On LinkedIn and other social media platforms, you will find advice like "Don't close deals, open relationships." This implies that asking your client to sign a contract will somehow harm them. In reality, closing the deal allows you to provide the improvement they need. Your role as a salesperson requires you to create and win opportunities. That is how you help your organization and your clients.
As a salesperson, you need to know your how to calculate closing ratio, which is sometimes also called your win rate. The higher your closing ratio, the greater your sales effectiveness. The lower your closing ratio, the lower your sales effectiveness. If you are a sales leader or sales manager, it is important for you to track the closing ratios of the individuals that make up your team. When you combine this data with information about the sales opportunity stages, you can identify the part of the sales conversation where training and development will improve each person’s closing ratio.
Calculating Your Closing Ratio
Determining how to calculate closing ratio requires simple math. The easiest calculation is to divide the number of deals you won by the total number of prospective clients you engaged in the sales conversation, then multiply the result by 100. If you engage 50 prospective clients and win 20, you have a respectable closing ratio of 40 percent. This is calculated as follows:
= (20/50) × 100
= 0.4 × 100 = 40
Some sales organizations try to improve their closing ratio calculator by including only the opportunities that make it through the sales opportunity stages. By removing the deals that didn't go through all the stages, the number of deals won is overstated. For example, if you engaged the same 50 prospective clients in the example above, and 10 dropped out of the conversation, organizations looking to inflate their closing ratio would remove them. So, they decide they engaged with 40 clients instead of 50. Then, assuming they won the same 20 deals, their win rate is 50 percent (i.e., 20/40 × 100). While seeing a higher closing ratio calculator may feel great, it’s problematic. It allows salespeople and managers to ignore the 20 percent of prospective clients who dropped out of the conversation, so there’s no way to train the team on how to overcome related challenges.
One sales leader showed me his team's closing ratios., and the top ten salespeople had win rates over 95 percent. After he did some research, he discovered that, when doing their calculation, they omitted deals that didn't buy. Their actual close rate formula were much lower once all the relevant information was included.
How to Improve Your Sales Closing Ratio
The reason you should include every prospective client you pursue in this calculation is because you want to know your current level of effectiveness. When you remove any deals that didn't go through all the opportunity stages, you are inflating your effectiveness. Instead of removing the deals that fell out of your pipeline, recognize the stages where you have trouble converting to the next conversation. The close rate formula might look like:
- Qualified Prospects Engaged: 50
- Prospects in Discovery: 50, 100%
- Prospects in Second Discovery: 42, 84% (–16%)
- Prospects in Solution Design: 36, 72% (–28%)
- Prospects in Presentation: 36, 72% (0%)
- Prospects in Negotiation: 28, 56% (–44%)
- Won Deals: 14, 28% (–72%)
The drop from 50 to 42 in the first discovery stage is a loss of 16 percent of the 50 prospects engaged in the sales conversation. The drop during solution design is another six prospects of the original 50, or 12 percent of your opportunities. The total loss in these stages is 28 percent of the opportunities you created. In this example, you lose six more deals between your presentation and negotiation. The total loss up to this point is 40 percent.
In this example, the salesperson wins 14 of the 28 prospects that engaged in a negotiation. That's a 50 percent win rate at that stage, but 14 of the 50 total deals is a 28 percent win rate overall, which is a loss rate of 72 percent.
To improve your closing ratio calculator, you need to reduce the number of prospects that drop out in each stage of the sales conversation. The first thing you need to improve is the first discovery call, increasing the number of prospects who agree to your second discovery meeting. From there, you can work on improving the conversion from presentation to negotiation.
What Improving Closing Ratios Looks Like
Reducing the number of deals that fall out of your pipeline improves your results. Focusing on the stages one at a time also allows you to hone specific skills that relate to each stage. This approach is far more effective than trying to improve everything at once. Let’s take a look at the example again, imagining the salesperson worked on improving their skills and techniques related to the number of prospective clients moving from first discovery to second discovery:
- Qualified Prospects Engaged: 50
- Prospects in Discovery: 50
- Prospects in Second Discovery: 46, 92% (–8%)
- Prospects in Solution Design: 40, 80% (–20%)
- Prospects in Presentation: 36, 72% (–28%)
- Prospects in Negotiation: 32, 64% (–36%)
- Won Deals: 20, 40% (–60%)
As you can see, improving performance at the first discovery stage has a ripple effect all the way down to the win rate. By converting an additional four prospects in the initial discovery call, 46 prospective clients move to the second discovery call, cutting the loss in that stage in half, (8 percent instead of 16 percent). By reducing the loss going into solution design from eight prospective clients to six, the loss rate stays at just over 8 percent. Instead of eight deals falling out at negotiation, you lose four prospective clients, or 9 percent. Ultimately, the overall closing ratio increases from 28 percent to 40 percent.
Misunderstanding Closing Ratios
The mistake sales leaders and sales managers make when it comes to closing deals is that they believe that the losses happen at the end of the sales conversation. A large percentage of the losses occurred before the negotiation stage. The salesperson in the second sales scenario won 62.5 percent of the deals that made it to negotiation. This is evidence that the salesperson isn't having trouble with their closing ratio. Rather, they are losing deals earlier in the sales conversation.
No matter how good you are at closing once you reach the negotiation stage, improving your average closing rate is certain to require you to move more deals through each stage of the conversation. Increasing your win rate means improving the conversion from one stage to the next, with fewer deals falling out across the entire sales conversation. By studying where and why deals expire before the next step, you can make changes that improve your conversion at those stages where deals are being lost.
Calculating the Cost of Closing Ratios
It takes a time and energy to create new opportunities. The opposite of closing ratios is something like waste. There is nothing wrong with a 40 percent closing ratio, but true efficiency in sales would find a way to eliminate as much waste as possible.
When people talk about velocity in sales, I suspect they believe that efficiency is more important than effectiveness. By trying to race through conversations, you aren't likely to create the value your client needs to move from one stage of the conversation to the next. When deals drop out, you have an effectiveness problem, one that will not be improved by trying to go faster. In a time when clients are stingy with their time, use that time wisely and ensure your prospect takes the next step in their journey with you.
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