Core sales metrics include leads generated, conversion rates, sales dollars, units sold, new customers won/lost, existing customer renewals, and sales cycle duration. Salespeople will often act in a manner that maximizes their commissions, and sometimes those behaviors aren't good for the organization. Measuring the right metrics helps you eliminate bad behaviors, such as excessive discounting.
- You can't have a strong business without a strong sales team. The sales portion of the value chain is perhaps one of the most measured functions out there. Usually this is because there's a great deal of data available and the data is highly accurate. This function is critically important to the organization's success and salesperson compensation is based directly on these metrics, so they tend to get measured heavily. They're also measured quite frequently, because you're paying salespeople that frequently.
Salespeople act in a manner that maximizes their commissions. Sometimes those behaviors aren't good for the organization. Measuring the right metrics helps eliminate bad behaviors, like giving excessive discounts. I'll highlight areas that can cause problems for you. I'll refer to them as watch outs throughout the rest of this video. Leads generated assesses how many new prospects are being contacted and qualified as potential buyers.
Look at absolute numbers and trends of contacts generated, the percentage of contacts that are qualified as buyers, and how quickly they're qualified. Conversion rates measure the percentage of leads that become buyers. This measures how effectively your salespeople are qualifying leads and getting them to buy your products or services. Here's a watch out on conversion rates. Measure both absolute numbers, as well as ratios. It's easy to game the ratios by excluding the number of leads in the denominator by saying they weren't qualified, or not documenting them until they become a sale.
I worked with one organization where the sales force was gaming the system. They were holding back their sales until the next measurement period. By doing so they knew they wouldn't get a great commission this period, however if they pushed the sales to the next period they could achieve a higher commission. This wasn't a big deal in terms of absolute dollars that they were paying the sales reps. Yes, we were paying them more. The biggest problem it was causing was customers were not getting the services they were supposed to get in a timely manner.
Sometimes sales reps were holding back a sale for two or three weeks and we had customers calling us saying, I bought your service, where are you? Once we realized what was going on we changed the sales commission plan, so that this bad behavior would stop. Units sold measures how much product the buyer purchases. Absolute numbers and trends are helpful for evaluating sales performance. You can also use ratios, like units sold per sale or per customer to evaluate the way salespeople are selling.
It'll show you if they're making small sales to many customers or big sales to fewer customers. Sales dollars in total is your revenue generated. Measure both absolute dollars, trends, and ratios, like dollars per sale, dollars per customer, and dollars per sales rep. Watch out, track discounts and refunds too, because you can increase sales dollars, but end up giving them back on something that you're not tracking.
New customers won and lost shows how strong or weak your growth is. You'll get a sense for how well your sales team is doing versus competitors. Performance can be a function of sales rep effectiveness, pricing, or product quality. So be sure you ask customers what drove their buying decision, so you focus on improving the right things. Existing customer renewals matter, because they'll drive future sales. Measure how many customers you lose or how many renew in a giving period of time, as well as what the renewal trends are.
This metric is most relevant when you have a contractual relationship or subscription-based revenue with your customers. Discounts and rebates can get lost in the shuffle. They have a huge impact on your profitability. Every dollar you discount or rebate comes right off your bottom line. Watch out, if you don't have your sales incentive plan right discounts and rebates can be abused, because they help other metrics, like conversions, sales, and renewals look better.
A sales rep can drive an incremental sale by offering the customer a lower price or telling them they'll get a rebate on the back end. If you're paying that sales rep on making the sale and on their sales dollars, but you miss the fact that they offered a rebate that person got a sale they might not deserve. Sales cycle duration tells you how long it takes your salespeople to go from initial contact with a prospect to actual sale occurring. It's a gauge of their selling effectiveness and followup.
You'll know if they're staying on top of their sales pipeline with this metric. Realize that customer dynamics, budget cycles, and contracting processes can have a huge impact on this metric. When I look at my team I'm always pushing them to ask when's the last time you followed up with this client? When is the client's budget cycle? Are we getting in in time to be included in next year's budget cycle? My best salespeople are the ones who are staying on top of their leads and contacting their customers frequently.
They tend to have shorter sales cycles. The ones who aren't performing as well don't do as good a job on the followup and they have a longer sales cycle duration. Selling costs assess how much money you're spending to make your sales. While it takes money to make money that doesn't mean you shouldn't measure and control sales spending. Again, look at adherence to budget, spending trends, and key ratios, like spend per sales rep and spend per dollar of revenue.
Sales is obviously a metric rich environment. Measure what matters. Be sure to think through how sales compensation plans can affect your metrics. If you're not measuring the right things you might be driving behaviors you won't like.
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- List the main purposes of measurement.
- Define value chain.
- Compare and contrast qualitative and quantitative measurements.
- Identify common measurement reporting tools.
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- List good measurements of strategic planning, financial planning, and legal performance.
- Explain measurement processes and best practices.