Beware “Hit-Rate Guy”
Why focusing on hit rate can have a detrimental effect on revenue growth.
If one sits through enough strategic planning, leadership or board meetings, the question eventually comes. Usually it’s posed by a team member who has never belonged to or led a sales team, grasping for a question that makes him look like he knows what he’s talking about. As the discussion turns to sales performance or sales growth, he looks to the person responsible for heading up the sales effort and, with a self-important air about him queries, “What’s our hit rate?”
In business-speak, the hit rate is derived by dividing the number of quotes or proposals completed during a certain period of time into the number actually won to arrive at a percentage that supposedly measures the effectiveness of the sales effort.
When posed this question in a meeting, I usually look Hit-Rate Guy in the eye and ask what he wants the hit rate to be. When he chuckles, looks at me like I’m an idiot and responds “100 percent,” I look back at him and say, “OK, then we will make it 100 percent.”
Then I share the tale of two members of my first sales team. At the end of my first year of leading the team, Don’s hit rate was 30 percent. George’s was 80 percent. Then I ask Hit-Rate Guy which of the two he would rather have on his team, a question to which he provides the obvious answer.
I continue to say that Don quoted $3 million in potential business and closed $900,000. The average gross profit on this new work was 40 percent, meaning Don’s new business generated $360,000 in incremental gross profit for our company.
That same year George quoted $600,000 in potential business and closed $480,000. The average gross profit on George’s new work was 30 percent so that year George’s new business generated $144,000 in incremental gross profit, less than half of what we derived from Don.
Now, when I ask Hit-Rate Guy who he would rather have on his team, Don or George, he is stuck as he unsuccessfully tries to make up a rational answer to my question without contradicting his first response. I then explain that I can make my hit rate 100 percent if my team only does one quote this year and we quote a project we are 100 percent certain of winning. I then ask Hit-Rate Guy if he thinks that is a good strategy.
Not only is measuring hit rate not an effective measure of the efficacy of the sales effort, focusing on hit rate can even have a detrimental effect on revenue growth. Consider a sales person we will call Rob, whose superior obsesses over hit rates—measuring them monthly and insisting that his team improve the result month after month. If Rob is to produce the encouraged hit rate result, he is best served by only quoting new business opportunities he is likely to close. Assume for the moment that he is presented with the opportunity to quote a $1 million new business opportunity—one that would grow his employer’s top line by 10 percent—but Rob assesses the odds of winning the business at only one in four. Not wanting to disappoint his boss by likely adversely affecting the hit rate given the relatively low chances of winning, he declines the opportunity to quote. This story illustrates the ridiculousness of using hit rate at a key measure of sales performance.
This is not to say that quote efficiency is irrelevant. Some dozen years ago I acquired a metal finishing company, thereby inheriting its customers and prospects. One such customer sent that company an infinitesimal amount of work. Not long after the acquisition, I received an extremely large quote request from that customer, to which I responded but did not win. A week or so later another request arrived and that one ended the same way. This process went on for several months, and each time the customer’s buyer explained that the work was awarded to another finishing company—the same one every time—and the reason given was that the other company would always be their “preferred supplier” thanks to its longtime relationship with the customer’s owner.
Eventually, I tired of spending hours on proposals that we never won so when the next request arrived I let it sit on my desk. A week or so later the buyer called and asked when our proposal would arrive and I explained that I had elected not to invest several hours in quoting work that would inevitably be awarded elsewhere. She actually had the gall to explain, in irritated fashion, that I had to respond because her employer required that she receive three competitive quotes before awarding a project. Not all projects are worth quoting, regardless of hit rate, and it is incumbent on the sales person to use some discretion as to where time is best invested.
At the close of the hit rate discussion I let Hit-Rate Guy off the hook a little by acknowledging that, in the absence of any other metrics, I suppose measuring hit rate is better than measuring nothing, but then go on to discuss how to better assess sales performance.
I like to regularly ask the members of my sales teams which prospects they met with yesterday, and which they’re meeting with today and tomorrow. The answers give me a good sense of how efficiently they are scheduling appointments. I keep a running list of their top two or three “game changing” sales leads and ask about them regularly, taking the time to make sure they are getting everything they need from me and other members of the team to keep the opportunities moving along.
On a weekly basis I ask them what new business they closed in the last week. Even when I know the answer is “nothing” I still ask, just so they know that I know. Monthly, I track and document what new business each one closed during the previous month and year-to-date. I review how actual revenue on new business is tracking to what they predicted when they closed it and resolve the reasons for discrepancies. I review how new business is tracking to the budget and goals for each sales person’s territory, and how current year results compare to those of the same period in the prior year. Loaded with this information, I am in a great position to assess current performance, correct any shortcomings and provide an informed and detailed answer when anyone asks about the performance of the sales team.
Leave in-depth discussions of hit rates to Hit-Rate Guy and his uninspired brethren, and measure something that actually drives productive results.
Originally published in the February 2016 issue.