It’s astounding to me how much leeway salespeople are given in how they go about making calls and reaching their numbers each year. In many companies, selling is considered more an art than a science.
I find it ironic, in light of the varied approaches to selling, that measuring performance is so precise. Seller achievement is calculated to decimal places throughout every year by dividing year-to-date revenue booked by year-to-date quota. The journey is uncertain but the desired outcome of clients paying invoices is clearly defined.
Analogous to a baseball player’s batting average, percentage of quota is the way sellers are stack ranked, evaluated and considered for promotions. Baseball players and sellers performing poorly halfway through a season or year are convinced major improvements will take place in the second half, and that they will make up ground.
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Just like students cramming before a test, salespeople go through quota years in much the same way. You won’t find a more optimistic salesperson than one who enters the fourth quarter at 36 percent of quota YTD. He or she is convinced — and hoping their manager is too — they can and will make their annual number in the next 90 days.
By Oct. 31, they’re at 41 percent YTD. On Nov. 30, they’ve reached 50 percent YTD. Somewhere in mid-December, at 54 percent of their annual quota, they realize its time to push business into January to jumpstart next year. The ongoing problem with this? Even if year-end cramming is successful, it often means the following year is effectively only nine or 10 months long as you start in January with little or nothing in the pipeline.
How to perform a mid-year reality check.
As a sales manager, I learned a long time ago that train wrecks happen a month at a time. Looking in the rear view mirror at YTD achievement means you’re tracking a lagging indicator. Doing some simple math on a monthly basis allows a sales manager to get a sanity check as to the likelihood of attaining quota for the year. It amounts to a glance in the rear view mirror (YTD position) with a fierce focus on projecting future performance — a leading indicator.
Here are the five parts to the mid-year sanity check:
1. Let’s assume a seller has an annual quota of $3,000,000, an average sales cycle of four months and a 33 percent chance of closing opportunities in their pipeline. That means to track at quota during a single sales cycle, the seller must close $1,000,000. Because there is a 33 percent closing rate at any given time, the sales manager would like to see $3,000,000 in pipeline opportunities.
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2. Regardless of how much a seller is above YTD, the minimum pipeline target will remain at $3,000,000. Let’s say, however, as of Jan. 31, a seller is $50,000 below YTD. That shortfall must be tripled (to $150,000) and added to the base so that the new target moving forward will be a have a pipeline of $3,150,000. The target ratchets up when sellers fall below quota.
As you can imagine, sellers less than YTD should focus on finding new opportunities, whether they be prospects or add-on business. By doing this each month, the seller and manager have greater visibility and hopefully ample time to take corrective action so that cramming at the end of the year can be minimized.
3. There are two powerful levers that can reduce the target pipeline amounts. In the example above, if the length of sales cycles could be reduced to three months (i.e., by starting opportunities at higher levels) and the win rate could be increased to 50 percent (i.e., with more stringent qualification) the target, assuming a seller is YTD, would be $1,500,000 rather than $3,000,000!
4. There are other ways to calculate pipeline targets. For example, if historic flow business from an existing territory generates $1,000,000 each year, the seller and manager may want to do calculations on the seller finding $2,000,000 in new business during a given year. If your offering uses a SaaS model, the numbers have to be tweaked accordingly because revenue will be spread out over the current year and possibly in future years.
5. Managers should be aware that, in addition to quotas varying by salesperson, the win rates and length of sales cycles often vary as well. You may have to look back within your CRM system to find actual numbers, or make intelligent guesses that can be monitored and adjusted over time.
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What are the advantages of a mid-year check?
One of the advantages of implementing these steps and having these targets in place for every seller is that you can go from an individual to an enterprise view. From first line sales managers, district managers, regional managers and up to the CSO, the target pipeline will be the total for all sellers that report up the chain of command to a given title.
Most sellers are now halfway through 2016. This is an opportune time to have a look at where you are year to date and project a sales cycle ahead to optimize the chances that you’ll meet or exceed your number without having to cram.