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Michael Taplin
Michael Taplin
realkpis.com is the home of The KPI Bible and offers the lowdown on KPI modeling

Corporate Dynamics Ltd
Principal Consultant

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Defining sales KPIs and setting an acceptable target or range

Posted over 8 years ago

I assume that you have examined your sales process and listed the milestones that apply to yours. If not, probably because you did not see the first article on this topic, I suggest you will find it interesting.

Your list of milestones is your starting point for your definition of your sales KPIs. The first article stated that your sales process KPIs are the success rates for each process that leads to achievement of a milestone. They have to be milestone linked to enable you to collect the data.

The underlying proposition

“As each milestone in the sales process is achieved the probability of closing the sale increases.”
For most people, and all sales people this is accepted as a fundamental truth. How do we put this into practice?

The formula is " The expected value (EV) of each prospect is the best estimate of the $ value of the transaction multiplied by the probability of closing the sale."
The probability of closing the sale is the value calculated for the last milestone that has been achieved.

You should assume that all prospects have the same probability at that point in the sales process. This is true if:
• They are in the same market or product segment.
• They are all following the same sales process.

Now we can add in two important ideas:
• The maximum possible value of the sales in your sales funnel or pipeline is the sum of the value of individual prospects.
• The Expected (or present) Value of the all your prospects is the sum of the EVs of individual prospects.

These numbers will change constantly for every segment or geographic territory as sales are completed, lost, new prospects added, order value changes, and everything else that happens in the uncertain world of selling.
They are top-level KPIs for your sale process.

Using this proposition

The model builder sets up a probability table based on the calculation of the probability of closing the sale at each milestone. These probabilities are in the range 0 to 1.0.

You calculate the milestone probabilities from your success rate data. What do you do if you have no data?

Estimate it. Ask your sales people, then discount their suggestions because salespeople always overestimate their chances of closing any sale. It will not be right but that does not matter.

Use your EV of sales that can be closed, say during next month, as a sales forecast, then check the forecast error. If you exceed the forecast your probabilities are too low; if you don’t make forecast your probabilities are too high. Adjust them and check it again. This is just like sighting in a rifle with a telescopic sight.

Assessing sales performance

Effective sales performance is defined as an increase in the expected value of the prospect in the sales funnel.
After all, completed sales need to replaced in one of two ways:
• Finding new prospects
• Taking identified prospects past the next milestone in the sales process

If this occurs the sales person has added real $ value for the work put in during the period, even if not a single sale has been closed.

Is “cost of selling” a KPI?

Logic suggests that it is, but let us examine the idea from a productivity perspective.

As an example, let us look at prospecting cost.

If you calculate the cost of your prospecting process it probably looks something like this:
• Total cost of generating enquiries ÷ No. of Enquries = $/Enquiry
• Total cost of follow up ÷ No of appointments = $/Appointment
• Success rate = Enquiries/appointment
• Average selling cost/order = Average cost per sales call x No. of calls/sale ($/sale)
• Total selling cost/order = $/sale + $/appointment + $/enquiry.

When it is set out in this form, it is hard to follow, use and interpret. It gets worse when you have a number of marketing campaigns to generate leads and alternative approaches to making sales appointments.

You can make sense out of this with a KPI model – a visual representation of the process and the formula that links the cells in a spreadsheet.

When you construct a model like this you find that none of these numbers are the real KPIs. The real KPI is the number of calls per order. This is the number that really measures the productivity of your sales process.

Why is it so?

This is a real KPI because it is driven by the quality of the sales activity at each point of contact with the prospect. It is the primary driver of the top-level measure Sales contribution per order.

The acceptable range or target.

The best way to think about this is to use your present numbers to determine the present level of sales productivity.

You can then use the model to look into the productivity of alternative ways of generating prospects. You will find that some generate high numbers but low quality. Others may reverse this relationship. What you are looking for is the leads that are high quality with good closing rates and low cost. You can then maximize your marketing spend on these segments. Let your success rates guide you.

Then you can build the success rates into your probability table in the Sales Management Model to drive your value of future sales more accurately.

As you fine tune your sales strategy in your search for improved productivity you will find yourself setting new targets for each function in the process, in the knowledge that they are feasible.

You can download a visual presentation of the ideas in the article at my website bizlearn.biz >themes>Free Modeling Resources

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