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Understanding your sales cycle.

Nov 15Dave Saunders

Understanding your sales cycle.

In order to effectively plan revenue and cash flow for your business it is important to understand the sales cycle.  A sales cycle is the amount of time that it takes your business to:

  1. Qualify a lead to determine that there is a need and that you have the capability and capacity to fill that need;
  2. Develop the appropriate set of relationships within the potential customer to demonstrate your capabilities, validate your company and its experience and propose a solution;
  3. Resolve objections encountered during the sales process.  Negotiate pricing, contract terms and close on the contract.

Once the sales cycle has completed, you will need to identify internal and customer resources to implement the solution, execute on the implementation, acknowledge customer acceptance of the solution and bill your customer.

It is helpful to separately track each stage of your sales cycle in what is known as a Sales Funnel.  Stages in a Sales Funnel will vary by the nature of the business and how it markets and sells product, but typical steps will include:

  1. Qualifying
  2. Proposing
  3. Closing
  4. Implementing

For each stage of the Sales Funnel, you should track the following metrics:

  1. Volume – number of opportunities at each stage;
  2. Velocity – the amount of time that it takes to move from one stage of the Sales Funnel to the next.  For example, it could take 2 weeks to accumulate and assign leads, another 4 weeks to qualify the lead, 4 weeks to complete a proposal, 2 weeks to achieve contract closure and another 8 weeks to implement.
  3. Conversion Rate – The conversion rate is a measurement of success in moving opportunities from one stage of the Sales Funnel to the next.  For example, if you start with 100 leads and find that only 50 have a genuine need that you can solution then your conversion rate at the Qualifying stage of the Sales Funnel is 50%.  If 10 of the 50 qualified leads results in a proposal, the conversion rate at the Proposal stage of the Sales Funnel is 20%.  If you close on 3 of the 10 proposals, the conversion rate at the Closing stage of the Sales Funnel is 30%.
  4. Average Deal Size – It is important to track the average deal size at each stage of the Sales Funnel.  Evaluating average deal size at the various funnel stages can give you great insight into your sales and marketing process as well as how effectively you are positioning your company and its solution.  Imagine the actions that you might take for your business if analysis reveals the average deal size for your qualified leads to be $250,000, the average deal size you are proposing on is $125,000 and the average deal size that you are winning is $50,000.  You also might find it helpful to separately track and manage Sales Funnel activity for large deals over $100,000 and smaller deals.  The larger deals may have differences in conversion rates due to differing levels of competition and the sales cycle might be longer.  Understanding your average deal size at each stage of the Sales Funnel can also provide you with valuable inputs to be used in forecasting sales and cash flow planning.
  5. Lead Source – As you develop your Sales Funnel and analyze activity, you will likely find that Leads form different sources can have significantly different conversion rate and process time requirements and might

    even be significantly different in the size of deals.

Imagine how you might change your marketing strategy and sales focus if analysis of your Sales Funnel revealed the following:

 

In my next newsletter, I will discuss how to convert your Sales Funnel into a Sales Forecast and to determine the amount of activity that will be necessary for you to achieve your annual revenue plan.

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