As a small business owner or a sales manager for a small business you should be able to answer these questions:
- How big is our sales pipeline both in terms of opportunities and dollars?
- Given the size of our pipeline what are the chances we are going to hit our monthly sales target?
- How long does it typically take for us to close a deal?
- How many deals to we typically win?
You should be able to answer each of these both as a company and at a sales rep level. Why are these important, what do we measure and how do we answer them? Let’s start at the top.
Pipeline size is important for a few reasons. It shows us if we have any shot in hell of hiting our monthly sales target. If it’s the 15th of the month and our pipeline is $100K and we want to close $500K in business what shot do we have? Similarly, how big does it actually need to be to realistically hit our target. The industry rule here is 3X. That is, if you want to close $500K in business you need a pipeline that is at least $1.5M. We also want to keep an eye on the number of opportunites in the pipeline. This is for the simple reason that we prefer to have the pipeline dollars to be spread out over a larger number of opportunities to limit risk. Think about a single $1.5M opportunity vs. ten…where do you typically have higher confidence?
Sales cycle, or the time it takes for us to close a deal, is also important for a few reasons. The first is that we need to understand how many of our opportunities are coming up on this average. If we just closed a bunch of deals, it’s the 15th of the month and our sales cycle is 60 days, what are the chances we are going to close more deals? Additionally, understanding the duration of our Sales Cycle helps us measure the Cash Conversion Cycle and know when we are improving it.
Finally, understanding our Win Rate ties into our understanding of the ability to hit our numbers. A simple way of thinking about this is that if we know we win 40% of all the business we go after, we can expect that (roughly) 40% of a pipeline will convert to closed business over the Sales Cycle.
To recap, all small businesses should be measuing the follwoing sales metrics:
- Pipeline Size ($)
- Pipeline Size (#)
- Sales Cycle (days)
- Win Rate (%)