How Much Value Does Your Sales Team Leak?

How should you measure the performance of your sales teams? Most sales leaders measure their teams by total sales in dollars [1]. For example, the southeast region sold $27.2 million in calendar year 2021, and the west region sold $15.3 million. The southeast region performed far better.

Total sales is a good measure for determining compensation of sales managers. But if your goal is diagnosis and performance improvement, total sales does not help you. Is $15.3 million good? Is $27.2 million? What skills should the west region improve, to sell more? What should they do different? Could the southeast region improve?

Sales leaders often measure teams by sales against quota. For example, the southeast region exceeded quota in 2021 by 24%. Quotas can be useful for normalizing total sales. The west region may be smaller than the southeast region, and so have a smaller quota. But performance against quota provides no information about how to improve performance.

Another common measure is sales conversion: what percent of proposals are sold? Conversion is even less useful for diagnosis than total sales. Suppose Michael’s team converts 80% of their proposals. Is that good? Michael avoids losing, so his team does not even pursue an opportunity unless they are certain of a win. Michael’s team could earn more sales by pursuing some less certain opportunities.

For diagnosis and performance improvement, there is a better measurement of sales performance. Consider an imaginary perfect sales process, in which the team does everything right. Then measure the distance from the actual sales performance to that perfect process. In manufacturing, that’s the basic strategy behind six sigma. Six sigma measures defects. The number of defects is the distance between reality and perfection. When manufacturing achieves 3.4 defects (or fewer) per million, they have reached six sigma.

Of course, sales is far from the precision of manufacturing. One sigma would be a stretch goal for many sales teams. But the strategy of comparing to a fictional perfect process is useful. First, we need to sketch out a generic sales process, so we can define what is perfect.

A sales process is sometimes described as a funnel. Leads enter the top of the funnel, and sales exit the bottom. The funnel is wider at the top and then narrows on its way to the bottom. Only some of the leads warrant a sales call. Only some of the sales calls result in a follow-up. And so on, until only a small fraction of leads become sales. The narrowing of the funnel reflects the narrowing from leads to sales. A large volume of leads results in a much smaller volume of sales. [2]

An actual physical funnel channels all the liquid from the top to the bottom. The sales funnel does not. Most of the “liquid”—the leads and opportunities—in the sales funnel escapes out the sides. It’s as if the funnel had spigots directing liquid out [3]. Those spigots are counterproductive in a physical funnel. But they are essential in a sales funnel, so time and effort is not wasted on leads that will never result in a sale.

Instead of a funnel we can look at the sales process as … well as a business process. Leads enter the beginning of the process, at the left. At the end of the process, at the right, the team proposes to the prospective customer. The customer may buy. Or the customer may buy a competing product from a competitor. Or the customer may make no decision at all, deferring until some later date.

Between the beginning and the end, the sales professional qualifies the lead. He decides whether a sale is possible, before spending much time and effort. Impossible sales exit downward.

Of course real sales processes are more complex, with multiple qualification stages. And sometimes customers require multiple approval stages. For example, a customer might downselect to narrow the field of suppliers. Then they hold a bakeoff to score suppliers against each other. But this simple model is good for our purpose, of comparing to a perfect process.

Qualification is mutual learning: the sales professional learns, and the prospective customer learns. The sales professional learns about the prospective customer and the opportunity. The sales professional learns, to decide whether to pursue the opportunity. If the sales professional does pursue, he continues learning. Learning allows him to make a better offer, an offer that creates more value for the customer.

The prospective customer also learns. She learns about the various offerings from the different suppliers. She learns how the different offerings would create value for her organization. She learns so she can better compare the offers, and decide which to buy, or whether to buy any at all.

Some sale professionals help their prospective customers learn. He teaches her how his offerings create value for her organization. The teaching of a customer is called “shaping”. Good shaping improves the win probability. Good shaping also results in growing the scope of an opportunity. She purchases more units, or purchases a more complete package of goods and services. He realizes more sales, and she realizes more value.

Suppose the sales process is perfect, with no value wasted. In this fantasy, qualification is perfect. If a lead cannot result in a sale [4], it is always qualified out, and the sales professional spends no more time. If a lead can result in a sale, the sales professional qualifies the opportunity, and writes a proposal.

Continuing the fantasy, if he writes a proposal, he always wins. The sales professional learns enough to write a winning proposal. The prospective customer learns enough to understand the value created by the offering. She accurately compares the value to that created by competitive offerings. She accurately compares the value to the value of doing nothing.

The scope in the proposal is maximal. The proposal offers as many units as create value for the customer. The proposal offers a package of goods and services if such a package creates more value. The proposal leaves no scope on the table.

In this hypothetical perfect sales process, no value leaks out. As a sales funnel, many leads spigot out of course, those leads that are unwinnable. But no value leaks.

Unlike the imaginary perfect sales process, real world sales processes do leak value. They leak value in four ways. First, qualification is imperfect, resulting in false negatives. The sales professional misjudges some winnable opportunities as unwinnable. These opportunities exit below, lost early due to imperfect qualification.

Second, qualification is imperfect in the other direction, resulting in false positives. The sales professional misjudges some unwinnable opportunities as winnable. Some are unwinnable because a competitive offering is better for this customer. Some are unwinnable because a competitor is better positioned with this customer. For some, the customer is not ready to make any decision [5]. Value leaks in all these cases. The sales team spends time and effort chasing these unwinnable opportunities [6].

Third, winnable opportunities are sometimes lost. Jason identifies an opportunity as winnable, but he does not make the sale. He failed to learn enough to write the best proposal for this customer. Or he failed to shape the customer. He did not teach the customer how his offering created more value. Or he failed to execute, writing a confusing proposal.

Fourth, some wins are underscoped. Christopher’s team sold a $1 million deal. But it might have been a sale for $3 million had the customer better understood the scope of her problem. $2 million in sales is not realized. And the value of that extra scope is not realized by the customer. The $1 million win is good of course, but stunted by $2 million.

Continuing the liquid metaphors, let’s call these four value leakage buckets. Each bucket is a category of leaked value in sales process.

  1. Winnable opportunities mistakenly rejected
  2. Wasting effort on unwinnable opportunities
  3. Winnable opportunities lost
  4. Wins stunted

We measure value leakage in dollars [1]. Suppose a team loses three winnable opportunities, for a total of $4 million. The winnable lost leakage is not 3 (opportunities) but 4 million (dollars). By measuring leakage in dollars, we normalize the differing sizes of opportunities.

Every sales team leaks value in these four buckets. But sales teams differ a lot both in how much value they leak, and in the bucket mix. Some sales teams are quite cautious, only proposing to customers when they are certain to win. These cautious teams leak a lot of value in winnable opportunities mistakenly rejected. Some sales teams are aggressive, pursuing opportunities that cannot be won. Some sales teams lose opportunities they could have won. With better learning and better shaping, their losses could have been wins. Some sales teams fail to grow opportunities, and leak value in their stunted wins.

We cannot measure value leakage precisely. But we can estimate it with statistical analysis of pipeline history. [7] The resulting leakage estimates are uncertain. The situation resembles sports. Will the Minnesota Timberwolves will defeat the Washington Wizards on March 17? It’s impossible to know for certain, but it is possible to estimate a likelihood. The Timberwolves have a 29% chance. Similarly, we can estimate the value leaked by a particular sales team in each of the four categories.

Each estimate has a range of uncertainty. For example, Joshua’s team leaked $43.4 million – $60.8 million last year, in winnable opportunities lost. Ryan’s team leaked $20.7 million – $32.1 million in winnable opportunities mistakenly rejected.

With leakage estimates, we can decide how to improve sales. Joshua can coach his team to better communicate the value in their proposals. He can teach them to better shape their opportunities. Ryan can encourage his team to be more aggressive. They can be coached to pursue some opportunities that look more challenging.

There are four methods of using value leakage estimates to improve sales.

  1. coaching and training
  2. hiring different sales professionals
  3. changing organizational incentives, and
  4. providing sales professional with analytic tools.

The details vary, depending on the leakage bucket:

Value leakageHow to improve
Winnable opportunities mistakenly rejectedCoach sales professionals on being more aggressive, and pursuing opportunities that look challenging. Hire more aggressive sales professionals. Change organizational incentives, to reduce the penalties for trying for less certain wins. Provide analytic tools to sales professionals. With the right analytic tool, a sales professional can recognize a winnable opportunity.
Wasted effort on unwinnable opportunitiesCoach sales professionals on recognizing unwinnable opportunities. Hire sales professionals who are better at qualification. Change organizational incentives, so busy work is not rewarded. Provide analytic tools to assist recognizing unwinnable opportunities.
Winnable opportunities lostCoach sales professionals in better communication of value. Coach sales professionals in better shaping of the opportunity. Hire sales professionals who are better at winning winnable opportunities. Provide analytic tools to quantify value created in customer organizations.
Wins stuntedCoach sales professionals in better shaping of the opportunity. Hire sales professionals who are better at growing opportunities. Provide analytic tools to quantify value created from larger scope.

Leakage can be estimated for teams, and also estimated for individual sales professionals. For example, Brandon leaked $2.9 million – $5.4 million in winnables lost last year. His manager should coach him in the skills needed to win similar opportunities in the future. Or his manager should provide him with the right analytic tools.

By comparing a sales team to a perfect performance—no value leakage at all—we have a better measure. Value leakage estimates can diagnose the shortcomings of a sales team, ultimately improving their performance.

If you are interested in estimating the value leaked by your sales team, please contact me.

[1] Or euro or sterling or yen, etc.

[2] Many sales professionals believe their biggest problem is insufficient lead volume. With more leads they could sell more. They are right. But these same sales professionals also leak value with the leads they have.

[3] Outside the United States, spigots are often called “taps”.

[4] Or if a lead cannot result in a sale at a price that provides enough margin. Lowering price often buys a sale. But the business suffers.

[5] Some sales professionals continue working opportunities they know are unwinnable. They want to seem busy. They want to show activity in their funnel. To improve their own reputation, they waste effort on unwinnable opportunities. This pathology is quite common.

[6] Consider a sales team that misqualifies an unwinnable opportunity as winnable. If the unwinnability is only recognized late in the process, much time and effort is wasted. The later the recognition, the more waste. This situation is a bit like rework in a software development process. Errors discovered late in the process create more rework than errors discovered early.

[7] The technical details of the estimation are beyond the scope of this description. Contact me for details.

Thanks to Brian Otis, Michael Bean, Robert Howe, and Chris Townsend for reading drafts of this, and making useful suggestions.

This entry was posted in Uncategorized. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s