As we work with businesses to help them sell more and grow their revenues, we often find that there is a lack of basic understanding of the principle of sales ratios.
A organization’s sales ratios are the ratios between the numbers in the funnel. These are essential pieces of data needed to understand how to improve performance, measure results and can help identify where to make strategic investments.
Step 1: Understand Your Ratios
Every business is different, therefore the selling process can vary dramatically. We usually suggest starting with your target market. How many potential clients will you market to this year/quarter/month? Then determine how many of those contacts you can qualify as having a need for your product or service over a period of time. That is your first ratio. Now identify the stages of the selling process before it is closed as a won deal. The ratios between these numbers are considered your sales ratios.
Step 2: Measure Your Ratios
For instance, let’s say you have a technology product that is sold to schools and you have identified 200 school districts in your territory on which you'd like to focus. After reviewing your historical data (or estimating if you, in fact have no prior reference) you determine that you can qualify 40 new leads out of these 200 target accounts. You have now determined the first ratio is 5:1 or 20%.
After reviewing your process, it's clear that your next step in the cycle is a face-to-face meeting to demonstrate your product. So your next ratio will be the percentage of the 40 qualified leads you have identified that will agree to meet with your rep for a presentation.
Let’s say that the ratio is again 5:1 or 20%. So that means you can plan to meet with 8 prospects out of every 40 that you qualify.
Next, you know from experience that if you meet face-to-face with a prospect, 38% of the time that meeting will result in a new opportunity being created. So, your ratio is 8:3 and you will have 3 new opportunities to pursue.
Finally, because your team is so skilled at selling and your product’s competitive advantages are crystal clear, you will typically close 33% of all qualified opportunities. Your close ratio is 3:1. Therefore, in this example, you will win one new account. That is 1 new account for every 200 target accounts identified. In other words...
200 targets > 40 qualified prospects > 8 meetings > 3 opportunities > 1 new account
This list of ratios is commonly represented as a funnel because it narrows as you work through the selling process.
Step 3: Improve Your Ratios
Now that you have determined/estimated what your ratios are, you can leverage this data to help you make business decisions on hiring, training, coaching, and marketing investments to name a few. The insight these numbers provide will allow you to create tangible action plans to improve your team’s effectiveness and increase revenues without worrying about the close rate.
I recommend as a starting point, you should identify the 2 ratios that you believe through coaching and professional development can be improved the quickest/easiest, then mount an effort to create a measurable improvement in those ratios.
In the example above, by improving the ratio of targets to qualified prospects by just 10% from 20% to 30%, and boosting qualified prospects to meetings by another 10% from 20% to 30%, you will double the number of new accounts closed without improving the close rate at all!
200 targets > 60 qualified prospects > 18 meetings > 7.2 opportunities > 2.3 new accounts.
Without a solid understanding of your ratios, managers almost always go straight to the end of the funnel to increase revenues. They focus a disproportionate amount of time and resources on the close rate, when (as shown in the above example), a significant return can be found by making moderate improvements in early stage of selling cycle ratios.
The point is that understanding, measuring, and continually striving to improve your ratios can have a huge impact on your revenue and quota performance.
TIP: Consider what other investments can be made that will have an impact on these ratios. Perhaps by investing in market research you could identify 200 target accounts that are more likely to be qualified. Or, by leveraging a professional appointment setting firm, the ratio of qualified prospects to meetings could be increased.