Sales Basics: Closing Ratios and How to Improve Them

An average company can expect to close a sale on their product 30% of the time. This is called the closing ratio, and is often used by sales people as their bragging trophy. Although closing ratios may seem like a good metric to measure sales performance on, it is very linear by design. A business owner would look at an employee with a closing ratio of 15% and think he is a bad salesman, while an employee with a 60% closing ratio will be seen as a top performer. The reality is that closing ratios do not measure external factors that have a substantial effect on your business. 

External Factors

In the world of numbers and data, we often get lost trying to find the metrics that matter. Closing ratios may be the best measurement of sales that is available to us, but it doesn’t mean we can’t do better. 

Prime Sales Contracts

Let’s go back to the example of the percentage driven salesmen. One has a very high closing ratio, we’ll call him  Bill. The other has a low closing ratio, let’s call him Jim. Bill is a very driven salesman, he spends hours of time networking and communicating with his clients. Some would say he might spend too much time talking to certain clients. He spends a majority of his time golfing, going to networking events, and drinking with his group of  clientele. He wears his 60% closing ratio on his sleeve, and often brags about it around the office. And he brings in $100,000 of revenue for you (the business owner) every year.

On the other hand, Jim is quite the opposite. He doesn’t dare speak about his 15% closing ratio around the office. He tends to hide away in his cubicle for a majority of the work day, and you rarely ever see him go out to network with potential clients. Upon closer examination, despite his abysmal closing ratio of 15%, he brings in $200,000 for your business every year. This is because unlike Bill, Jim tends to only network with high-grossing clients. Rather than spend his time closing deals with little or no value to your company, he pursues Prime Contracts that help him meet his sales quota.

This brings us to our next point.

Time Management & Tracking

Time is money, and you know this better than most. However, this directly contradicts what our competitive biology tells us. Some people are hard-wired to chase the big fish, and invest a lot of time and resources to land the deal of a lifetime, while others are more motivated to reel in a large amount of small fish. Both examples can land you enough to eat, but each has it’s ups and downs.

Someone who chases large contracts usually spends too much time on one client. This can be problematic when the deal falls through. This mindset is usually followed by the typical inner monologue; “If i had more time I could land the client”,  even if you know it will never come to fruition. As I outlined earlier, our biology hard-wires us to be competitive, even if it’s exclusively with ourselves. This is why using different metrics to outline progress can be more helpful. Generally if a deal does not close within 90 days it is considered a waste of time and resources. Using a time based metric to track progress can be more helpful than closing ratios when dealing with this kind of sale.

Inversely, when dealing with sub-prime deals, progress can be successfully measured by taking the average revenue per sale creating basic metrics around that number. In the next section I will describe how to create a metric that allows you to accurately track your entire sales team and base your evaluations around a single number.

Creating A Universal Sales Metric

Convincing your sales team to bring in more revenue can extremely difficult, especially because most salespeople are under the impression that closing ratios are the direct translation of more revenue. Closing ratios create an unequal distribution of performance among a sales division. That’s why creating a universal sales metric is important. Ranking your employees on a global scale can be beneficial to your business and skyrocket your sales. It doesn’t even have to be overly complicated, as long as you incorporate all of the important factors of sales performance.

Here is the simple calculation:

Closing Ratio x Average $ Per Sale / Average Time Spent

 

This gives you an approximate number that you can track sales performance with. Applying this calculation to each one of your employees, stores, or websites, can precisely analyze what is being done right, vs. what is being done wrong. You can call this number anything you like, but for the sake of the coherence, we will call it the Sales Coefficient.

Create Relevant Sales Goals

“Competition always drives sales; people who are good at sales become competitive by nature.”

This brings us to the final point, creating relevant sales goals that you or your sales team can follow to escalate their performance. Telling a sales person to “make more sales” is a perfect example of how not to set goals. This statement cannot possibly be viewed as a relevant sales goal because it is simply not attainable. No matter how many sales they make, they will still be unable to meet the quota, because it remains undefined. Telling a salesperson to raise their sales coefficient by 10% creates a manageable and attainable goal. It also works better for you because a 10% increase in the sales coefficient can mean multiple things. It can mean an increased closing ratio, increased average sale, or a decrease in the average time spent on a sale, or a combination of the three. Sales people also see this as an opportunity because they now have more pathways to achieve their goal. Creating incentives can be a great way to boost performance and make sure goals are clearly met. Incentives can include bonuses at the end of the year, raises in salary, equity packages or anything you feel your sales team would be rewarded by. Fairly rewarding your sales team for the revenue they bring in is not a new practice, but it is still the most reliable way to help you reach your sales target.

 

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