Closing Percentage Is Not Enough

Closing Percentage Is Not Enough

“How many deals did you close this week?”
“Three!”
“How many leads did you take?”
“Twenty-five.”
“Okay, not bad—12 percent closing percentage.”

Conversations like this are happening all around the country, every day, all day. Whether it is an inbound, inside sales call center, or outside sales team knocking on doors, managers are judging their reps’ performance of reps, owners are judging their sales managers’ effectiveness, and reps are judging themselves.

In my experience with most inside sales organizations, the focus on closing percentage and the go-to stat is misleading at best.

How valid is it to use closing percentage as the metric of comparison and judgment? It really just depends on the organization. Several factors combine to calculate a closing percentage. And just because you have a “closing percentage” doesn’t mean you can compare yours to someone else’s within your own organization. First, all the contributing factors must be the same. And it’s nearly impossible to compare your performance to that of someone else from another company.

Why is it so hard to calculate in order to compare? To calculate a closing percentage, you must have a predetermined definition of what a “lead” is.

Is it the number of outbound calls made? Times when someone answered the phone? What if they answered and said they were too busy to talk and to call back later? Is it when you have a two-minute call because the prospect doesn’t qualify? What if they do qualify? What if they don’t qualify now, but will next month? Is it inbound calls that last more than sixty seconds? Is it when someone filled out an online form for more information, but then didn’t answer when you called them?

What is a lead? In my experience, creating a way to count leads even within a single organization can be difficult if there is any diversity of activities among the sales reps. It’s usually clear when a deal is a deal, but when is a lead a lead?

One critical metric for a sales-based business is the Cost Per Acquisition (CPA). This number represents the total cost to generate one sold/enrolled client. The simple version of this calculation would be the total amount of purchased leads (if buying leads for sales reps) divided by the total number of sales completed.

For example, if a rep took $1,000 worth of inbound, warm/live transfers in a week, and closed 5 sales, then the CPA is $200 each ($1,000/5). If the rep closed 10 sales, the CPA would be $100. And going back to our closing percentage calculation, if the rep took 50 leads ($20 each, $1000/$20 = 50) and closed 5 sales, the closing percentage would be 10 percent. At 10 sales, the closing percentage would be 20 percent.

But what if the rep also took 30 inbound calls that were $10 each and closed 3? ($300 lead cost, $100 CPA, 10 percent closing rate.) What if the rep took 20 more calls from a different lead source that cost $35 each, and closed 4? ($700 lead cost, $175 CPA, 20 percent closing rate.)

Now it is getting complicated because a 20 percent closing rate on one lead source will mean the company and rep are winning, but 20 percent on a different lead source represents a loss. And you cannot just use a basic average calculation of closing percentage or even CPA because it needs to be weighted appropriately.

When done correctly, the management team of sales and marketing-based departments will always be optimizing based on several factors. To the sales rep, a lead is a lead—inbound or outbound. But to management, many different ways exist to calculate closing effectiveness.

For inside sales teams, I have found the best approach is to treat each lead source as its own marketing vertical, essentially its own business unit, and to optimize it in relation to target CPA versus the other available lead sources. Working backwards from needed profitability calculations per sale/deal, the target CPA should be determined and then set as the benchmark goal for the sales team as a whole.

Each rep’s minimum performance requirements could then be set to this figure as well, but the correct calculation time frame needs to be set appropriately, relative to the average acceptable sales cycle of a deal, as well as to the relative experience of the rep. (Management should not hold a brand new rep to the same performance requirements as a seasoned rep.)

With the target CPA set, you can compare the whole sales department, individual rep, and individual lead source performance to the standard set. When diving into CPA and closing percentage to this level, per lead source per rep, you also have the potential to optimize each rep to the lead source they perform best at.

When dealing with salespeople, you are dealing with humans who are all different. While it would be great to have an inside call center where all your reps loved the lead source(s) you gave them, you will find over time that some reps will develop preferences where they are more effective with certain lead types. (This is usually just a mental preference/limitation within the rep, not anything to actually do with the leads themselves.) If able, you should try to determine if a rep has a preferred lead source and then do your best to bias their lead flow to that lead type.

In my experience, most organizations do not do this and end up turning over potentially good reps who were square pegs that management tried to fit into round, square, rectangular, or triangular leads, when square leads were available.

While it will be customized to each organization, a Closing Effectiveness Score model can be built instead of using basic closing percentage-based calculations. The ultimate value of this model is the easy, apples-to-apples comparison of sales reps, teams, branches, or the organization’s performance from one period to the next. The model can be built to automatically weigh the various lead source costs, closing percentage within each, and the collective value of leads taken (cost) and leads closed (CPA).

Note:
I used the simple version of CPA calculations. A more complex, but thorough way of calculating CPA is to combine the total marketing costs, labor costs for that sales rep, variable and fixed overhead costs for that rep (office/desk space as a percentage of office lease, technology license costs, etc.) within a given period—week or month, and then divide that by all the deals generated by that rep. Since most factors do not change, you can create a standard “seat cost” per rep.

This process will provide management with a value for each seat in the call center, and thus, the minimum revenue each rep needs to generate to cover their costs and break even. As a goal, management should push for the entire sales floor to be achieving higher revenue than the collective base minimum needed.

Either CPA calculation can be used to the same effect. The complete business CPA will just provide an additional figure to be used in the calculation, but it will not affect management’s ability to compare reps to each other, or compare data from different timeframes within the organization.

If you need a new way of calculating the performance of your reps and teams that takes into account all your marketing sources, call or text Jason at (206) 234-1848, or email at jason@cutterconsultinggroup.com and let’s set up a discovery call to see what formula will help.

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