and sales managers are generally optimistic and believe sales is just a numbers game. With their “happy ears,” they listen for and hear what they want to hear to generate the number of new opportunities and proposals that are supposed to bring them the peace and prosperity that hitting and exceeding quotas should bring. And yet…? peace and prosperity are often lacking.
How can I tell?? ?And what are the deep, fundamental, and strategic problems lying beneath the surface?? The first tell is salespeople and sales teams that consistently fail to deliver closed deals on time to meet their forecasts.? The second tell is an ever-building wave of forecasted opportunities rolling forward and being re-forecasted from quarter to quarter.? The third tell is a focus on the quantity of the numbers instead of the quality of what is behind the numbers, efforts geared towards producing activity metrics instead of meaningful outcomes, and an overreliance on sales pipeline-to-production ratios in setting bookings and revenue expectations.
These are common signs of deep, fundamental, and strategic problems, including:
Many of today’s salespeople and sales teams lack the essential skills to succeed. This lack of skills is insidious and compounds over time, leading to an ever-increasing pipeline filled with lots of hopes and dreams and very few genuinely compelling opportunities for the prospect to make a change to solve a serious business problem and buy the solution the salesperson is trying to sell within the timeframe they expect.? Sales is more than just a numbers game; when it comes to the numbers, it is usually the quality over quantity of the numbers and what is behind them that matters most.
The good news is that many salespeople can learn these skills, especially with a good coach. An excellent first step is to treat your sales or your sales manager job as a profession and start being professional (see “Are you a Sales Professional? Or just a salesperson?”), followed by learning from some of the top professionals in our field (see “What are Your Top Five?”).