One of the best sales tools available to CEO’s, VP’s of Sales and sales managers when evaluating salespeople and sales performance is the use of a lost sales analysis metrics program. The lost sales analysis is more effective than percent of quota attainment as a measurement tool, because it measures not just the sales success of an account manager against some predetermined sales quota, but it also measures their success against competitors based on lost sales.
By calculating the total dollar value of lost deals and measuring that against the value of business opportunity inside the geography region, you can more accurately evaluate a salesperson’s performance.
When a sale is lost, it also means that the potential client’s recurring revenue stream is lost for three to five years (i.e., service contracts, training contracts, maintenance, repairs).
So, if a salesperson loses a deal in their territory, it is not just the immediate revenue that is lost, but generally all of the recurring revenue as well.
To focus on sales sold as a percentage of quota as the only measurement of success underestimates the firm’s potential revenue within a territory and overstates a salesperson’s success.
From an integrated business development approach, we do not want to focus only on individual sales successes, but instead look at revenue from a territory potential as a measurement for individuals and companies.
What has occurred is that executives have arbitrarily set up standards of measurement for salespeople that are based on elements that have nothing to do with sales potential.
Lost Sales Analysis Calculation
Here is how the model works:
- Determine the potential dollar size for one year of sales within the market segment or geography in which your salespeople are assigned.
- When this number is calculated in dollars, divide it by the actual sales quota in dollars to determine the territory efficiencies as a percentage.
- Then take the total percentage of the person’s closing ratio for proposals submitted and add it to your territory effectiveness percentage.
Let’s say our territory potential for the first year is $10,000,000 and a rep’s quota for the first year is $1,500,000. By dividing his quota by his territory potential, you will see that his market effectiveness is 15%.
$1,500,000 divided by $10,000,000 = 15% market effectiveness
Next, let’s say our rep has a closing ratio of 25% from proposals submitted. If the rep hits his quota of $1,500,000, that means he has submitted $6,000,000 in proposals and has generated $1,500,000 in sales, leaving 40% of the market available.
25% + 15% = 40% territory effectiveness
So, is the rep that hits 100% of his quota successful?
By this equation, they are only 40% effective and in fact they may have sold $1,500,000 but they LOST $8,500,000 that year in their territory.
If the lost clients had a cumulative effect of recurring lifetime value of 35% per year through additional sales, support, add-ons and upgrades, then that 100% of quota salesperson has actually cost your firm $20,000,000 or more in lost revenue over three years.
Yet, under most sales quota systems, the rep would be deemed successful and the senior management would just try to improve their sales closing ratio as the only mechanism to increase corporate revenue.
This method of back door analysis helps management understand the relationships between sales, quota, salesmanship, territories, and lost sales opportunities. It allows executives to adjust compensation to better reflect those reps that are “territory” productive and those reps who are “quota” productive.
Generally, shooting for a territory effectiveness of 60% or better is an optimal goal to seek. This way, sales reps must increase their closing ratio and their territory penetration simultaneously to meet their corporate sales goals.
The key to successful sales forecasting is understanding where the sales numbers are, where they need to be, and where they came from.