How to improve your sales using data
This is part 1 of a 5 part series on Sales Metrics.
Most businesses employ sales people to help generate revenue. Sometimes the sales team comprises most of the business (car dealerships) and sometimes they are just a small part of a larger puzzle (food production). Whatever role sales plays in your business, measuring sales effectiveness is crucial, but always a challenge.
The easiest way to measure the effectiveness of your salespeople is to track the total amount of new revenue they bring in every month or quarter. Easy, right? Even this simple measure can be difficult to calculate! Do you measure booked revenue (when the contract is signed), or only collected revenue (when the money is in your bank)? What do you do if a customer fails to pay their bills? These issues become important factors in building both your sales goals and your sales plans to motivate your team to sell as much as possible.
Even if you master measuring sales revenue, it rarely gives you enough information to truly optimize your sales organization. Luckily there are other sales metrics, beyond revenue, that can help greatly in measuring, evaluating and planning for your sales team. We’ll cover them this week and hopefully help you make your sales organization a data driven engine.
Tomorrow we’ll get started by covering Sales Efficiency, which will tell you if your sales team is worth what you pay for them.
Sales Metrics: Measuring your Sales Efficiency
This is part 2 of a 5 part series on Sales Metrics.
As with any business, I’m sure your company spends a lot of money on marketing and sales. How do you know if you are getting a return on that investment? Sales Efficiency (also known as Sales & Marketing Efficiency) is a measure of how much revenue you generate for every $1 you spend on sales and marketing.
To calculate your sales efficiency, you simply divide the amount of new business you generated in a set time period (e.g. January) by the total sales and marketing cost for the same time period. For example, if you spent $10k on sales and marketing in January which generated $15k in new customer revenue then your Sales Efficiency would be 1.5.
If your Sales Efficiency is above 1, it means your sales and marketing are generating more cash than they consume and you can spend more to generate more revenue! If the value is lower than 1 it means that you are burning capital and you need to watch your bank account, as you can’t run a loss forever and remain in business.
Okay, that sounds too easy. What is the catch?
You are right, that does sound too easy! Sales efficiency can be difficult to calculate for a number of reasons:
- It can be hard to determine how much of your revenue is due to sales and marketing spend. If a customer returns to your site and spends more money, is that because they had a great experience previously or because you spent money to reach them again? What about subscription businesses where you might not know how much revenue you generated in January until September?
- It can be hard to classify expenses as sales and marketing! Advertising is easy to classify as marketing, but what about promotional discounts? What about channel partnerships where you provide wholesale pricing?
- If your business experiences seasonal swings, it can be hard to have a consistent measure of efficiency. E-commerce businesses boom around the holidays which can influence the Sales Efficiency calculation.
Due to all of these challenges, many different variations of Sales Efficiency have been created over the years for different kinds of businesses. We’ll cover them here on the Data Driven Daily, starting tomorrow with the Magic Number!
(Yes, it’s really called the “Magic Number”. No, I didn’t come up with that.)
Sales Metrics: Using the Magic Number to improve sales
This is part 3 of a 5 part series on Sales Metrics.
As we discussed yesterday, Sales Efficiency can help you make decisions about your sales & marketing spend by measuring how much revenue you generate from every $1 you spend. (Hint: If you generate more than $1 you should probably spend more.)
However, it can be hard to calculate Sales Efficiency. For subscription businesses it is especially hard because you will not know how much revenue you generated from January sales until many months later! Have no fear, this is why subscription businesses use a metric called the Magic Number – a metric that allows you to compare the incremental revenue you made in the last quarter against the sales and marketing expenditures, but extrapolated over a whole year.
You calculate your Magic Number by taking the amount of incremental revenue you generate in a given quarter, multiply it by 4 and divide it by the sales and marketing spend for the previous quarter. For example, if you spent $10k on sales and marketing in Q1 and generated $5k of incremental revenue in Q2, then you would calculate your Magic Number as:
Why do you multiply the incremental revenue by 4? You are estimating how much that new business will be worth over 12 months (4 quarters) instead of waiting 12 months to find out. This shortcut allows you to calculate your Magic Number every quarter and make changes immediately instead of waiting a year! (More explanation here)
That sounds like hocus pocus.
Ha, that’s a pretty good pun. Seriously, though, you are right that it seems dangerous to extrapolate revenue by simply multiplying by 4. There are some hidden traps here:
- If your customer churn is very high, you may not actually have customers pay for 12 months so you would vastly overestimate incremental revenue. In that case, you would use a more appropriate (lower) multiplier than 4.
- If your sales and marketing strategy is shifting, you may not be able to attribute all the incremental revenue in a given quarter to the spend from the previous quarter. You should fall back to the simpler measure of Sales Efficiency in this case.
- If you don’t have a very clear definition of incremental revenue, you can misattribute revenue you would have earned anyway to your sales and marketing, which will overestimate their effectiveness.
Even with these dangers lurking, the Magic Number is a useful compass when making decisions about increasing your sales and marketing spend at subscription businesses. It is also a useful yardstick to use to compare how well your sales and marketing is performing compared to other companies in your industry. Read more about Magic Numbers across different companies.
Tomorrow we’ll talk about another way to think about efficiency: the length of your sales cycles.
Sales Metrics: How long is your Sales Cycle?
This is part 4 of a 5 part series on Sales Metrics.
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.
Sales Metrics: Optimizing your Sales Funnel
This is part 5 of a 5 part series on Sales Metrics.
So far this week, we’ve discussed the performance of sales as if it’s a black box, where the inner workings are hidden from us. This is far from the truth, as any developed sales organization is using a repeated sales process, with clear steps and milestones that help them evaluate deals and estimate the likelihood of closing. We can measure that process like any business funnel (See Funnels) and in doing so find opportunities for improvement.
Take the following example sales process and corresponding metrics:
In this example, only 3 purchases resulted from 100 customer leads, which is hard to evaluate on its own. The key measures in any sales funnel are not the actual counts at each stage, but the conversion rates between steps in the funnel. We can see that 50% of customer leads convert into customer demos, but only 20% of those demos convert into trials, which seems like a significant problem. Even worse, only 30% of trials convert into purchases, indicating that there are serious challenges in moving customers between those stages. The conversion rates in your sales funnel will often make the problems in your sales process very clear.
Measuring your sales funnel is most useful when done over time, so that you can see how the conversion rates between each step in your funnel change. As you add more salespeople, do your conversion rates go down? What if you increase your prices? These conversion rates become one of the most important indicators of the impact of larger business decisions on revenue, as well as helping you get ahead of revenue problems in the future.