Sales Metrics for Early Stage Companies
I recently attended a CEO panel discussion and asked the group, “What metrics do early stage companies measure to help make data driven decisions?” To my surprise, there seemed to be no clear consensus. A quick search confirmed this. There are numerous articles discussing many well known metrics to track when companies scale, and an overwhelming volume of metrics you can track, but not enough clear guidance on early stage sales metrics that can help companies answer three critical questions:
- What is a Predictable Growth Rate?
- How Effective is the Sales Team?
- How Healthy is the Sales Funnel?
The purpose of this article is to discuss the foundational metrics that early stage companies must capture to give them insight into these questions.
Growth Rate Metrics
Every company wants to grow, and sales leaders should expect aggressive goals. But setting a growth target without the right inputs will guarantee a miss. Even worse, company morale at any growth company is heavily influenced by “hitting the number.” Here are four key metrics that will help determine the right growth rate based on historical data.
- Bookings — First, figure out the unit of measurement to track: MCV, ACV, TCV, or Software bookings. What you measure will drive sales behavior. If you measure TCV, reps will close multi-year deals. Measure monthly bookings and reps will try to close smaller deals faster. The solution: make your bookings metric match your sales motion. Companies targeting large, enterprise deals should measure ACV (annual contract value) with a kicker for multi-year contracts. Companies with a high velocity sales model can measure MCV (monthly contract value).
- Qualified Pipeline — Prospecting is essential to building a strong pipeline of opportunities. Early stage companies should track prospecting by measuring their Qualified Pipeline. Qualified Pipeline are deals that have a potential close date in the current quarter, or some common understanding that it’s more than an unqualified lead. Track your Qualified Pipe at the start of the quarter and then weekly thereafter. Additional information like lead source of the opportunity should be captured as well to determine demandgen and prospecting effectiveness. Once the data is in place, you can establish a pipeline goal for reps and a weekly reporting cadence.
- New Logos — Sales leaders should distinguish between New Logo bookings and Expansion bookings. Although both are important, new logos are critical at the early stage of company growth. Great products will expand in an account, and new logos are the fuel to drive that growth. It’s easiest to define a new logo as a company that requires a new contract. Categorize expansions around three scenarios: expanded Usage (i.e new product capabilities), more Users, or an entirely new Use Case (i.e a new division).
- Renewal Rate/Churn — Churn can be the achilles heel for any company’s growth plan. Churn is the percentage of revenue that does not renew in a given period. Estimating churn at early stage is challenging when companies have limited renewal history. As a result, sales leaders often fall into the trap of underestimating churn and the impact on bookings plans. In addition to measuring churn numbers, capture the churn reason code so you can understand why customers leave.
Sales Effectiveness Metrics
CEOs often focus on lagging indicators of growth. The metrics below are leading indicators that help sales leaders understand sales effectiveness. Are they hiring the right profile rep? Are reps ramping up as planned? Do reps have the tools they need to be successful? These metrics help determine where to focus your effort to get the most from your sales team.
- New Reps Hired/Attrited (vs Plan) — A sales leader’s ability to hire to plan is key to long-term sales success, as is minimizing attrition. When tracking attrition, be sure to note whether attrition was regretted (they quit) vs non-regretted (you fired them). Tracking hiring ensures sales leaders can build a team to have the appropriate amount of sales capacity.
- Average Quota Attainment — Sales reps want to hit their plan, and sales leaders are responsible for creating reasonable sales goals based on data. Sales leaders should track both average attainment (e.g. $$ actual versus plan) and percentage of plan (e.g. 84% versus 100%) across the entire team. As you grow, this metric helps you determine both the number of reps you can hire, your sales capacity, and the right quota for the reps.
- Average New Hire Ramp Time — Sales leaders must understand how long it takes for a new rep to reach full productivity. Ramp time is defined as total time for new rep to reach quota. Sales leaders can use ramp time to forecast when new hires will drive future bookings.
- # of Productive Reps — Productive reps are no longer ramping up and can be expected to produce their quota or more. The number of productive reps times Average Quota Attainment, plus any contribution by reps that are ramping, helps you calculate total sales capacity. Sales leaders should always have more sales capacity than the total plan for the quarter.
- Forecast Accuracy- This is an indicator of the sales team’s ability to produce accurate forecasts and close deals in a predictable manner. Sales leaders can track forecast accuracy by comparing a rep’s forecast at the beginning, midpoint, and end of a sales period. Measuring this metric communicates to reps that forecast accuracy is a key part of their job. It also helps sales leaders determine whether rep forecasts are aggressive or conservative. Sales leaders are expected to predictably forecast their business with no quarter-end surprises.
Sales Funnel Metrics
Early stage sales leaders are responsible for building a healthy sales funnel. To achieve this you need goals for quota, activity (new demos, POCs), and leads (both inbound marketing driven and outbound sales driven). The metrics below allow a sales leader to build a funnel math model and understand basic unit economics. As your growth advances you can capture more advanced funnel data and conversion rates.
- Average Sales Price — This “deal size” metric helps flag larger deals outside the norm and determine when (or if) to move upmarket to bigger deals. The ASP is also a key component to determine how many deals a rep needs to close to be productive, and the number of transactions needed to meet the plan.
- Average Sales Cycle — This metric measures the typical time it takes for sales to go through a complete cycle, from lead generation to contract. The average sales cycle provides insight into how typical deals progress and if a deal will close in an expected timeframe. Tracking sales cycle also helps identify areas for sales efficiency improvements and areas for sales training.
- Win/Loss Rate — You want to track both wins and losses versus the competition. Sales leaders need to know why they win deals so they can repeat these patterns, and why they lose deals, so they can adjust or avoid these situations altogether. Make sure to capture “reason codes” for each so you can identify trends and patterns. Once you have enough of each you can do the math to figure out the percentages.
- Average Discount — I don’t see this metric discussed often, but it should be. Early stage companies should rigorously test pricing. Are we pricing it too high, or too low? Tracking the average discount helps sales leaders establish reasonable expectations and rules to govern discounting.
With so much focus on data, sales leaders can overdo metrics. While I’m a big fan of data driven analysis, don’t let this crowd out good judgement and insight. Quantitative (data based) and qualitative (gut based, in the trenches) feedback are equally important. Make sure both show up in your strategy and board level discussions. And remember that metrics are most valuable when they give you trends and insights, so make sure to track them consistently over time.
Finally, it’s never too early to start capturing these metrics, so invest in a good Sales Operations executive early. Determine the metrics to measure, set up your system to capture the information, build your charts and graphs to see trends, then report on them in a consistent manner.
What are the key Sales Metrics you measure today?