Building an enterprise sales model is really hard. This is especially true for Founders with a technical background building a sales function for the first time. At AirTree, we often get Founders asking us how they can improve their sales performance and the answer always involves a deep dive into their sales funnel metrics. Depending on the stage of your startup, you’ll either have a VP Sales closely tracking these metrics or, at an earlier stage, you as a Founder should be tracking a basic version that can evolve as your business grows. Either way, you can only improve what you measure, and it’s never too early to identify areas for improvement in your sales process. But which metrics really matter?
At the top of the sales funnel, you need to be tracking the number of leads you’re receiving each month. These leads could come from many prospecting sources including those generated by the marketing team (e.g. email marketing campaigns, SEM, content marketing) and those generated by the sales team directly (e.g. outbound prospecting, sales run events). There should be close collaboration and alignment between sales and marketing to ensure the sales team is receiving enough leads to hit revenue goals. You should hold your marketing team responsible for a lead commit quota, often referred to as marketing qualified leads (MQLs), and your VP Sales should work with you and your marketing team to set this quota. Not taking responsibility for how lead generation and sales work together is a key mistake for any VP Sales.
You should also be setting goals and measuring how your lead volume varies by month. Lead Velocity Rate (LVR) measures the month-over-month growth in qualified leads and you can read more about its importance here. You should typically set your LVR ~15% above your revenue growth target.
A funnel naturally implies the numbers decrease as the sales process progresses, and you should be tracking overall funnel conversion as well as measuring key conversions throughout the sales process. Conversion of leads through to closed won business is calculated as:
Conversion % = (Won deals / Leads) * 100
If conversion is dropping, it may be due to a poor lead qualification process, poor performance of your sales team or a problem with your product/pricing due to a changing competitive landscape.
You can also break this down further to measure conversions through the key stages of the sales process, such as lead to opportunity conversion and opportunity to won deal conversion:
Lead to opportunity conversion % = (Opportunities created / Leads) * 100
Opportunity to won deal conversion % = (Won deals / Opportunities created) * 100
While it’s clear when an opportunity is closed won, it’s important to avoid ambiguity as to when leads should be converted to opportunities. Each company may have a different qualification framework for each stage of the sales process and the most important thing to solve for is consistency overtime and across the team. You don’t want one rep considering a lead converted to an opportunity once the buyer shows any interest in a meeting while another is waiting to satisfy the complete BANT (budget, authority, need, timing) framework. Whichever option you choose, if you have a higher threshold for lead to opportunity conversion, you would expect a higher opportunity to closed won conversion and vice versa.
Sales velocity measures how quickly you’re generating revenue. It captures the amount of time it takes to turn your qualified sales leads into revenue and is expressed as dollars per time period.
Sales velocity = (Leads * Deal value * Conversion) / Sales cycle
You should track how your sales velocity changes overtime and identify which of the 4 variables you can further optimise to improve sales performance. To increase sales velocity, you should focus on increasing the variables in the numerator (number of leads, deal value and conversion) and/or reducing your sales cycle.
Sales cycle will naturally vary by deal value and customer type. Sales cycles will be longer for large deals into enterprise clients vs smaller deals into SMBs. Typically, the higher the deal value, the longer the sales cycle. It’s not uncommon to see 6 month sales cycles for $100k+ deal values and 2 week sales cycles for $1–2k deal values. You should be tracking the time from when a prospect first responds to a campaign, to when a quality opportunity is created and the time from opportunity creation to a closed won deal. Track any changes in your sales cycle over time to capture the impact of changes to your sales team, sales process, pricing or product.
A Founder should use sales funnel metrics to understand how much to spend on top of the sales funnel customer acquisition and which acquisition channels to invest in. I’ve written previously about the importance of considering customer acquisition cost (CAC) and CAC payback when determining an appropriate go to market strategy. Importantly, you won’t know how much to spend on top of the funnel acquisition or which channels to invest in, unless you understand sales funnel metrics showing the relationship between leads, opportunities and ultimately customers.
In order to measure performance by acquisition channel, you should track volume of leads, cost per lead and conversion metrics throughout the sales funnel to determine CAC for each channel. Differing sales funnel conversion rates means it’s not as simple as investing in the channel with the lowest cost per lead at the top of the funnel.
To demonstrate this point, the example below shows channel 2 is a more appropriate lead acquisition channel despite the higher cost per lead. This is due to better sales funnel conversion i.e. leads from channel 2 are more easily converted into customers and therefore the leads acquired via channel 2 are more valuable than those from channel 1. This is why close collaboration between sales and marketing is so important.
Example sales funnel calculation
Let’s assume you need to add 240k of annual recurring revenue (ARR) this month and one new customer adds $12k ARR. You’ll need to acquire 20 customers to hit your ARR goal and for simplicity, we’ll assume your sales cycle is less than one month. Given the below facts, you’ll need to provide the sales teams with 1,429 leads from channel 1 or 438 leads from channel 2 in order to hit revenue targets.
As these calculations show, improved conversion at each stage of the sales funnel makes a material difference to the top of the funnel costs of customer acquisition. In order to hit the desired revenue targets, the business should invest $79,716 to acquire the leads through channel 2 despite the higher cost per lead.
Of course, with an inside or enterprise sales driven go to market, the top of the funnel acquisition costs aren’t the only costs to acquire a new customer. There are sales costs incurred to convert a lead to an opportunity and an opportunity to a customer. There are also onboarding costs which need to be accounted for in CAC. In the above example, it’s highly likely the sales costs incurred to acquire a customer via channel 1 will be greater than those for channel 2 as the more experienced and expensive sales reps who focus on bottom of the funnel activity will need to work more opportunities per customer. If we assume these sales and onboarding costs contribute an additional $5k to CAC for channel 1 and $3k for channel 2, we can calculate CAC and payback for each acquisition channel as below:
CAC Channel 1 = Cost to acquire 72 leads + Sales and onboarding costs
= $9,503 + $5,000
CAC Channel 2 = Cost to acquire 22 leads + Sales and onboarding costs
= $3,986 + $3,000
Assuming a contribution margin of 60%, each customer contributes $600 monthly so we can calculate CAC payback as:
CAC Payback Channel 1 = CAC / monthly contribution per customer
= $14,503 / $600
= 24 months
CAC Payback Channel 2 = CAC / monthly contribution per customer
= $6,986 / $600
= 12 months
CAC payback for channel 1 would be over 24 months whereas CAC payback would be achieved in under 12 months for channel 2. Given CAC payback should generally be under 18 months, sales funnel metrics for channel 1 would need to improve for channel 1 to be an appropriate acquisition channel for this business.