KPI’s (key performance indicators) are important metrics that allow you to objectively assess the effectiveness of your operations. They provide valuable information on whether the business is going in the right direction, indicate which elements could be improved or reveal weak links in the processes. The correct determination of indicators measuring sales may prove to be crucial for the functioning of the entire organization.
Before you set KPIs
Before we talk about setting and measuring KPI’s, it’s important to make a clear distinction between a sales funnel and a sales forecast.
Many sales professionals still confuse or mix these two terms. A sales funnel provides a clear picture of all sales opportunities, regardless of the opportunities of closing them. While a sales forecast is a subset of a sales funnel, containing only qualified leads, which are likely to be closed at a given reporting time.
A correctly defined sales funnel, with clear stages can significantly help you organize the sales process and create effective tools for your sales team, making it easier to predict future sales successes and correctly determine KPI’s.
Using KPI’s allows you to increase your forecasting accuracy by up to 5%.
Don’t use KPI’s set by others
Setting KPI’s is like finding an effective diet. When you ask around, everyone will say they have the best one. But what is best for some, might not be “the best” for you – both with diets and KPI’s.
Instead of trying to establish which KPI’s are better, ask yourself a simple question: which indicators are right for your sales team and which will help you reach the goals set for your organization?
There is no universal set of KPI’s that works for all.
5 Steps of Defining KPIs:
1. Set your Objective
What are the key objectives for your company – profit, growth, customer acquisition or customer retention? In most cases, companies have one primary objective and one or two secondary objectives, which provide context and support for the main goal.
For example, the company’s goals may look like this:
Key/primary objective: Increase yearly profit level to X
Secondary/supporting objective: Maintain 4% monthly growth for a year
2. Establish Detailed Targets
What sales targets will help you reach your company’s business objectives?
Focus on the big goal, e.g. total monthly sales target and break it down. What is the average transaction value? What is the average length of the sales cycle? What is the cost of sales?
When setting your key/primary objective (e.g. total monthly sales) make sure you factor in the industry and business specifics.
Specific Sales Targets:
1. Primary sales target: $ monthly sales
2. Secondary sales target: % of growth month to month
- Average sales value ($)
- Average sales cycle X days / weeks / months
- Sales cost ($)
- Won opportunities indicator (%)
3. Plan Your Activities
Review targets and contextual indicators mentioned in Step 2. Then, decide what your team needs to reach those goals. How many transactions need to be closed? Based on this, how many opportunities should be in your sales funnel? How many calls, emails and/or meetings are needed? How many leads and contacts should be generated by your marketing team? Ask questions and look for answers for as long as it takes to determine key activities needed to get your target revenue.
KPI’s are more effective if they pertain to specific activities. On one hand, they trigger the desired actions, on the other – they help you discover the reasons behind missed sales targets.
Sales funnel flow:
- Number of wins (#)
- Number of transactions/ sales opportunities (#)
- Number of sales qualified leads (SQL) (#)
- Number of marketing qualified leads (MQL) (#)
- Send X emails
- Send X reminders
- Make X calls
- Arrange X meetings
- Send X offers
4. Prioritize Your Indicators
Once you complete the exercise described in Step 3, defining your KPI’s should be easy.
You can create a list of several sales indicators, including both contextual and activity based ones. This will help you focus on the most important data. Remember, you can always change, add or remove the list.
Contextual example: Monthly sales to date ($) vs monthly sales target ($)
Activity example: X reminders vs number of sales qualified leads (#)
5. Monitor Your Indicators
You cannot skip this step. Defining KPI’s will be a waste of time if you just leave them in a statistic document. KPI’s need to live. This means they should be shared and monitored on an ongoing basis. To do this, you can use tools like a CRM. Regularly reviewing your key performance indicators will make it easier for you and your team to track progress in reaching your goals.
KPI’s are living indicators – they should be regularly shared and monitored.
Remember, that simply defining KPI’s is not enough. It’s when they are regularly monitored, analyzed and adapted accordingly to the situation, that they become the key to your success.
Examples of metrics
There are many types of metrics, which can help you assess the effectiveness of your sales process. In his article, Dave Lavinsky lists 6 metrics, that could boost your sales:
- Total sales by time period – month, quarter, year or any other defined period of time.
- Sales by product or service – useful for companies selling many different products or services.
- Sales by lead source – helpful metrics for analyzing the worth of different lead sources.
- Revenue per sale – it shows revenue generated by a single sale.
- New vs. Returning customer sales – shows, whether it’s better for you to acquire a new customer or retain an existing one.
- Sales per prior activity – analyze, which prior activity convert prospects.
KPIs popular with sales managers and directors:
- Monthly sales target ($)
- Sales cost vs revenue
- Conversions of marketing qualified leads (MQL) to sales qualified leads (SQL)
- Conversion of SQLs to wins
- Sales growth vs target
- Sales person activity vs wins
- Closed deals (#) vs goals
- Average sales cycle
- Average number of reminders (follow-ups)
- Sales velocity
KPIs popular with account managers, business development partners and sales professionals:
- Individual monthly sales target ($)
- Number of opportunities
- Lead response time
- Individual wins and loses indicator
- Individual sales activity (e.g. number of phones, emails, meetings) vs effectiveness
- Monthly value of closed deals ($) vs target
As you now know, there are countless ways of measuring sales effectiveness. You can use any one of them with respect to a defined period of time, product, service, department, sales team etc. Select only those, which fit your organization, to get a clear picture of the situation and avoid information overload.
Remember, to always ask yourself a question: why do you want to measure those particular KPI’s?
Only correctly defined indicators will allow you to reach your goals and secure business success.