Building a Better Sales Metric
We all know the sales manager who focuses all their energy on "what is closing this month." This sales manager knows backwards and forwards total revenue sold, number of deals closed, average deal size and sales cycle length. When interacting with your company ownership or the C-suite, these numbers are what they will be asking for. So by all means you need to understand these. However, If you want to be answer the next question they will ask, "How are your going to improve those numbers?", there is a whole different set of indicators you need to understand.
Lagging Vs Leading Indicators
The metrics above are what we call lagging indicators. Lagging indicators measure actual results. These indicators are easy to measure, but hard to directly influence. By the time a lagging indicator becomes visible, it is too late to change anything. Your primary indicator as a sales manager, quota attainment, is a lagging indicator.
Leading indicators measure inputs or in the sales world, activity. They can be harder to measure but are much easier to influence on a day to day basis. Examples of leading indicators are new leads into the pipeline, lead to opportunity conversion rate, closing ratios, and percent of opportunities that pass into each sales stage. Understanding these indicators will help you more accurately predict where your lagging indicators will ultimately end up.
What leading indicators should I track?
The maturity of your sales program coupled with the amount of data you already have and what your primary lagging indicator is, will dictate what different leading indicators will be needed to help the sales team progress.
A brand new sales team normally has limited visibility into cycle time or closing rates, and is focused on revenue generation as the primary lagging indicator. Ideally you will want to track the following data in your CRM:
1. Daily lead generation
2. Opportunity progression though your sales cycle
3. Opportunity size
From this data you can calculate four key indicators:
1. Closing rate
2. Average revenue per deal
3. Lead to opportunity conversion rate
4. Average sales cycle length
These four leading indicators will help you look at your team's pipeline and accurately forecast your revenue totals for the sales period. If you aren't going to achieve your revenue goal you can see what factor is impacting your lagging indicator early enough so you can help adjust your teams activity levels.
As a sales program matures and has increased data, the leading indicators should become more specific. In addition to average sales cycle time, average days per stage and closing rate per stage should also be tracked. These new leading indicators will give you greater insight into your sales cycle and where choke points are causing opportunities to drop out of the funnel. If a program sells to multiple verticals, closing rate by industry is also a key indicator of issues. If one industry has a dramatically lower closing rate, it may be due to a failure to identify the correct client pain point or the value proposition is not being communicated effectively.
Sometimes, specific sales initiatives such as implementing a new sales process, may require a temporary shift from the traditional lagging indicator in order to ascertain the effectiveness of the implementation and the effectiveness of the process as a whole. When this happens sales leaders need to be creative and understand what the lagging indicator they are striving for is, and what the leading indicators are that signal that success will be achieved.
Leading indicators are geared to help sales people achieve their goals. Leading indicators will help sales managers identify where they need to spend time working with their team. And ceasing the constant nagging about quota and engaging your sales team with effective coaching based on these indicators will not only increase individual performance, but also build a stronger relationship between the sales manager and their sales team. Engaging the team in identifying these leading indicators also increases your team's ownership over their own performance, producing better accountability and a better sales culture.