When it comes to tracking sales, it can be tough to decide what data will help most with strategic decision-making and improvement of results. I’ve found that by prioritising a few key metrics, you can get much better insight into what’s really happening with your sales results than the typical practice of tracking “total dollars in the door”.
To make informed decisions, you need good data. That’s a given. But if you focus purely on lag measures (those that you can only really see after it’s too late to do anything about them), you’re looking backwards while trying to steer your business forwards. So, what data should you be looking at?
First, you should understand that there are two common problems when it comes to collecting data. On the one hand, a business might not be measuring enough or tracking metrics that don’t really tell them much. For example, comparisons of this year’s sales to last year’s typically aren’t very useful, especially if your business has only been around for a short period. The opposite problem comes when a business tracks everything. If your dashboard looks like the flight deck of the space shuttle, you’re most likely collecting more data than you’re able to do anything useful with anyhow. The critical issue with collecting data is not quantity, but quality. If you’re going to measure anything, the important question to ask is, “Why am I collecting this data and what am I going to do with it?” If you can’t answer that question, you’re risking measuring too much or too little and not getting any insight from your efforts.
So what is the most relevant information when it comes to sales? When consulting to my clients, I concentrate on three metrics that offer insight into their current operations and help them perform effective short-term forecasting. For most small companies, these three measures focus their attention on critical information and informs good strategic decisions.
1. Pipeline coverage
Your sales pipeline is a list of all your sales prospects. Typically, you’d include projected sales amounts and estimates of the probability of success for each prospect. This information should be updated regularly to make it as “real-time” as possible.
Sales pipeline coverage is a fraction. The total dollar amount in your pipeline is the numerator, and your sales goal is the denominator. Pipeline coverage measures everything in the sales pipeline against the sales target. As your business matures, you’ll get better at estimating closure rates, and you’ll be able to tie closure rates to specific milestones. For instance, if you’ve only had one meeting with a particular customer, you might assign that deal a 20% chance of closing. Once the customer has agreed to pricing, you might bump that up to 50%.
In practice, you want your pipeline coverage to be at least three times your sales target. That is typically sufficient to make sure you achieve your goal, as long as you have a reasonably competent sales team and have done a good job qualifying your prospects.
2. Sales per employee
This metric is simple and a good measure for businesses of all sizes. Simply divide your gross sales figure by the number of employees in your organisation. Many small businesses scale too fast and get ahead of their sales prospects. Therefore, sales per employee is a critical measure for growing companies. This metric comes with a warning: once you start focusing on this number, you’ll quickly understand the wisdom of hiring salespeople in preference to non-sales personnel.
3. Customer payback period
The very best metric for evaluating your business - customer acquisition cost - takes a while to assess accurately. Ultimately, everything your business does will either make sense or not depending on how much it costs you to acquire each new customer. If you can acquire customers cheaply (and profitably), you’ll generally do well.
Initially, customer acquisition cost is based on an educated guess. But once you have a starting point, you can start analysing your customer payback period. If you know what it costs to acquire each customer, the logical question to ask is, “How many months will it take to recover that cost?”
The value of this metric is that it tells you how much money you need to grow and how profitable your company is likely to be. If you think about it another way, it’s like asking how many customers you can afford to “buy” using your existing working capital or operating profits. Essentially, it tells you how much growth you can support. Growth is always more capital-intensive than failure. The length of your customer payback period gives you a window into your sustainable growth potential.
The beauty of these three metrics is that they apply universally. Business owners can use them to better understand what’s working and what needs to change. Sales managers can use them to help them strategically tackle both short and long-term targets. If your company is thinking about seeking outside funding, understanding these metrics and effectively managing the business based on the results will prove critical to allowing investors grasp your business’ true potential. But even if all you’re trying to do is improve your sales results, these metrics offer much more insight than traditional lag measures such as revenue growth year on year.