January 2024 Newsletter
Growth Metrics to Build Shareholder Value
CEOs, presidents and business owners of top performing businesses drive growth and value. Setting budgets and sales goals are just the beginning. CEOs need to pinpoint a specific sales strategy, sales management techniques, and track metrics, analytics, and key performance indicators (KPIs) to ensure targeted growth (at or above industry growth rates) in Revenues, Gross Profit Margins, and Net Profits to substantially increase shareholder value.
If growth, sales and sales management are not your strengths, gain the help you need from a seasoned business advisor such as CEO Advisor, Inc. as failing in these important aspects can cost you millions of dollars in sales, profits, value and your ability to sell your company in the future.
Strategy, sales and sales management are all an art and a science. Below are 12 key sales metrics and KPIs that will create a tremendous return on your investment and grow your business to the next level.
1. Sales GoalsSales Goals include the number of closed customers signed, bookings or signed contracted Revenue and many other Sales Goals for a given time-period. They should be measured monthly, quarterly or annually. Sales goals also include the number of new customers, number of renewed customers, number of new opportunities created, number of outbound calls per sales rep and by the sales team, number of days of the sales cycle and many others.
2. Sales Pipeline CoverageSales Pipeline Coverage refers to the amount of opportunities you have in your Sales Pipeline to ensure you reach your Sales Goals. Every industry is different, but you want to ensure that your Sales Pipeline is robust, growing and advancing through the sales stages to achieve or exceed your Sales Goals. In today’s uncertain economic climate, sales management should track your late-stage Sales Pipeline opportunities on a weekly basis.
Sales Pipeline Coverage Calculation = Late Stage deals in dollars (Proposal Stage and later) / Sales Forecast in dollars
A rough rule of thumb, depending on your industry, is $3 of Sales Pipeline for $1 of Sales Forecast. Knowing this metric can help sales management to course-correct quickly to ensure an accurate Sales Forecast and successful quarter to achieve your Sales Goal.
3. Sales CyclesSales Cycle refers to the average amount of time it takes for a prospect to move from A) First contact to a Closed-Won deal, and B) The Opportunity Stage to a Closed-Won deal. Understanding these two metrics can help sales teams determine whether there are any bottlenecks in their sales process—which can not only delay deals but potentially lose them—and streamline the sales process moving forward for a better close rate and more accurate Sales Forecast.
There are several reasons for an increasing Sales Cycle, including a) Targeting larger prospects, b) a newly launched product, and c) sales people not closing effectively, etc. Target your prospects prudently, qualify them thoroughly and close hard, and you will reduce your Sales Cycle and increase Sales substantially.
4. Close-Won RateThe Close-Won rate refers to the percentage of deals that are Closed-Won within a specific time-period per Opportunity.
The Close-Won Rate Calculation = Total number of Closed-Won Deals / Total Number of Opportunities
Analyzing how the Win Rate changes over time can help you gauge your sales reps’ performance, as well as, how much Sales Pipeline Coverage you need to hit your Sales Goals.
5. Conversion RateIn sales, the Conversion Rate refers to the number of qualified leads that result in Closed-Won deals.
The Conversion Rate Calculation = Number of Closed-Won Deals / Total Number of Qualified Leads
This key metric can measure how well your sales team turns leads into new customers. Tracking Conversion Rates over time, and the characteristics of those leads, ensures that your company is focused on selling to relevant buyers. Sales teams should track the origin of deals in the sales funnel by lead source, as this is very valuable for efficiency in your marketing.
6. Average Deal SizeThe Average Deal Size refers to the average dollar amount of each Closed-Won deal.
Average Deal Size = Total Dollar Value of Closed Deals (over a specific time-period) / Total number of Closed Deals (over the same period)
If a company closes four deals in a quarter, at $60,000, $60,000, $80,000 and $80,000, the average Selling Price would be $70,000 for that quarter.
This metric tracks your Sales team’s ability to move upstream to larger deals and to avoid smaller prospects. Is your Sales team able to manage complex sales cycles with larger deal sizes? Are you generating leads from larger prospects? These are critical questions when growing your business to the next level.
Average Deal Size should be tracked for given time periods (monthly, quarterly, annually), as well as broken down by renewals and new deals to get an understanding of where the most profitable deals lie.
7. Annual Recurring Revenue (ARR) and Monthly Recurring Revenue (MRR)Annual Recurring Revenue, or ARR, is the total amount of contracted recurring revenue that your company has each year. It’s a particularly crucial metric to follow for any Software-as-a-Service (SaaS) business that is subscription based, as it tells you how much contracted Revenue you can expect to receive from customers in a given year.
The ARR Calculation:
Annual Recurring Revenue (ARR) = Total Value of All Recurring Revenue in a 12-Month Period Contract
For a 3-year annual contract for one customer totaling $75,000, the calculation would be $75,000/3 = $25,000 in ARR. Add up the ARR for each contract to calculate the total ARR in your company. You can also look at ARR by product to gain insight into the performance of each product line.
For Monthly Recurring Revenue (MRR), which represents the total amount of contracted recurring
Revenue each month, a similar calculation applies. It is simply the monthly contracted subscription Revenue.
8. Average Revenue Per User (ARPU) and Average Revenue Per Account (ARPA)Average Revenue Per User (ARPU) and Average Revenue Per Account (ARPA) refers to the amount of Revenue per subscriber/user, or account in a particular time-period. It is calculated by dividing the total amount of Revenue for that time period by the number of subscribers/users or number of accounts during that period.
This KPI is helpful to track for a few reasons. If your ARPU is increasing, it’s an indicator that your pricing is stable. Identifying your highest ARPU customers may also give you insight into your best product-market fit. For example, if you notice that manufacturing and technology companies are your highest ARPU clients, that may be a signal to double down in those segments because you know they’re willing to pay the asking price for the value your product brings them.
ARPU = Total Recurring Revenue / Total Number of Users
ARPA = Total Recurring Revenue / Total Number of Customers (Accounts)
9. Churn Rate – Customer Churn and Revenue ChurnCustomer Churn Rate refers to the number of your recurring customers who either cancel or don’t renew their subscriptions during a specific time-period (monthly, quarterly or annually). Revenue Churn refers to the dollars of Revenue that do not renew or cancel in a specific time period (monthly, quarterly or annually).
Customer Churn Rate Calculation = Number of customers at the beginning of the period - (minus) Number of customers at the end of the period (Less number of New Customers sold in this period) / (divided by) Number of customers at the beginning of the period (expressed as a percentage)
Revenue Churn Rate Calculation = Recurring Revenue in dollars at the beginning of the period – (minus) Recurring Revenue at the end of the period (Less Recurring Revenue upgrades or add-ons during this period) / (divided by) Recurring Revenue in dollars at the beginning of the period (expressed as a percentage)
Customer Churn and Revenue Churn are critical metrics to track for any business with a recurring Revenue subscription model. If you’re losing Customers or Revenue faster than you’re gaining them, your net growth is negative. This is the core reason that strong Account Management for protecting your customer base, providing fantastic customer experience, and continuing to innovate in order to provide value is so critical.
10. Net Revenue Retention (NRR) RateNet Revenue Retention is the percentage of recurring Revenue that is retained/grown from existing customers over a period of time. It measures how well your company is at renewing, sustaining or growing your existing customer base.
The Net Revenue Retention Rate Calculation (for a year period) = Beginning ARR + Expansion/Upsell ARR - Contraction/Downgrade ARR - Annual Revenue Churn / (Beginning ARR) (expressed as a percentage)
The formula above applies on a monthly or annual basis as both calculations should be tracked on-going.
11. Sales LinearitySales linearity is the steady and predictable pattern in which deals close throughout the quarter. The idea is that sales linearity helps avoid the end of quarter scramble to get deals in and make quota. Ideally reps attain 30% of quota by the end of the first month of the quarter, 60% by month two, and 100% by the end of the quarter.
Top sales teams strive to achieve this sales targets for a number of reasons:
• Relief from heavy discounting at the end of the quarter just to make their number• More predictable Revenue, allowing more strategic and sound investments• Better cash flow• Customer success teams can plan onboarding resources to support new customers 12. Sales Productivity MetricsSales Productivity data includes any activity that a member of the Sales team engages in with a customer or prospect. Sales Productivity includes several metrics that assist in tracking and monitoring sales activity in a given period:
Sales calls completed per sales repSales calls completed per sales teamOpportunities created per sales repOpportunities created per sales teamProposal Stage Opportunities achievedOpportunities Closed-WonOpportunities Closed-LostAverage Sales Cycle Other Sales Metrics
Sales metrics should be monitored on a consistent basis every month. A disciplined approach to monitoring sales metrics is critical. Sales are the lifeblood of your business and will be the difference in reaching your growth goals and a successful exit.
CEO Advisor, Inc. has the expertise and experience to help you focus on the growth of your business to achieve your goals and build shareholder value. Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520, by mobile phone at (714) 697-3370 by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.
Sales Management: The Ultimate ROI
- Managing your sales team to maximize productivity and sales can generate the greatest Return on Investment (ROI) for any CEO or business owner.
- Whether you have a one person sales team or you have a large salesforce, you can manage and leverage your sales effectiveness to generate a tremendous ROI. If you want to achieve maximum productivity and double your sales to grow to the next level, you must focus on and refine every aspect of your sales efforts and your sales team, as well as, have the tools to properly manage and track your sales activity.
- 1. Prospecting
- Set clear goals of the number of required calls completed per day, calls scheduled for the next week in your customer relationship management (CRM) software, opportunities created in your (CRM), sales appointments per week, proposal presentations and sales per month. Tracking sales activity in your CRM is key. You must ensure that each salesperson on your team has their calls scheduled a week or more in advance in your CRM, and time and priorities are scheduled daily to accomplish these calls.
- 2. Prospect Meetings
- Most importantly, your direct sales team or outside salespeople need to use the telephone for one primary thing - getting sales appointments with prospects. Have a well-crafted script including the added benefits of a meeting, credibility, qualifying questions, overcoming objections, and train your salespeople to ask for the meeting multiple times.
- Make sure your salespeople do not have an overly elongated initial conversation and basically conduct the first meeting on the telephone - qualify the prospect, briefly determine their needs, secure the meeting and get off the telephone to ensure a productive first face-to-face meeting as the next critical step. And then confirm the meeting by email with the salesperson’s contact information and a company overview brochure attached.
- 3. Probing Questions
- Whether you sell by telephone, face-to-face or both, your salespeople need to begin by asking open-ended probing questions to both identify the decision-maker(s) and get a clear understanding of the needs of the prospect. Then, present the benefits of using your products and services and briefly provide some examples of how current customers have benefited the same way. Benefits sell, not features.
- 4. Recommendation
- Using a range of questions to qualify the prospect and determine their needs, you need to formulate and make your recommendation. An inside salesperson will do this by telephone with smaller prospects, but an outside salesperson needs to do this face-to-face with larger prospects. This is critical to move the sales process forward, to gauge interest, reduce the sales cycle, fine tune their needs, and to formalize the next step toward closing the sale.
- 5. Closing the Sale
- Closing the sale is a process in itself. In order to minimize the sales cycle and move forward with the close, you should ask close-ended questions in the form of a Trial Close, such as, "If we could solve your lead time problem, would you be interested in moving forward?" Or, "Do you feel that a company with our expertise and lead time responsiveness could meet your needs?"
- The Trial Close does not ask for the business, but serves to verify their need, readiness to buy, address any hesitations, concerns or initial objections and gets the prospect in "Yes" mode. A yes response to your trial close will lead you right into the close and a positive outcome.
- There are many types of closes to gain a new customer. You have heard the saying, "Close early and often." This refers to not waiting too long to ask for the sale and be willing to close, overcome objections and close again. If your sales team is not doing this, they are going through the motions and leaving a lot of money on the table.
- A preferred type of close is the "Either or" close. By having two options in your proposal you can ask, "Do you prefer Option A or Option B?" Simply ask for the business and be silent until you get your answer (the next one to speak losses so let your prospect answer your closing question). If you have done your job properly, a yes will follow, and you should proceed in locking up and signing your new customer. Remember, you cannot help someone if you don't ask for their business.
- CEO Advisor, Inc. has helped many of our clients to hire, train and implement proper sales management techniques to optimize sales and grow businesses to the next level in order to generate a tremendous ROI. Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. for a no cost initial consultation at (949) 629-2520, by mobile phone at (714) 697-3370, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.