MaRS Library Sales metrics and the sales process for early-stage tech startups
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Read the highlights
- Sales metrics are a collection of individual/organizational performance indicators and ratios that reveal the effectiveness of your marketing/sales activities and the efficiency of your sales process.
- Early-stage tech startups should use them not only to help manage the sales team/funnel, but also to build realistic sales projections when seeking financing.
- Some typical sales metrics (among many): average size of sale, sales cycle time, conversion rate, closing rate
Sales metrics are a collection of individual and organizational performance indicators and ratios. They are calculated from collected data that describe the startup’s historical and ongoing sales processes. Sales metrics are used to understand the effectiveness of marketing and sales activities and the efficiency of the sales process. Developing sales metrics is necessary for managing the sales team; these metrics are also vital for those individuals who manage a sales funnel.
Sales metrics for early-stage tech startups
Early-stage tech startups should monitor the sales metrics described below when engaging in direct sales. If your startup is seeking financing, these metrics will enable you to calculate realistic sales projections as part of your business planning process.
Key sales metrics include:
Average size of sale:
Determine the average dollar amount brought in by each sales contract. Refine the metric by eliminating very high and low values that skew the average. If your deals include a mix of service (consulting) revenue and product sales, split the revenue into two streams, unless they are inextricably linked (that is, no product sale takes place without service revenue). This metric will help you to make sales forecasts and look for factors that contribute to increases in deal size.
Sales cycle time:
Measure the average number of days that sales opportunities sit in the funnel (that is, what is the length of sales process?). Cycle time can be measured as an average and as an interval (for example, maximum and minimum process length), and you can categorize cycle time by deal size.
Many tech sales processes can be very long, so finding ways to shorten them is extremely valuable. Good salespeople spend time early in the process establishing the value they offer customers and getting their buy-in to move the sales process forward. This allows salespeople to focus their efforts on opportunities that are likely to close, and move on from opportunities where no buy-in exists.
Determine the ratio of closed deals compared to the number of opportunities at various stages of the sales funnel. The conversion rate will help you understand the quality of your qualification and sales processes. For example, you might see ratios such as 20 leads to generate one sale, 10 prospects per sale, or five qualified prospects per sale.
Closing rate (“win rate”):
Calculate the number of proposals per sale. It is a variation of the conversion ratio, but it focuses on the final stage. By that stage, your sales staff will have invested a lot of time and resources in the opportunity, so this rate should be as high as possible.
A low or fluctuating closing rate is a serious sign of your lack of competitiveness in the market; your value proposition or market relevance might need work. A low close rate may suggest that your sales staff require additional training. Given what it takes to reach the final stage, this ratio should be around 1 in 3 (that is, one deal expected from every three proposals) or better.
Sales funnel leakage:
Determine the number of opportunities that are eliminated from the sales funnel at various stages. This is inversely related to the conversion rate. You should find that funnel leakage is relatively predictable. The purpose of tracking this ratio is to better understand why deals are removed from the sales funnel—this will enable you to make corrections where necessary.
If you manage a sales team, this ratio can help you compare and evaluate individual strengths and weaknesses. Because of the long cycle times in technology sales, high funnel leakage ratios at the lead or prospect stage mean that sales levels will be affected in three to nine months. Monitoring funnel leakage enables you to take measures to stabilize the leakage and your resulting business volume.
This is the monetary value of all opportunities in the sales funnel. It makes sense to weigh opportunities based on how far along they are in the sales process. Understanding conversion rates and funnel leakage can help you attribute weight to opportunities based on their stage and their expected conversion ratios. For example, if you have $300,000 in proposals and your closing rate is 1 in 3, then you can expect $100,000 in sales to close.
Note: There are many more sales metrics you can use. Over time, you will find that some metrics prove more critical for your business than others. Read the article Using sales metrics to assess your sales performance and competitiveness to better understand what you can do with sales metrics once you start to capture data.
Selling through distributors or intermediaries
If you sell through a distributor or network of dealers, some metrics may vary. In channel sales, key metrics include closure rate on leads, lead quality, lead quantity, lead-to-close time, time to first contact and sales per co-op dollar.
Summary: Sales metrics are a collection of individual/organizational performance indicators and ratios that reveal the effectiveness of your marketing and sales activities; use them to help manage the sales team/funnel and build realistic sales projections when seeking financing.