"The Closer” is a popular detective show starring Kyra Sedgewick. She plays an LAPD investigator and interrogator with a remarkable talent for trapping criminals in their lies. This is one of the biggest cable TV series airing today.
The close ratio is also an investigative star among sales teams. It’s a simple formula that helps sales managers and sales producers investigate and interrogate their forecasts in order to flush out the truth about what will actually close from month to month.
The close ratio is determined by dividing what actually closed in a given month into what was forecasted to close for that same month. For instance, let’s say a sales producer had 10 opportunities identified to close for a given month, and they actually closed five of the 10 identified opportunities. This sales producer achieved a 50 percent close ratio for that particular month.
So who really cares about what your close ratio is? In short, the close ratio measures the predictability of a sales producer’s forecast, so any business leader with the responsibility for managing the sales or the financial side of the business should care about the close ratio.
Because one’s past performance is a pretty good barometer of their future performance, when reviewing a sales producer’s past close ratios, the sales manager is essentially identifying the closing trends of their collective selling team. Assuming nothing is done to improve upon past close ratios, the sales manager will have a pretty reliable way of predicting how much business on the forecast will actually close from month to month.
The rub with forecasts
Too many sales forecasts are filled with, what I call, fairy dust. This is my nice way of saying crapola. If you don’t believe me, just ask any sales manager. Often times, it’s difficult for the sales manager to reliably discern what will actually close on the monthly forecasts. Keeping track, however, of the sales team’s actual close ratio will help the sales manager achieve the goal of producing a higher level of predictability as it relates to the sales forecasts.
The close ratio helps to alert management when a producer is struggling and in need of some coaching or assistance. This alert comes when a sales producer has a full forecast, but still has a low close ratio. When this situation arises, this is a signal to the manager that a learning opportunity exists.
For companies that are not aware of their selling team’s close ratio, once they finally track it, most organizations will find that their collective close ratio will fall in a range between 10 percent and 25 percent. With such a low close ratio in a business-to-business selling environment, this typically means one of two things:
1. The sales team has a forecast that is filled with unqualified prospects, therefore there is limited opportunity to achieve a high close ratio.
2. The sales team has a forecast that is filled with highly qualified prospects but they are unable to close them, indicating the possibility of a skills development need.
If the forecast is filled with unqualified prospects, this could mean that the sales producer is not prospecting as much as they should be, or they are prospecting and they don’t know how to qualify a prospect properly. Either way, if the pipeline is filled with unqualified prospects, it will be impossible to produce a close ratio that is 50 percent to 65 percent.
On the other hand, let’s assume the pipeline is filled with high-quality prospects, but the sales producer continues to have a low close ratio, 25 percent or less. This implies a learning opportunity exists. If qualified prospects are in the pipeline, and not closing, this is an opportunity for the sales manager to help develop the sales producer so they can improve their personal closing abilities.
Keeping track of the sales team’s close ratio, by producer, will help to dramatically clean-up the sales teams forecast, and it will also help the sales manager more quickly identify the producers that are working hard, not working hard, and in need of assistance.
The close ratio is a key performance measurement. Start measuring each producer’s close ratio and set the goal for your team to achieve a 50 percent close ratio over time. You will immediately start to notice a cleaner forecast. Initially, the forecast might be skinnier than you would like to see. However, I am assuming you would prefer to have a smaller, more predictable forecast, as opposed to having a huge forecast to which you have no idea what will close. The huge forecasts that are filled with fairy dust are designed to keep their managers at bay, and they provide a false sense of security with regards to the near-term sales reality. Measuring the close ratio will start to put the words reality and predictability back into your forecast review meetings.