You can’t improve what you can’t measure.
When you’re looking to maximize sales in any business, certain KPI (Key Performance Indicators) will be your guiding light. We have compiled the most essential and insightful metrics to help you fully understand exactly what is happening in your business so you can close more deals and generate more profit--without getting bogged down with the nitty-gritty.
Read on to discover what these essential KPI are, what they mean, how to calculate them, and how to put them to practical use.
The KPIs of Closing
Lead Response Time
Imagine you’re finally ready to spring for a new sound system. You pretty much know exactly what you want and have saved up the cash to pay for it. So, you drive on over to RadioShack (RIP) and tell a salesperson you’re interested in some speakers.
“Great!” They say, “Let me get back to you in 42 hours.”
This is obviously a horrible sales move, but businesses do it online all the time. In fact, according to James B. Oldroyd in The Short Life of Online Sales Leads, the average response time of companies is 42 hours . . . and that’s only considering companies that respond within the first month at all.
Why is this such a big deal? Chris Gutman from HubSpot puts it eloquently: when you first showed up at RadioShack, you were as warm as a lead can be--you were ready to bite. 42 hours later, you’ve gone cold. Now, the sales rep will have to build you back up to the point where you’re ready to buy all over again.
And that’s assuming you haven’t already gone to the Best Buy down the street.
According to InsideSales.com, 35-50% of sales go to the vendor that responds first. And minutes matter. The Lead Response Management Study found that leads who are contacted within just five minutes are 21 times more likely to bite than those contacted in 30 minutes.
Speeding up your Lead Response Time is essential to maximizing your company’s conversions. So know where you’re at and dial it up.
How to Calculate
No formula is required here. All you need to do is compare the time a lead contacted your business with when they received attention from one of your reps.
To discover what speeding up your Lead Response Time could do for your business, consider keeping a log of how long it took for your reps to respond to each lead and the outcome of the interaction. Studies show there will be a correlation between Lead Response Time and your Opportunity Win Rate.
Opportunity Win Rate (Sales Closing Ratio)
If you’re not successfully closing sales and winning opportunities, then all these other statistics don’t matter--and probably can’t even be calculated. And if you have studied statistics, you know that the more data points you have the better, so as we say, always be closin’.
Opportunity Win Rate is one of the most basic KPI. As Gary Smith points out, it can be interpreted in one of two (equally valuable) ways.
Source: Gary Smith Partnership
The blue columns in the graph above represent the percentage of leads that were converted into customers in a month (also the percentage of deals closed or conversion rate).
This can get complicated if you have a long sales cycle. For example, if you begin communicating with a customer in March but don’t close the deal until May, it can be unclear which month should “get” that deal.
To simplify matters, Gary Smith recommends logging deals in the month they are closed--win or lose--regardless of when you got the lead.
Having a low count percentage may not be a bad thing if the deals won are high value. The green columns in the graph above represent the calculation of profit earned vs. profit potential.
Like with count percentage, it simplifies matters to log deals in the month they are closed.
Why do both of these KPI's matter? Together, they can help you to better understand the success your company is having with different reps, territories, segments, and more. Furthermore, this report could help to deter “sandbagging”--that is, closing a high amount of low-value deals in order to look good on paper. If you are a sales rep yourself, you can use these KPI to understand your performance on a deeper level.
How to Calculate
Count Percentage = Deals Won in a Month / Deals Closed in a Month
Value Percentage = Value of Deals Won in a Month / Value of Deals Closed in a Month
Jane closed four deals, one win and three losses. Ariel closed ten deals with six wins. Jane’s count percentage is 25% and Ariel’s is 60%. Based on this, you may be inclined to think that Ariel is the more successful salesperson.
Together, the four deals Jane closed had a potential value of $1 million and the deal she won was worth $800,000. The ten deals Ariel closed had a potential value of $1 million and the deals she won were worth $600,000 total. Jane’s value percentage is 80% and Ariel’s win percentage is $60. Based on this, we see that although Jane is successful fewer times, the deal she closed is a much bigger win.
The KPI of Making More Money
If you want your business to make more money, you really only have three options:
- Sell for more (increase your prices)
- Sell more (more items, services, etc. to your existing customers)
- Sell to more (get more customers without overpaying to acquire them)
Each of these methods corresponds with an essential KPI that your business should be monitoring like a hawk.
Sell for More: Average Purchase Value (or Average Order Value)
Want to make more money? Get customers to spend more.
. . . Of course, as business people, we know it’s not that easy. But it is that simple. Knowing this essential KPI is absolutely imperative for calculating how much a customer is worth to your business and understanding how to increase your profits (which we will get to later on).
When calculating your Average Purchase Value, you are specifically looking at how much the average customer spends each time they check out (or complete a transaction with you). While calculating the Average Purchase Value across your entire business may not be super helpful on the ground, it can go much further when it comes to segmentation or upselling.
For example, if you know the Average Purchase Value for customers one segment is $2,000, but a customer there is only spending $500, you know you have a strong opportunity to upsell. This works across all segments--territories, customer types, business sizes, etc.
Additionally, you may find that different sales techniques lead to increased Average Purchase Value. By tracking your interactions (following up, product recommendations, meeting in-person, phone calls, etc.), you can see what makes the biggest difference in your ROI.
How to Calculate
Average Purchase Value = Total Cost of All Purchases / Total Amount of Customers
Example You are a manufacturer selling electronic components to businesses focused on making consumer goods in tech. Across your fifteen clients who create drones, you make $55,000.
Average Purchase Value = $55,000 / 15 = $3,667
However, one of your long-term clients only spends about $1,000 per order. So, you approach them with an upsell. Because you understand similar clients, this client feels like you have anticipated their needs and happily accept your offer.
Sell More: Customer Lifetime Value (CLV)
How much is a single customer worth to your business, from your first transaction to your last?
Customer Lifetime Value (some people just call it Lifetime Value, or LTV) is the projected revenue you will earn from a client over the course of your relationship. So, if your goal is to sell more, this is the number you want to drive up.
There is a positive correlation between CLV and retention--the longer you can keep a customer coming back and satisfied, the more valuable they are to your business.
So, how is CLV calculated? It’s more complicated than just adding up sales and averaging. Neil Patel identifies numerous variables to take into consideration, like:
s: Average Customer Expenditures per Interaction: How much do customers spend at a time on average? c: Average Number of Visits per Unit of Time: How many times does the average customer buy from your business over a period of time a: Average Customer Value per Purchase Cycle: How much money does the average customer spend over a set amount of time? t: Average Customer Lifespan: How long do your customers usually stay customers? r: Customer Retention Rate: What percentage of customers buy again at all? p: Profit Margin: What’s your average profit margin per customer? i: Rate of Discount: What percentage of interest do you need to earn to keep up with inflation, etc.? m: Average Gross Margin per Customer Lifespan: How much profit do you make per customer?
How to Calculate
There are many different ways to use some (or all) of these numbers to calculate CLV because, in the end, it’s a projection. This is why large successful companies often work with the average of multiple computations.
Here are three formulas identified by Neil Patel in his blog:
CLV1 = a * t
CLV2 = t (s * c * p)
CLV3 = m (r / 1 + i - r)
Average CLV Equation:
Average CLV = (CLV1 + CLV2 + CLV3) / 3
Example To borrow Neil’s example once again, let’s look at Starbucks. Here is their data:
s: Average Customer Expenditures per Interaction: $5.90
c: Average Number of Visits per Year: 218.4
a: Average Customer Value per Year: $1,288.56
t: Average Customer Lifespan in Years: 20 years
r: Customer Retention Rate: 75%
p: Profit Margin: 21.3%
i: Rate of Discount: 10%
m: Average Gross Margin per Customer Lifespan: $5,382.94
(Note that since Starbucks’ average customer lifespan is in years, I chose to calculate c and a by year. But you can easily convert these numbers to weeks or months if it’s more helpful for your business--the only thing that matters is making sure all your values are using the same unit of time.)
CLV1 = $1,288.56 * 20 = $25,771
CLV2 = 20 ($5.90 * 218.4 * 0.213) = $5,489
CLV3 = $5,382.94 (.75 / 1 + .1 - 1) = $11,535
Starbucks’ Average CLV = ($25,771 + $5,489 + $11,535) / 3 = $14,099
Sell to More: Customer Acquisition Cost (CAC)
It’s easy to get millions of eyes on whatever you’re selling. You could purchase a billboard on the interstate, snatch up a Super Bowl commercial spot, or pay somebody to fly a blimp over New York City with your company’s logo on the side of it.
The only catch? It’s going to cost you. A lot.
Customer Acquisition Cost (CAC) looks at how much money it takes for your business to get a customer over the finish line on average. CAC directly compares how much you’re pumping into marketing (including promotions!) with how many new customers you’ve acquired over a set period of time, giving you a set dollar amount per customer.
It’s important to understand your CAC because, without it, you have no way to gauge a marketing campaign’s success. You may think your blimp was a hit when 20 new customers come rushing through the door. But if that blimp cost you $20,000, you need to ask yourself--are these customers are worth $1,000 each?
Maybe. Maybe not.
What counts as “good” varies from industry to industry and is entirely dependent on how much money an average customer will generate for your business and other factors like your operation costs.
Source: For Entrepreneurs
It’s important to note that “good” doesn’t necessarily depend on the first deal. According to BIA Kelsey, 66% of small and medium-sized businesses report that more than half of their revenue comes from repeat customers. To drive this point home, many businesses have even found long-term success by taking hit during their first transaction. They offer an enormous discount at a loss and then, over the customer's lifetime (CLV), earn more than enough to make up for it.
How to Calculate
Customer Acquisition Cost = Costs Spent Acquiring Customers / New Customers
Example Imagine you run an ad for your auto shop in the paper promoting your amazing oil changes. It cost you $500 to run the ad and during the time it ran, you acquired 15 new customers.
CAC = $500 / 15 = $33.33
If your cost per oil change is $55, then you’re making $21.67 per customer.
Of course, the formula is deceptively straightforward. In order to get it to work, you’ll need to have a way to track whether or not the marketing campaign is responsible for the new customers. If you’re running ads online (like through Facebook or Google), you’ll track the customers’ paths automatically.
But print ads can be a bit trickier . . . which is a large part of why print ads so often include a discount code or coupon.
To return to the auto shop example, let’s say that instead of just promoting your brand, the ad you ran offered $5 off your first oil change. 25 new customers come in the door with the coupon. Now you know exactly how effective your ad was, but you will need to figure in the discount as well.
CAC = ($500 / 25) + 5 = $25
Now, you’re making $30 per customer.
To really make your head spin, there are a number of other expenses that could have been calculated in, as well. Did you pay someone to write your ad copy or design the ad layout? How about the labor cost for the employee who coordinated with the paper to run the ad? The service bill for the WiFi you used when planning?
In general, keep it simple by only factoring in the costs that are unique to this marketing campaign. If you would have paid the WiFi bill anyway, don’t add it in.
When you’re ready to lock down deals or maximize profit, let these five KPI be your roadmap. A little math will get you a long way and give you the boost you need to dominate in sales.
Want to learn how Map My Customers can help you do this? You can watch a video demo, attend an upcoming webinar, or book a live 1-on-1 demo here, or jump straight into a free trial to explore it yourself.