Oddly, customers rarely buy your products as soon as you talk to them. The length of time that it takes between when you first talk with a customer and when they buy is known as the Sales Cycle. Cycles vary in length by industry, ranging from minutes (telemarketing) to years (airplane manufacturers). They are not hard to measure, as it is the average amount of time between customer first contact and their purchase.
How often you measure your sales cycle depends on how long long it is and how many deals you close. Companies that only close a few deals a year will measure it once a year, while companies with sales cycles measured in days are likely to measure it everyday.
On its own, your average sales cycle is a useful benchmark on sales performance. If the cycle gets longer over time, that means it is taking your team longer to close customers and might be an efficiency problem.
However, knowing your sales cycle is more useful if you combine it with some other metrics:
- Deal Size. Typically, the more revenue a deal generates the longer it might take to close. If your sales cycle is getting longer but your deal size is also increasing, then it means your team is pursuing bigger deals and that might be okay. However, if your sales cycle is getting longer, but your deal size is the same or shrinking, you are working harder to close the same business.
- Deals per Salesperson. Knowing how many deals a single salesperson can handle at a time is critical to knowing if your sales team can hit their goals. When you combine this with the average sales cycle (and the average deal size), you will know how long it will take for that salesperson to produce a given amount of revenue. If a salesperson can manage 5 deals at a time, average deal size is $100k and your average sales cycle is 6 months, then it will take a salesperson around 6 months to generate $500k in revenue.
Your sales cycle is also critical information when doing business planning. The longer your sales cycle, the harder it is for you to grow by hiring more salespeople because of how long it will take a new salesperson to close new business. If your sales cycle is more than 6 months, even if you hire new salespeople this year they likely won’t produce revenue until next year!
Tomorrow we’ll dive deeper into the sales process to find opportunities for improvement when we cover the sales funnel.
Quote of the Day: “Success is the ability to go from failure to failure without losing your enthusiasm.” – Winston Churchill