The sales meeting started like this, “We aren’t going to make our sales goal because we lost this big job. How are we going to make up the shortfall?”
My questions were, “What changed? You did not have this revenue before; you still don’t have this revenue.”
And, “Were you going to stop selling because you won this project? Isn’t there other revenue in play?”
A quick review of the pipeline told the story.
About fifty organic leads a year generated 25 prospects, which turned into 12-14 proposal opportunities. The 80% close rate earned the 10 or so new clients they needed a year.
So why did one lost proposal mean so much?
Do the Math
Think about your business. Let’s assume you want to win ten projects a year. How many do you need to quote on?
If your close rate is 20%, you need to write 50 quotes. You will lose 40. Do you have 40 lose-able quotes per year?
If you want to write 50 quotes, how many opportunities do you need to process?
If your conversion rate from opportunity to quote is 20%, then you need 250 opportunities. Do you have anywhere near this number?
If you need 250 opportunities, how many prospects do you need?
If 20% of the prospects you pursue eventually become an opportunity, then you need 1,250 prospects on the books.
If you have 1,250 prospects and keep in touch, promote your brand, offer value, and generally don’t stink at marketing, then you will retain many of them.
Let’s say you are good at keeping prospects and 80% stay engaged, then you only need to find 250 new prospects per year.
Finally, if your lead to prospect conversion rate is 10%. You will now need to generate 2500 new leads per year to maintain your prospect list and eventually win ten projects.
Does your marketing machine generate 2500 new leads per year? I didn’t think so.
I Don’t Like Those Odds
Agreed. You need to improve your odds.
My point is that when I hear someone staking their future on one job, I know this is a company with no effective marketing, inadequate conversion skills, and probably little insight into their pipeline.
Let’s assume you improve your close rate by being more selective and putting more focused effort into each proposal. Now, you are at a respectable 50% close rate. What happens to your sales funnel?
You only need 125 opportunities, 625 active prospects, 125 new prospects per year, and 1,250 leads per year. That’s half of what you needed before!
How can you earn that many leads? What if you improved your conversion rate? What if you improved your retention rate? Good questions!
What if your close rate was 80%? Wouldn’t that be better? Maybe not.
Better Your Odds
A client once told me that they only needed a few new leads per year because their close rate was so high. When we looked at how they achieved what turned out to be an 80% close rate, we found that it was all based on price. In fact, low margins were the reason I was in their office to begin with.
The problem was not in their operational delivery, though everyone can improve their operational margins at least a little. The source of low margins in this case was the sale. There was not enough gross profit per job to account for the timing of projects, availability of resources, and the volatility of the market.
But that is a topic for another blog post.
What management needed to understand was that they were subsidizing their high close rate with low margins. Their sales funnel was more like a cylinder. 80% of what went in came out as low margin business.
When I postulated simply increasing prices, the sales team wailed that they couldn’t win business and their close rate would go down.
Great, at a 50% close rate – down from 80% – they would need to write more quotes to achieve the same income.
Then we got to the heart of the matter. The process of quoting was very labor-intensive and time-consuming. The owner dismissed the idea of adding resources to make up the difference. “We need to stay at 80% close rate in order for this to work.”
That would mean that in order for a prospect to be accepted as an opportunity, there had to be a qualifiable potential for the buyer to pay a higher price. In other words, get better customers.
Stay with me here.
This means that the prospect to opportunity conversion needs to be LOWER than the current rate. I don’t mean less successful, rather more selective. In order to yield the same number of higher quality opportunities, the firm would need to dramatically increase the number of leads while raising standards for prospects.
We set a goal for ten new clients per year. The new math for an 80% close rate looked like this:
1500 new leads yields 250 prospects per year.
250 prospects yields 15 opportunities.
15 opportunities at 80% close should yield 12 new clients per year.
In order to maintain the same sales labor intensity at higher margins, the firm would need to invest more in filtering prospects. The sales pipeline then would look like a funnel at the top and somewhat cylindrical at the bottom.
Marketing is Not Optional
By now it should be obvious that if you have few leads and a high close rate, your margins will be meager.
More leads and a little selectivity should allow you to increase margins even as you lower your close rate.
To increase your close rate, generate even more leads and be even more selective with your prospects.