Over the past 20 years of working with some 100 small and medium sized companies, we have found that the top six reasons why companies miss their revenue targets are:
- Not setting Valid Revenue Targets
- Poor quality of sales pipeline
- Insufficient size of sales pipeline
- Bad fit between What you sell and the Sales Team’s skills
- Poorly Defined Sales Structure
- Misuse of Sales Quotas and Sales Incentives
- Slow conversion of Contracts to Revenues
Some of these are quick fixes. Others may take some time to address. We also recommend that companies tackle this issue in the order listed above, as some are interlinked and are prerequisite steps to the next.
1. Not setting Valid Revenue Targets
Yes, this one surprised us too, but many CEO’s and their executives don’t clearly know what revenue targets they want to achieve. When we ask, “What is your revenue target for this year?” some say they don’t know; others answer vaguely; still others give inconsistent numbers from one executive to another within the same company.
Even when companies do set revenue targets, the question is whether these are valid. A valid revenue target is one that has its foundation in data. It is composed of what is possible, but it stretches the company to live up to its full potential.
The first criterion for A Valid Revenue Target is that it is based on data. You must first do the analysis necessary to know what is possible. You should look at the various products you sell, then set different targets for your customer base versus new customers. They add all of these to come up with the total for the company.
2. Poor quality of sales pipeline
The next reason for missed revenue targets is low quality sales pipeline. This means that sales people are engaging prospects that are not likely to buy anytime soon, for a number of reasons. Poor quality of sales pipeline shows itself primarily in two ways:
- Deals that don’t close (low closing ratios), and
- Deals that don’t close for a long time (long sales cycles)
Both of these are symptoms of poor quality sales pipeline and they typically manifest together. The end result is a Sales Organization that works hard to produce little and is demoralized.
Of these two, the second is a bigger problem. Companies seem to accept the delay as being their “sales cycle”. When we ask our prospects, “What is your average sales cycle?” we get responses such as, “Well, that depends…” or “It varies anywhere from 3 months to 18 months…”, and other similar responses. Such ambiguity regarding sales cycle length tends to indicate poor quality of the sales pipeline, rather than indicating the true sales cycle period.
There are many reasons why a company may have a large but poor quality sales pipeline.
The first is that marketing leads are being passed straight to Sales people without being properly qualified, and the Sales Reps begin working all of them in the order they are received, rather than in quality-prioritized way. So, the Sales organization may be working hard, but it is not producing much.
The second reason is that marketing leads may be qualified by a telemarketing team, but the company thinks that this is an entry level job and hires very junior people to qualify leads. What typically happens in this case is that these junior telemarketers prospect to their own comfort and skill level—i.e. junior level people in the prospective company—rather than to real decision makers. Then they pass these as “qualified” leads to the Sales Team. Sales Reps will find out that these are not the right prospects ONLY after they talk to these “qualified” leads. Again, Sales works hard, but not smart.
The cure to poor quality Sales Pipeline is diligently using the Four Funnels Framework.
- Use a Teleprospecting team to further Qualify the Marketing Qualified Leads before passing them on as Sales Qualified Leads (SQLs)
- Don’t have your Teleprospecting cold call to find SQLs. This is very slow, very expensive way to prospect. Instead, market continuously to your target market and pass on warmer leads or Marketing Qualified Leads to further qualify.
- Have a healthy mix of marketing campaigns designed to interest both decision makers and line managers so you have the business line managers recommending you, and the decision makers finding sufficient business return to make the purchase decision.
- Use the Four Quadrants to guide your Marketing and Sales efforts. Marketing and selling to your existing customers is very different from marketing and selling to non-customers. And, even getting existing customers to buy new products requires a different kind of marketing and sales than asking them to buy more of what they already buy from you.
Some Additional Quality Points
Teleprospecting is the Quality Assurance (QA) “department” when it comes to Sales and Marketing. Just as companies would test their products to make sure they are of sufficient quality before bringing them to market, so must companies check the quality of the leads before passing them on to Sales.
It is also important to understand that Teleprospecting is NOT an entry-level position. It is a business process that requires very skilled and experienced telephone sales professionals who have the competency and confidence to talk to senior level decision makers.
If a company is not using experienced Teleprospectors to qualify the marketing leads before passing them on to Sales, then the company is probably wasting money paying junior level people to do a very difficult and sophisticated work.
3. Insufficient size of sales pipeline
The next reason why companies fail to achieve their revenue targets is because they don’t have sufficient size of sales pipeline.
If Sales reps do not get sufficient number of Sales Qualified Leads (SQLs), then they tend to start thinking “scarcity” rather than “abundance”. Insufficient Quantity then becomes Poor Quality (Reason #2 above) as Sales Reps start hanging on to opportunities they know will not close, trying to artificially inflate the size of their pipeline.
And almost just as bad, even when reps close any of these leads, they tend to have done so by offering deep discounts, since they cant walk away from tough negotiators.
Any sales rep afraid to lose anything on his or her pipeline exudes that fear and will be quick to either offer or agree to a deep discount. Experienced buyers can smell that fear and wring out price and other concessions before agreeing to sign the contract.
The worst of this is when a shrewd negotiator uses one of your sales reps to provide him with a low price quote, which he then takes to the vendor he had chosen all along to get a better price from that vendor.
The solution is to keep the Sales pipeline stocked with sufficient size of well-qualified sales leads. This process starts with reverse engineering the numbers to arrive at the required size of the pipeline, starting from the sales target.
Let’s say your target is to achieve $25 million in new sales and your average sales price is $25,000. That means you will need to close one thousand (1,000) new deals to achieve this revenue target, on average.
If your average closing ratio is 20%, then you will need five times as much in sales pipeline, or about $125 million in sales pipeline.
Obviously, you have to build that pipeline throughout the year. Without adjusting for seasonality and/or ramp-up period, this assumes that you would need to build roughly $31.2 million in new sales pipeline each quarter, or roughly $10.5 million each month. We highly recommend that you pad this pipeline by another 20% to ensure that you will achieve or exceed your revenue target.
4. Bad Fit between What You Sell and Your Sales Team’s Skills
Assuming that you have set valid sales targets, and that you have provided your Sales team with sufficient size of high-quality sales pipeline, why would you miss your revenue targets?
Often, companies simply grow their sales force by hiring anyone they consider to be a “closer”. After all, that is what a Sales Organization is for—to close deals. So, what could be wrong with hiring more “closers”?
The problem with this is similar to a hospital hiring anyone who is a licensed MD. Sure a hospital needs doctors, but how many doctors of what kind are needed? A heart surgeon is not the optimal substitute for a kidney ailment, and an Optometrist can’t fill in for a podiatrist.
In the same way, a closer is not a closer. A talented sales rep who always blew her numbers selling $200,000 complex enterprise solutions will struggle to sell $500 licenses. A sales rep that is a genius at explaining very complex concepts simply and getting the sale, will struggle selling simple products that don’t need much explanation. The top sales guy at a construction company selling construction projects will flounder selling a consulting service to the construction industry.
Simply because a sales reps resume said she did over $1 million in sales selling for her previous company doesn’t mean she can do it for your company—unless the sales skills required are a match.
The solution is to always hire the right skills for the right job.
The Prospecting Myth – understand and accept that Prospecting and Selling are two different but related phases of making a sale. The work is very different. Prospectors make 60 or more calls a day in the hopes of connecting with maybe 4-5 people a day and hopefully getting one Sales Qualified Lead a day. The Teleprospector is on the phone all day long, never meeting anyone, and hardly leaving her desk except for short breaks here and there.
Sales reps, on the other hand, are great at building rapport and engaging prospects—once they have them in a meeting. Sales reps don’t do well with a 30 second conversation. They are far better at a 30 min to 2-hour conversations.
Far too often, we see companies hiring sales reps to do their own prospecting and justifying this by saying, “That’s what the base salary is for…” It may sound like smart use of money, but it is actually the opposite. It is a waste of money because the end result is a highly frustrated and unproductive sales rep.
The "Selling is Selling" Myth – selling is NOT selling. Selling cars is very different from selling homes. Selling homes is very different from selling enterprise software to the global financial services firms. Selling telephone headsets is different from selling telephone equipment, which is different from selling telephony services.
There are many differences in the sales of each of these. The work ethics is different. Some require lots short, low-priced transactions as in sales of cars. Others require skill in simplifying complex concepts and reducing them into easily provable business benefits. Still others require the ability to talk to very senior people in large global companies, while others require talking to the foreman of a construction project.
Where one skill was the key to success can become useless in another.
- Always determine what kind of skill you need for a given role, then how many of that role you need to fill. Don’t start hiring until you do.
- Then interview very carefully to make sure you have found the right candidate.
- Lastly, put in place the early flags that will tell you whether you have hired the right person or not, much sooner than later.
5. Poorly Defined Sales Structure
Having identified the right sales talents and having hired them, it is critical to place them in the right roles. Too often we see those with very good service instincts required to hunt, and those with very good hunting skills required to nurture and grow accounts. Again, these are very different types of skills and personalities and your company will likely need both. Just make sure you place the right person in the right role.
It will be very difficult for you to achieve your revenue targets if you don’t properly optimize the structure of your Sales Organization to align with the intended prospects.
Define your Sales Organization according to the Four Quadrants of High Growth
- Quadrant 1 requires light selling and heavy marketing. Therefore, you can use junior level order takers in training to be hunters or account managers. Their job is to assist customers in ordering more.
- Quadrant 2 requires significant account management and relationship building skills. Make sure you place a service oriented sales rep who enjoys working with her accounts to determine what they need and when, and gradually increase the size of each of her accounts. In Quadrant 2, Patience is virtue.
- Quadrant 3 is the domain of the Hunter and the Teleprospector. You need a professional Teleprospector to find the right door into the account, and the Hunter to find a way to get into that door. Don’t waste the Hunter’s talents in finding the door. Assign a skilled Teleprospector for each Hunter—even one Teleprospector 2-3 hunters is a much more cost-effective organizational structure. And don’t look for service-oriented people to do a hunter’s work. In Quadrant 3, impatience is the virtue, and you need professionals that consult and then tell the prospect it is time to make a buy decision.
- Quadrant 4 is pure New Business Development. You need someone with an entrepreneurial spirit, someone who likes to go where no one has gone before (at least in your company). The challenge here is to find the first key customers that don’t mind being the first to use your products in quite that way. And each of these have to be total success so you can obtain the reference-able customers necessary to get more. At some point, you will start adding your Hunter-Teleprospector team from Quadrant 3 so as to get more customers, and this new market will need to be segmented into three other quadrants.
The Four Quadrants of High Growth provide a highly effective way of segmenting markets enabling you to create the right territory assignments that are a fit for the appropriate sales roles and talents.
6. Misuse of Sales Quotas and Sales Incentives
One of the worst understood and often misused sales management tools is a sales quota. The first and worst offender is having different sales quotas for different sales people, not because they sell different products and/or to different customers, but because they just bring in different levels of sales.
As an example, one company we work with set their target for new incremental revenue to be $10 million. While we couldn’t see how they arrived at that number, other than a straight increase over the previous year’s $9million, that was not the real issue
The real issue is how they decided to allocate “quota” to the team. The company has six sales people. Management first announces the incremental revenue target and then announces the “quotas” for each rep.
- Their top producer was to bring in $4.8 million of the $10 all by herself—or 45% the new revenue
- Three other reps had their quotas set to $1.5 million (15% each)
- The last two were assigned half a million each, or 5% of the revenue.
When we asked if these six reps sell different products or to different customers, the answer was “No, they all sell the same thing…”
The reason the first sales rep was expected to sell nine times as much as two others was only because she was good. So, she was being punished for being a great sales rep by having her quota raised, yet once again.
Using quotas in this way is punitive to your best people, possibly forcing them to look for less stressful position in another company, while allowing your worst performers to continue to perform at a low rate with no repercussion. Obviously this is not what you want.
The Right Approach to Setting Quota
The appropriate use of Sales quota is to establish the floor or minimum of what a sales rep must bring in to justify the expense of keeping that sales rep on the payroll. In the example above, since the company would never let go of their top sales rep, then the continual raising of the quota would only drive this rep away due to the intense stress that creates.
The right approach would have been to set a quota of, say $400,000 which means that if any has trouble meeting this number, then it is not cost-effective for the company to keep this rep and should let her go.
Also, quotas should be exactly the same for all reps who sell the same thing in equivalent markets or sales territories. Otherwise, you can expect a sales rep to think it unfair if his or her quota is higher than others who are selling the same product(s) in an equivalent territory. The above-mentioned Four Quadrants provide a systematic methodology for assigning selling territories for a given sales role.
The right Way to Incentivize Reps
Quotas should never be used to incentivize sales reps to produce more.
The right way to incentivize sales reps to produce more is to give them financial incentives to do so. Now that you have set quotas for the minimum productivity you need to justify the cost of keeping a sales rep on the payroll, the rest is to provide a combination of commissions, short-term rewards, and recognition to drive productivity.
Rather than having a straight commission rate no matter how much a sales rep sells, provide a variable one that increases every time a sales rep achieves a new sales production level.
Lets illustrate these two improvements over the bad practice of misusing quotas to try and increase sales productivity.
Scenario 1- Misused Quotas
In this scenario, a company pays a straight 7.5% commission on sales. The company also has also awarded different quotas to their sales reps as indicated above, with the top rep struggling to make $4.5 million in sales. The two least productive sales reps each are told to achieve $500,000—which they may or may not achieve, and it is not clear what would happen to them. In fact, these two sales reps typically bring in around $300,000.
Scenario 2 – Proper Use of Quotas and Variable Commission rates
In this case, the company has the same quota for all sales reps selling the same products in equivalent territories—say $300,000. If any sales rep brings less than that, then the sales manager will have to seriously consider letting this sales rep go and look for a better-suited sales professional.
Commission rates are 5% for achieving quota ($300,000); then 6% for sales of $301,000 to $400,000; then 7% for sales of 401,000 to $500,000; then 8% for sales of $501,000 to $700,000; then 9% for sales of $701,000 - $900,000; and 10% for sales over $900,000 to $1.2 million; and so on.
Let’s see the effect of this variable commission rates on those two least productive sales reps.
- Under the old model, if the sales rep sold $300,000 she would make. The increase in commission to get this rep to sell $301,000 is another $75 only.
- Under the second model, this rep will see a jump in commission of $3,060 for selling one more $1,000 because of the 1% increase in commission on ALL $301,000.
For sales level of $401,000:
- Under the first scenario, sales rep will earn $7,575 in additional commission compared to sales on $300,000
- Under the second scenario, the sale rep will earn $13,070 more (because of the 2% increase in commission over the entire $401,000).
What we have done differently is that both our stick and our carrot are stronger and clearer in the second scenario. Sales people could lose their job if they produce under $300,000 and the upside for them for continually increasing their productivity is significantly higher under the second scenario. Both are hard to ignore for any sales rep.
The key is to first determine how much of revenue you are willing to allocate to compensating your sales force, and then designing the commissions to incentivize increased sales productivity.
7. Slow conversion of Contracts to Revenues
If your company cannot invoice a customer until certain conditions are met, and you have significant time lags in meeting these conditions, then you will likely miss your revenue targets, even if the “booked” revenue is equal to or exceeds your revenue target.
For publicly traded companies, this is a legal requirement that must be met to recognize revenue within the specified accounting period. However, even for a private company, pretending a deal is closed when the signing of the contract is contingent upon the deliver of conditions within a specified time frame is a recipe for missed revenue targets.
- At best, the customer simply will not pay until all conditions are satisfied—and though you will receive the funds at some point, this puts significant cash-flow strains on your company.
- Even worse, the customer will get out of the contract if you don’t satisfy the conditions and you will have wasted significant resources to get a contract without receiving any funds in return.
- Far worse would be if that customer was upset enough to give your company bad reviews. Then future prospects might be skeptical about signing up with you.
The first step is to monetize this issue so you know how much money you are not collecting as a result of the time lag between signing a contract and delivering what is expected so you can invoice the customer.
If your business model is a recurring revenue model where customers pay a certain amount each month, each month that you have not yet delivered is what you are forgoing.
As an example, let’s say you charge $5,000 a month and it takes you roughly 60 days to get a new customer to be ready to be invoiced. That means that you have foregone $10,000 due to this delay. Let’s say on average you close five such deals a month. That means, on average each month, you are losing about $50,000 in opportunity costs (money you could have earned that you are not).
Next, let’s say you figured out a way for cutting the time from 60 days to 30 days. That means you are now saving $25,000. Therefore, you can spend up to $25,000 each month to reduce this to 30 days and it would be a wash from a cash-flow perspective.
However, the real gain comes with increased new customer satisfaction—customers want to start seeing the benefits of their purchases as soon as possible. After all, that was the reason they decided to buy. Therefore, speeding up the process of realizing the benefits would significantly increase customer satisfaction.
If you can get customers to write great reviews, agree to be references, and in other ways provide you with positive testimonials, then this will go a long way in enabling your sales people to close more deals in shorter time.
Your company may not have all of these issues. However, if you are having difficult meeting your revenue objectives, it his highly likely you have at least one of the above seven challenges.
Having worked with over 100 companies, SOMAmetrics has developed the tools, resources, and expertise to help your company overcome the challenges that prevent you from consistently achieving your revenue targets.
The first step is to conduct an Assessment of your company to determine which of the above challenges you may be facing, and what the root causes are. The next step would be to look at some options of how to address these challenges and begin to consistently achieve your revenue objectives.
SOMAmetrics provides a one-week assessment service that enables you to quickly identify where the bottlenecks are in achieving your revenue targets and develop viable options to address this.
Please contact us today to determine how we may be able to help.