The Sales Conversion Rate metric measures the effectiveness of your sales team at converting leads into new customers. It’s an important metric for aligning your sales and marketing teams as both teams will use this metric to determine the quality of leads.
The marketing department’s role
The process of generating leads is the responsibility of the marketing department, and that team will engage in lead generation activities.
- A marketing team will organize and execute a conference sponsorship (often in coordination with sales) to generate sales-ready prospects
- Once the marketing team has qualified those leads, it’s then the responsibility of the sales department to convert those leads into paying customers
Let’s say the marketing department is able to generate 100 leads for the sales department, and after working with those leads, the sales team is able to convert 10 of those into actual customers.
That is a 10% conversion rate.
Good or bad
The real question is whether this is good or bad.
Ultimately, this depends on your past history’s performance and industry benchmarks.
A 10% sales conversion rate may be astronomical, or it may be terrible. It depends on what you sell and the market to which you sell.
How to calculate the sales conversion rate:
- (Leads converted into sales / qualified leads) x 100
- (Number of conversions / Number of Clicks) x 100
How often to report on the sales conversion rate:
- Weekly, monthly
Who uses the sales conversion rate metric?
- Sales managers, executives
How to measure the sales conversion
Modern sales and marketing are wrestling with an ancient challenge which is, how to attribute prospects and leads to a particular marketing activity or channel.
Even the most advanced attribution models leave room for error, since prospects may be influenced by dozens of online and offline factors.
Word of mouth, for example, is nearly impossible to track, though metrics such as NPS or viral coefficients are good proxy for this metric.
Tracking of conversion rates
In most sales-marketing funnels, conversion rates are tracked by measuring the number of qualified leads compared to the number of new sales conversions. This can be done by a campaign, by a program, by a channel, or left at a high level to encompass all leads.
Measure conversion rate
An effective way to measure conversion rates is to analyze progress through a discrete funnel with defined stages.
For instance, looking at leads that have been captured by marketing (those with an email or known name) versus marketing-qualified leads (those whom marketing believes are ready for sales engagement).
This is often called a lead or customer life cycle. Life cycles are useful for measuring conversion rates by giving both sales and marketing a common frame of reference for the buyer’s journey.
Calculate sales conversion rates & lead value
The problem is that many small business owners don’t know where to begin when it comes to marketing their businesses and tracking their efforts.
As a business owner, you have to be more than a marketer and understand a few important metrics about how your sales funnel can help direct your efforts sensibly, without throwing your money away on advertising that doesn’t bring you any ROI.
What is a lead?
In marketing terms, a lead is any person or entity (as in a business) that is potentially interested in purchasing your product or service.
So, obviously, some leads are going to be better than others.
Hot vs. Cold leads
A “hot lead” might be more qualified (more ready to buy) compared to a “cold lead” who needs more convincing before buying.
This is why a hot or warm lead would be understandably more valuable to you than a cold lead…
But how much more valuable?
We’ll explore the value of a lead more in-depth in a bit, but let’s talk about conversions first.
What is a conversion?
A conversion is any action that you define such as…
It could be a purchase, an old-fashioned phone call, a contact form submission, a newsletter signup, a social share, a specified length of time a visitor spends on a web page, playing a video, a download, etc.
Many of the small businesses that I meet only have a gut sense of where their new business comes from because they haven’t been tracking conversions.
Data is everything!
Knowing your conversion rate(s) is the first step in understanding how your sales funnel is performing as well as which marketing avenues are giving the greatest ROI.
Conversion rate and how to calculate It
Once you have defined which conversions you want to track, you can calculate the conversion rate.
For the purposes of the following example, let’s call a conversion a sale…
- Conversion Rate = Total Number of Sales / Number of Leads * 100
- Example: Let’s say you made 20 sales last year and you had 100 inquiries/ leads. Your sales-to-lead conversion rate would be 20%
If you’re tracking conversions from website leads, your formula looks like this:
- Conversion Rate = Total Number of Sales / Number of Unique Visitors* 100
- Example: If you made 20 sales in a month and you had 2,000 unique visitors to your site, your conversion rate would be 1%
What is the value of a lead?
The value of an item/concept is based on what it’s worth to you.
If you sell lawn irrigation systems at an average price of $2,000 including installation, and you turn a lead into a sale, then that lead is worth $2,000 to you.
However, we know that not every lead will end in a sale.
You might only turn 2 out of 10 inquiries into a sale.
That would make your conversion rate 20% (2/10 * 100 = 20).
This means you can expect to generate about $4,000 from your 10 leads (2 sales @ $2,000 each).
That’s because we know on average you are closing 2 out of 10 sales, at a 20% conversion rate.
This means that the value of one lead is actually $400 (4,000/10).
Lead Value = Value of Sale / Number of Leads
The previous example is a bit simplistic and you can get into a lot more detail with this.
As we discussed earlier, some leads will be more qualified than others and we will also want to look at what the actual profit is – not just the revenue.
But more on that in a minute.
The monetary value of a lead is phenomenal
Understanding the monetary value of a lead is of utmost importance, and this is true whether you are using pay-per-click (PPC) or any offline advertising, like mailers or print ads.
Conversions Needed = Desired Revenue / Lead Value
Let’s say you need to generate $15,000 per month to float your irrigation business. Based on your conversion rate of 20% (2 sales / 10 leads x 100 = 20) from the previous example, you already know that each lead is worth about $400 (4,000/10).
This means you would need about 37-38 leads per month (15,000 / 400 = 37.5) to make about 7-8 sales ($2,000 each) and generate $15,000 in revenue.
(Note: This is a very simple example of using revenue generated. A more accurate option would be to use the profit generated by sales and not just the revenue, but many businesses have difficulty defining this number, so we use revenue as a guide.)
If each sale of $2,000 actually costs you $1,000 to deliver, then the profit on each sale is really $1,000. To get a return on your advertising spend, you’ll actually need to generate 75 leads to reach your $15,000 monthly goal.
- 1 sale = $1,000 profit
- Conversion rate = 20% (2/10 * 100 = 20%)
- Average lead value = $200 ($2,000 /10 = $200)
- Leads needed = 75 ($15,000 / $200 = 75)
Even if you use revenue instead of actual profit, as long as you are constantly tracking these metrics, you will be able to make much better and wiser informed decisions.
Understanding your sales funnel can help you to:
- Determine the number of leads you need to get each month
- How much you can safely spend on advertising
- And what you can expect in return
How to leverage lead value to your advantage
In the business world, things aren’t always so simple.
Not all sales are going to be equal.
Some sales will be a home – run, and others won’t.
Also, the conversion rates are going to be different depending on the traffic source.
You may find that leads generated by paid search convert better because you’ve been hyper-focused on your advertising, using keywords with extremely high commercial intent and/or targeting customers that are very local to you.
Use Google Analytics
If you have Google Analytics installed on your site (and you should), you can determine the average lead value. Enter this into your analytics goal, then Google Analytics will do most of the hard work for you.
If you just stuff the average revenue value into the goal value, you’ll see highly inflated numbers that won’t make sense. Hence, not every lead generated from the website will actually result in a sale.
So, here is your challenge…
If you are serious about growing your business, then don’t wait any longer. Start today, by introducing the sales conversion rate metric that measures the effectiveness of your sales team at converting leads into new customers!
It does not matter where you are in business, jump on board with us at RAS Digital Marketing, and let our team help you grow your business online, by making use of our RAS Hourglass model.