You have goals. Your company has goals. Whatever your sales goals are, they are these two enabling metrics can help you understand what you need to do to reach your goals. Moreover the ability to control these metrics has a tremendous impact on your overall sales results and your ability to reach your goals.
Average Deal Size
Many salespeople and sales organizations set stretch goals, and that’s a good thing. But there is an enormous difference between a stretch goal and a goal that is simply inconceivable. Some goals are mathematical impossibilities.
It is helpful to test your goal against the metric of your average deal size to get an idea where it sits on the continuum. You can simply divide you sales goal by your average deal size to determine how many new deals you will have to win to reach your goal.
You need $1,000,000 in new sales. Your average deal size is $100,000. You need 10 deals over the course of the year. Without making too many assumptions, this sounds pretty reasonable; it is less than one new client per month. It is when you see much higher numbers that you have to either adjust your goal or adjust your resources.
For example, what if the goal was $4,000,000 in new sales. With the same average deal size, $100,000, this goal requires 40 new clients. This means our salesperson needs about one new client per week.
Remember the rule about adding the context of other metrics? So, let’s add his win ratio.
If his win ratio is a respectable 30%, our salesperson has to actually compete for 120 deals. Without knowing too much more, we can do some back-of-the-envelope math to discover that our salesperson cannot possibly manage the number of targets and opportunities necessary to hit his numbers.
Increasing the deal size means you need fewer wins to reach goal, but you are probably adding cycle time. Decreasing deal size means you need a greater number of deals, but you probably reduce the cycle time because you are acquiring transactional clients. If it is difficult to manage winning 40 new clients, winning 80 isn’t usually much easier.
Your choices are either to adjust goals or to apply additional resources in order to reach your goals.
Most sales organizations and salespeople underestimate their churn when planning. They have long and deep relationships with dream clients and they have performed well for years. It’s hard to believe that they could be lost, least of all to a competitor.
Oftentimes the client isn’t lost to a competitor; they are just lost. They move overseas, or they change their business model. They vertically integrate, or they just don’t need what your company sells. It’s ugly, and it’s unexpected—especially when it is a your big deal dream client.
Let’s stick with the same salesperson and the same quota. If he loses one of his $100,000 clients, instead of needing 10 new clients he now needs 11. No problem; it is just one additional win. That would be okay if our story ended here with this salesperson. What if you have 15 salespeople? The challenge becomes considerably more difficult.
Instead of needing one additional deal, you need 15 additional deals. This is the equivalent of needing an additional 1.5 salespeople just to cover your churn, and we still haven’t dealt with the unexpected loss of the big deal dream client. It is inconceivable to lose your $3,000,000 dream client—until you lose your $3,000,000 dream client.
Churning clients not only costs you lost revenue, it also costs you by increasing the cost of the sales force needed to replace it.
Two metrics that you need to capture to understand how to reach your sales goals are your average deal size and your churn rate. These two undervalued metrics do much to determine how you go about reaching your goals, and they cannot be overlooked.
- What was the average deal size of all of the deals you won last year? What is the average deal size of all of the deals you on in the first half of 2010? Has that number increased or decreased and why? What is the impact on your goals and your quota?
- Would your goal be easier to obtain with a higher average deal size? What would you give up in the way of cycle time to pursue those deals? Do you have enough targeted deals to make pursuing larger deals a possibility? Is your win ratio the same on larger deals? Is it lower or higher?
- What was your churn rate last year in revenue? How much have you lost in the first half of 2010? What percentage of your revenue do you churn? Is that number increasing or decreasing and why? Based on your current churn, how much business do you need to replace just to be even? How many new clients do you have to win before your new clients mean forward progress?
- Based on these two metrics, what do you have to do to reach your sales goals? What other metrics do you need in order to make these metrics more useful?
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Filed under: Sales 3.0