What Should Your Close Rate Be?

By Dan McDade

A well-known industry analyst firm reports that best-in-class companies close 30% of sales qualified leads while average companies close 20%. This factors in that between 52% to 86% of the marketing qualified leads put into the top of the funnel leak out before they are considered sales qualified.

If you do the math, this tells us that sales reps are expected to work 1,000 marketing qualified leads down to 14 to 48 sales qualified leads and close 20% to 30% of those leads respectively; and end up with 3 to 14 deals. Not very efficient, right?

The reality is? Sales isn’t qualifying 1,000 marketing qualified leads to 3 to 14 sales qualified leads. They don’t have the time or interest (or the DNA).What does happen? A few leads are cherry-picked out—and other leads are left to go into the black hole called CRM.

Imagine Spending $208,350 on Marketing Leads That Are Trashed Immediately   

One of the biggest software companies in the world has a division that spends over $200,000 per year on leads that sales refuses to follow-up on. Why don’t they follow-up? Because it turns out that only 1.8% of the so-called leads were even with qualified companies. None were actually leads. What chance do you think there is that sales will work thousands of “leads” when they know that fewer than 2% of them are even qualified companies? The sales close rate on these leads is zero percent. What a waste.

Close Rate Example

It is amazing how low the close rate can be to break-even on converting marketing qualified leads to sales qualified leads via lead qualification and nurturing, and what the return is on good sales lead management.

Assumptions:

  • Margin is 60% (probably conservative for software and services)
  • Cost per sales qualified lead is $1,250
  • Assume that the deal size is either an on-premise license sale or a SaaS solution with the net present value calculated—for this example we want to make the math easy.

  • For a $300,000 deal ($180,000 in margin) the close rate would need to be .694% (not even 1%).
  • For a $100,000 deal ($60,000 in margin) the close rate would need to be 2.08%.
  • For a $10,000 deal ($6,000 in margin) the close rate would need to be 20.8%.

If 50% of the leads provided were with not qualified companies (only the best companies achieve this), the necessary close rates would double to roughly 1.4%, 4.2% and 42% respectively. Lower quality leads cause the necessary close rates to go up even more —and at some point the average deal size does not support generating the leads in the first place.   

If the average company could, in fact, close 20% of sales qualified leads the ROMI would be $28.80 for every $1 invested (again based on 60% gross margin).

I find that close rates are generally over-stated. When I ask sales executives what percent of sales qualified leads they can close their answer is generally in the 60% to 80% range. What they mean is that they will close 60% to 80% of what they thought they would close. Close rates probably can be a lot lower than most people think. Not that they should be. But they can be.

Finally, no sales executive wants to admit that they are closing 1-out-of-10 opportunities (as an example). So, they don’t provide visibility into the pipeline until late in the game which causes inaccurate forecasts and other pain.

Recap

  • What is a healthy close rate for your solution(s) and/or service(s)?
  • How much money could you save and how much more revenue could you generate if you understood the optimal close rate and provided sales with sales qualified leads?

Did you know that leads cost more than you think, but probably a lot less than you are currently paying?.

For more from Dan McDade see www.prospect-experience.com

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