Monitoring the Core Elements of a Standard Pipeline (Part Three)
Understanding Sales Performance
In part three of our series on company metrics (find part 1 & part 2 here), we’re talking about sales metrics, namely the core elements of your standard, run of the mill sales pipeline, which you should be monitoring.
Sales metrics refer to sales data a business monitors to understand their performance, determine if they’re reaching sales goals, understand their cost to acquire a customer (CAC) and to ultimately get a clear picture of the lifetime value of a customer (LTV).
We’re saving a more detailed discussion of LTV and CAC for another day (we PROMISE to tackle them soon!), but in this article we will look at the top 6 sales metrics of a standard pipeline that we recommend your startup business tracks to get a grasp on your sales efforts and its return on investment (ROI) so you can allocate resources more appropriately.
Our Top 6 Sales Pipeline Metrics
In our article titled, “Intro to Metrics & 4 KPI Rules to Live By” we already mention the famous phrase by Peter Drucker, “What gets monitored gets managed,” but it’s just too true not to bring up time and again. It would be daft to spend more on your sales than the value of your sales but to understand the value of a sale you must first get more familiar with your sales pipeline metrics by monitoring them closely.
The top 6 sales metrics Simple Startup tracks, and hopefully you do too, are number of new leads, pipeline volume, deals won, average days in pipeline, sales conversions, and average deal size. They help us cut through the noise of the vast number of sales metrics we could track and keep focused on the critical numbers that count.
1) Number of New Leads
Leads are basically where the sales pipeline begins, they’re business gold! The first core element of a standard sales pipeline is the Number of New Leads generated by your sales activities or how many new contacts are entering your pipeline. These people haven’t made a sale yet, but they’re likely a very ideal client, have expressed an interest in your product or service and have the potential to convert into a customer in the future (with a little cultivation by your adept sales team, of course).
2) Pipeline Volume
The great thing about leads is that they have the potential to convert into a paying customer BUT depending on your business model, once they convert they’ve likely reached the end of your pipeline. Which brings us to our next metric, Pipeline Volume – you need to track the accumulation of leads in your pipeline. This will clue you in to when you need to up the ante on your sales activities (i.e. your pipeline volume is low) or you can slow down on sales (i.e. you have SO MANY LEADS you and your team can’t handle them all). That sounds like a dream!
When tracking pipeline volume, there is the opportunity to get more granular in your understanding by tracking the sales volume by sales stage (or even by product or service). After all, a contact who recently responded to your email is very different from a lead who has scheduled a meeting with you, because the likelihood they will convert to a customer in the former situation is much higher.
We highly recommend tools like our metric tracker and a customer relationship database (CRM) to keep your leads and pipeline mega organized. We’re fans of Pipedrive but there are tons of great options like Salesforce and HubSpot and even industry specific platforms.
3) Deals Won
A lead is still a lead until they convert into a customer, which means sweet, sweet victory! Tracking Deals Won, or the number of leads that have converted into a customer, will help you understand your ability to turn a lead into a customer which will ultimately help you predict how many leads you need in your pipeline to reach a certain number of sales and produce a certain level of revenue for your business. This is especially important if you’re trying to scale up the size of your startup.
4) Average Days in Pipeline
You also have the opportunity to further qualify deals won, by tracking the Average Days in Pipeline. This will help you fine tune your sales pipeline even more by painting the picture of not only how many leads you need in your pipeline to reach your sales goals, but also how long a lead takes to convert into a sale.
5) Sales Conversion
To build on our last core element of a standard sales pipeline, Deals Won, let’s talk Sales Conversion. Sales conversion is the percentage of leads that become customers which can be developed by dividing your number of sales won by your total number of leads. Since we’re doing a little math, I always find it helpful to work through an example.
(Deals Won / Total Number of Leads) x 100 = Sales Conversions (%)
Let’s say you’re an award-winning CPG company like our customer Sun Valley Mustard and 600 people enter your sales pipeline as a new lead by downloading a coupon (who doesn’t love a coupon?). Then 60 people go to their website and purchase one of their mustard products, like this 3 pack of hot jalapeno mustard. Sun Valley’s sales conversion rate would be 10%.
(Deals Won  / Total Number of Leads ) x 100 = Sales Conversions (10%)
We could also take this a step further by looking at your annual sales goal. Say you want to bring in $500,000 in annual sales revenue and your average mustard sale is $50. You would need to reach 10,000 sales (deals won) to meet that revenue goal. And if only 10% of your leads convert then you need to bring in 100,000 new leads.
You can quickly see how tracking sales metrics allows you to make more informed decisions about your sales program and its overall effectiveness.
6) Average Deal Size
Another interesting facet is that every deal is NOT created equal. Most businesses have a set of products that differ in value and are best suited for different types of clients. For example, among its service offerings, Simple Startup provides bookkeeping, accounting, tax preparation, and fractional finance services. In the case of a very early stage startup, controller level financial services may not be the right fit for their budget, but a Tier 1 accounting subscription could be. The same could be said for a mature, CPG company opting for a controller package over a cash accounting package.
This alludes to the fact that understanding your Average Deal Size, which is calculated by dividing your total number of deals by the total dollar amount of those deals, is important. This is NOT to say that one deal size is better than the other, in fact it is important to steer clear of customer concentration, but it IS to say that each customer will have a different impact on your business and your resulting bottom line.
Total Number of Deals / Total Dollar Amount of Deals = Average Deal Size
For a growing business this can be particularly important to understand. If you’re trying to move upmarket, you would want to see your average deal size increasing. Or, if you’re trying to tackle a customer concentration issue, you may be looking to decrease your average deal size and increase your overall number of customers.
So Many Sales Metrics, So Little Time
I would like to call your attention to the fact that there truly are a vast number of metrics you could potentially track to understand your sales performance. Some of these metrics are as follows:
- Sales volume by location
- Upsell or cross-sell rates
- Average conversion time
- Lead response time
- Lead sources
Depending on your business’s stage of growth (startup, mature etc.), the growth objectives you have, and other company objectives that come into play, some of these other metrics may be useful to keep a pulse on. However, our core goal in this article was to ensure you have a firm grasp of the core elements of a standard pipeline first.
The fun thing to understand about company metrics is that they don’t have to be static, and they shouldn’t be, they should change and evolve with your company over time.
Backsolving Your Sales Activities to Revenue Goals
By tracking sales metrics, you can do fun things like backsolving to understand what the revenue potential of your sales metrics are. At their most basic, all sales metrics lead you to a greater understanding of your revenue potential, because revenue is the ultimate reason for completing sales activities in the first place.
As an example, you can backsolve for the number of leads you need to reach a revenue goal while at the same time understanding the activities you need to accomplish that goal. This “lead to revenue ratio” will give you confidence in your ability to achieve that revenue goal OR provide an opportunity to reassess the revenue you are actually capable of.
With backsolving you can answer questions like:
- Is my sales pipeline large enough relative to the size of my company?
- Will my pipeline allow me to maintain or grow the size of my company?
- Do I have enough bandwidth (resources, products, labor) to service the deals I expect to win?
- Should I allocate more funds to sales than I am now to reach my revenue goals?
To answer these questions, we can back solve for your “leads to revenue ratio” to understand how many leads you need in your pipeline and how many you need to nurture to hit your sales targets.
There is a two-step process for calculating this ratio.
To begin you need to know how many converted leads you need to reach your sales revenue goals. So you will start by identifying your revenue goal and then divide that by the average revenue per deal won.
We can revisit Sun Valley Mustard for this example and their fictitious $500,000 annual sales revenue goal. $500,000 divided by an average revenue per deal won of $50 is 10,000 closed deals (the number of closed deals over the course of a year you will need to reach the $500,000 goal).
Annual Sales Revenue / Average Revenue Per Deal Won = Number of Closed Deals
Now you have to determine the number of leads required to arrive at 10,000 closed deals. This is where the lead to customer conversion ratio comes in, which we already calculated for Sun Valley Mustard, and, as a reminder, it was 10%. Here’s the formula:
Closed Deals / Lead to Customer Conversion Rate (%) = Total Number of Leads Required
If only 10% of leads convert into a customer, Sun Valley Mustard would need to generate 100,000 leads (10,000 closed deals at an average revenue per deal of $50) to meet their goal of $500,000 in revenue.
Clearly, not every lead will convert, it is simply reality, but if you can account for the typical conversation rate of your sales pipeline then you can use those numbers to backsolve the sales activities that are required to meet your revenue goals. Which in the case of Sun Valley is a “lead to revenue ratio” of 5 leads to every $1 dollar of revenue.
Monitoring your “lead to revenue ratio” makes it much more simple to understand the productivity of your pipeline and manage how to best allocate limited resources like time, capital, and labor. Remember, what gets monitored gets managed!
Customize Your Sales Metric Tracking
We look at sales metrics as part of our accounting services and customize them specifically for each business we partner with. If you’re struggling with knowing your sales numbers or are not looking into your metrics yet, you need to!
The best place to start is by downloading our metric tracking tool and then scheduling some time on our calendar to see how we can support you in using your sales metrics to make revenue projections and forecast your business’s financial future and ultimate SUCCESS! We’ll even help you determine the ultimate in critical numbers, a customer’s lifetime value. How does that sound?
Simple Startup’s Series on Company Metrics
- Part One: Intro to Metrics & 4 KPI Rules to Live By
- Part Two: Liquidity is Really King
- Part Three: Monitoring the Core Elements of a Standard Pipeline
- Part Four: Is Your Sales Spend Worth Its Weight in ROI?
- Part Five: Let Your Operational Excellence Type Be Your Guide
Need help tracking all these metrics? Download our handy metric tracker and library here.