A close ratio, or close rate, represents the number of sales you close compared to the number you tried to close. This is usually measured by the number of quotes you've given to customers and the number of sales you made from those quotes. For sales teams and commissioned sales representatives, it's one of the most important numbers to know. Certainly, it's not the only component that determines sales success, but its value in the sales funnel can't be underestimated.
TL;DR (Too Long; Didn't Read)
To calculate your close ratio, simply divide the number of prospects you tried to close by the number of those who bought from you.
The Importance of Close Ratios
There are several important numbers at work in any sales funnel or sales pipeline. A win rate, for example, compares the number of deals you closed compared to the number of qualified prospects you met. In a pipeline, you usually have four components:
- Qualify the prospect
- Meet the prospect
- Propose a deal
- Close the deal
One reason close rates are so important is that closing a deal represents more work than any other part of the sales process. Qualifying a prospect may take just a few minutes, while the time invested in meeting with that prospect on one or more occasions, drafting a proposal and then meeting again can require many hours.
A second reason close rates are so important is that they also measure your abilities in all the previous stages of the funnel. Failing to properly qualify prospects before meeting them, making a poor impression during the first meeting or sending proposals to uninterested prospects will all reduce your close rate.
Close Rate by Industry
Any sales department and each sales rep will have different close rates; however, there are also averages within each industry to help you determine how your close ratio compares to your competitors. According to Hubspot, which analyzed the close rates of 8,900 different companies over 28 industries, close rates by business sectors include:
- Biotechnology: 15%
- Business and Industrial: 27%
- Computer Software: 22%
- Computers and Electronics: 23%
- Finance: 19%
If your close rate in your sector is on par with the industry average or even better, pushing to significantly improve your rate may not be the most productive endeavor. Of course, if your close rate is below the industry benchmark, there's probably something your competitors are doing that you're not.
Sales Pipeline Formula
The sales pipeline formula helps you determine how much money is moving through the pipeline daily. It's also known as the pipeline velocity formula. There are four components to this formula:
- The number of deals in your pipeline: This includes qualified prospects who have booked a first meeting to those who are considering signing a contract.
- Win rate percentage: Based on previous deals, the percentage of qualified prospects who became customers.
- Average deal size: Based on previous deals, the number of deals you signed divided by their value.
- Average days in the sales cycle: This is how long it takes to get the average customer to sign a deal after the first meeting is booked.
(deals) x (win percentage) x (deal size) / (days in sales cycle) = Sales Velocity
Suppose, for example, you currently have 20 opportunities in your pipeline, and historically, you have an average win rate of 25%. You've calculated that your average deal size is $5,000 and that it takes, on average, 32 days to make a deal after booking the first appointment with a prospect. Using the velocity formula, you're making about $781 per day: 20 x 0.25 x $5,000 / 32 = $781.25.