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The Importance of KPIs in Measuring Sales Success
Posted on May 5th 2013
Too often when looking at a sales team’s success, managers only look at the actual sales (the closing of the business). Of course, this is important—but the sale is a lagging indicator. If you have no sales closing today, it indicates that your team has not been performing well for months. By the time you’re at the point of no business, you’re already well into trouble. In fact, you are at the point of no return.
So how, as sales leaders, do you create leading indicators, tracking the behaviors required today for sales tomorrow? The answer is Key Performance Indicators (KPIs). KPIs are important leading indicators that ensure you have a healthy pipeline and future business. They provide an objective form of measurement that allows you a glimpse into your future—before it’s too late to change the direction or solve any issues with your team.
The first step in determining which KPIs to measure and how to measure them correctly is to differentiate between a sales pipeline and a sales forecast–two terms that many sales professionals mix up or don’t differentiate. A sales pipeline provides clear visibility into all of your opportunities, regardless of their probability of closing, whereas a forecast is a subset of the pipeline that only includes those qualified opportunities that are expected to close in a defined reporting period.
A properly defined pipeline and its stages help you organize your sales process and create effective tools and benchmarks for your sales team, making it much easier to predict the future success of your sales force. In fact, using KPIs, it’s possible to get within 5 percent forecast accuracy, meaning that you’ll always know not only how your team is currently performing, but also what roadblocks might lie ahead.
A sales forecast is a forward planning tool for budgets and spending, and measuring KPIs around lead conversion success, such as the cost per lead, can help you budget appropriately and accurately predict your revenues.
The KPIs that every sales team should be measuring are:
Leading indicators: KPI’s for funnel development
- Number of qualified leads in the pipeline
- Sales cycle length
- Total length of time to qualify a new prospect
- Qualified to proposal ratios
- Number of evaluations / short lists per year
- Number of new (first) client meetings per month
- Cold lead to qualified ratios with conversion rates
It’s important to not only measure your opportunity-to-close ratio but to measure conversion from stage to stage, which may be a new concept for you. Keeping an eye the length of your sales cycle, the number of new client meetings you have each month, and the conversion ratio of new leads to qualified leads will provide insights on whether you will be ahead or behind on future revenue and how you can best adjust now to ensure you will hit your future revenue goals.
Lagging indicators: Revenue and quota focused KPI
- Proposal to closed ratio
- Average deal size
- Number of sales per year
- Annual quota
- New vs. existing client sales
KPI’s for Account Management and client retention / growth
- Average client growth year over year
- Client retention rates
Depending on your business, you may have additional KPIs to take into account. A staffing company, for example, would measure positions filled. A company with multi-year contracts and varying usage would measure contract value versus actual contract spend, for example. Software as a Service companies would measure average contract value and average length the client stays in the program.
Be objective and use data when establishing KPIs. Each should have an appropriate benchmark based on actual data and information from your sales history or benchmarks from the industry if you are a new startup. Review your sales from prior years or quarters to help you calculate averages and quotas. Understanding your average deal size and combining that with your lead conversion rate will give you an idea of how many opportunities need to be in the pipeline in order to hit your quotas in a very objective and scientific way.
Of course, measurements are only helpful if they’re paid attention to. Get to know your KPIs, and review your data weekly. Pay close attention to any trends—both worsening and improving—so you can react appropriately. It’s helpful to include your sales team in this process; review each person’s KPIs once a week in a coaching session. This will help them to understand the types of behaviors that are important and will ensure that you spot any lags in performance early and can course correct quickly.
No one likes to be blind sided by poor sales, and there is no reason to not see what is coming! There are few opportunities in life to accurately predict the future, but paying attention to leading indicators now is an opportunity not only to predict, but to change the future course of your sales.
(image: KPI / shutterstock)