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Are your KPIs really managing performance?

By / April 30, 2018

Consider this fresh, practical approach to evaluating and boosting your sales team’s results.

Imagine a head football coach sending his offensive squad onto the field without a playbook and expecting them to outscore the opposition. Chances for success in this scenario are very low and, yet, this is exactly what we expect every day in the LBM Industry. You can’t produce sales by measuring only the results as they appear in a rear view mirror.

For this reason, I am introducing a new business term— KRIs—to supplement the measurement of Key Performance Indicators (KPIs). If you’re like most sales organizations, your KPI measurement evaluates comparisons of year-todate sales volume, month over previous year, gross margin, and product mix. These are valid measurements…with one problem. They are measurements after the fact and should be called Key Results Indicators (KRIs).

KPIs should be measurements of performance under the control of the performer. Consider the desire for weight loss many pursue in their lives. Nobody expects to lose weight merely by stepping on the scale with hopes that the pounds will melt away. Instead, the truly committed performer measures the important KPIs of diet and exercise as a means to the KRI of weight loss.

Statistical analysis with dozens of LBM dealers and hundreds of salespeople have helped me establish a clear path towards sales predictability using prospecting KPIs to produce KRIs. Salespeople and organizations who embrace the right KPIs achieve their desired results and outperform the competition and market trends. Sales leadership means more than rising and sinking with the economic tides; it means rising above them.

Here are three KPIs for LBM dealers that produce the desired KRIs:

 

1

Factor in attrition to calculate your “actual sales growth objective”
The first mistake of goal setting is to only calculate “nominal” sales growth. A typical LBM Dealer loses 10-15% of its business per year due to attrition. This rate is relative to market trends for housing starts and commodity fluctuations. In other words, $600 wholesale lumber prices and rising housing starts will cure a lot of mistakes. The correct measurement is attrition relative to market trends.

These data are already available in your computer accounting system. You only need to observe trends over the last three years to determine what your attrition was in 2016 and 2017. Armed with that information, you are prepared to establish an actual sales goal objective.

For example, a salesperson who sold $4 million in 2017 at a company with a 15% increase goal would need to reach $4.6 million this year. On the surface that seems like a $600,000 increase. After factoring in expected attrition of 10%, the salesperson would need to replace $400,000 and add an additional $600,000 to reach the actual $1 million needed to achieve the overall sales goal.

 

2

Prospect based on predictable closing ratios
This is where the KPI game starts to become challenging because closing ratios for prospecting are not what they seem. Many sales leaders measure the effectiveness of salespeople by calculating closing ratios from quote logs. This provides inaccurate evaluation when the quotes of prospects and customers are lumped together.

In the previous section, we’ve already established that your closing ratios with your existing customers should be as high as 90%. Thus a salesperson who closes 80% of his quotes is not necessarily more effective than another who closes only 40%. It’s possible the first salesperson has done zero prospecting while the second might be prospecting and quoting very aggressively. The only way to produce an effective measurement is to segregate your closing ratio of sales to existing customers from new prospect opportunities.

The other problem faced when launching a proper campaign of KPI measurement is the predictability of actual closing ratios. Ask a salesperson what her expected closing ratios will be and she may likely promise to close a majority of her target customers. To this, I say she would be in violation of the intergalactic laws of mathematical truth.

Consider that the attrition rate of your company might range between 10 and 15%. You would discover this is true for almost all your competitors in the marketplace. This proves that the rate at which salespeople are able to win business from their competitors must, by definition, be close to the rate of attrition in the marketplace. In other words, closing ratios are not a factor of skill, but are instead a market indicator.

Years of study have proven the difference between sales excellence and mediocrity, when it comes to closing ratios, is only a few percentage points. Just like the difference between the Hall of Fame and mediocrity in baseball is 5%, so the truth is that closing ratios in sales are relatively close.

The good news is that, unlike baseball and all sports where success is in the percentages, in sales the hungry performer can out-prospect the competition. Armed with the knowledge of a fixed closing ratio, the hungry salesperson can prospect to the necessary level for predictable results. Therefore, the salesperson who wants to increase sales by $1 million will need to prospect between $6.5 million and $10 million, the former a calculation of a 15% closing ratio and the latter at 10%.

This is the moment of truth for salespeople and managers. Instead of telling a salesperson what the sales goal is and waiting for the performer to create the right plan, a credible manager helps salespeople write a “contract” to themselves. The recognition of a large prospecting goal creates predictable anxiety for sure, but better to enter the game with the clear plan instead of a blind hope.

The KPI of annual prospecting should then be broken down into manageable bites—e.g. $600,000 per month in prospecting. At this point, the manager and salesperson are now working hand-in-hand, like an offensive coach and a quarterback on the field.

 

3

Create a valuation formula for prospecting activity – I.E. suspect versus lead
Armed with the right Key Performance Goal—e.g. Prospecting KPI—the salesperson can now build a tracking mechanism to fill the pipeline with meaningful leads. This is where the process is simple, but not easy. There are three factors that affect the definition of any lead—Dialogue Status, Opportunity Valuation, and Product Definition.

The “Dialogue Status” is the temperature of the lead. It is tempting for a salesperson to identify a target and conclude it is “lead-based” upon the drive by of a job site or, worse, an invitation to bid. A lead is legitimate until the customer or prospect has overtly expressed an interest in a conversation about a product you sell. Any experienced salesperson will tell you that an invitation to bid could easily come from a buyer merely seeking your price to keep one of your competitors honest.

The only way to determine if you legitimately have a prospect is to have a conversation in which the prospect sits down with you and conducts a meaningful dialogue about your products and services. A target who has not expressed overt interest in a dialogue is merely a “suspect.” A sales opportunity cannot be considered a “lead” until a quality dialogue is established.

A cross-selling opportunity with one of your existing customers should be considered a “lead.” The products you sell to your existing customers should close in the 90% range as noted earlier. Cross-selling opportunities should be treated as new prospecting leads with the expectation they will likely close at better ratios than leads to cold prospects, but not nearly as high as existing business.

“Opportunity Valuation” is the amount you will enter into your pipeline. The values of your leads should fall into two categories—Relationship or Project. In our industry, commercial leads should be treated as one-time projects sales and the valuation of such leads is easy to calculate—i.e. the one-time value of the project sale. The value of relationship leads should be calculated in annual potential.

For example, a builder who expresses interest in potentially buying windows from you for 12 houses per year should be valued as an annual lead for all the houses, not merely a one-time quote on an upcoming project. Your sales goals are annualized and therefore your prospecting opportunities should be too.

Each lead should come with a clear “Product Definition.” LBM dealers are fond of branding their organizations as “One Stop Shops.” It’s a fine way to beg for business, but not a credible expectation of your customers. Your buyers don’t care how many stops you make on their truck. Builders and contractors think about product specialists for each category they buy. Your sales measurement should isolate the quality of dialogue by every product category. Even if you are trying to sell two or more products to the same customer, they should be considered separate leads. In this way, your KPIs will be more accurate predictors of future KRI success.

Be warned that the numbers are simple, but the process is difficult. Actual closing percentages and attrition rates will vary and market fluctuations will affect the process. Adopt these ideas and you will gain more than short term results. You will institute a process that gives you a competitive edge for a lifetime.

Rick Davis

Rick Davis is the President of Building Leaders, the leading supplier of sales training to the construction products industry. For more information, he can be reached at 773.769.4409 or [email protected]