What is Stage Conversion Rate?
Opportunity stage conversion rate tracks how leads or prospects move from one stage to the next in the sales funnel. It's surprising to see just how many companies are getting conversion rates wrong and falling into common traps. The purpose of this post is to provide actionable recommendations and generate awareness of the common pitfalls so you can avoid them.
Here's a fun dashboard to play with.
How do you calculate Stage Conversion Rate?
Traditional Calculation: Number of opportunities that moved to the next stage divided by the number of opportunities from the prior stage.
Recommended method: Number of opportunities that progressed to any future stage other than closed lost divided by the number of opportunities in the original stage
We recommend counting any deal that moves to a future stage, but including Closed-Won and excluding Closed-Lost, because opportunities frequently skip stages.
Why is it important to track stage conversion rates?
ROI & CAC:
Converting more deals through to closed won is much more cost effective than finding new deals - similar to expansion at current customers is easier than finding new customers.
Intervention:
When you track how deals are progressing through the sales funnel, you can identify opportunities and issues before it's too late. This allows you to intervene and take corrective action to improve your chances of closing a deal.
Effectiveness:
Tracking the conversion rate of different cohorts allows you to gauge the effectiveness of everything from product launches to sales tactics to marketing content. For example, conversion rate from marketing to sales-qualified is an important metric to gauge marketing performance.
Forecasting and Modeling:
Conversion rates are often used to forecast sales for the quarter and sometimes even long-term revenue based on pipeline growth assumptions. This is important for setting realistic sales targets and creating accurate revenue forecasts.
Momentum:
By tracking conversion rates by different cohorts, and by coupling with other metrics like days in stage, teams can identify sources of bottlenecks and areas of strength across strategies. This allows them to adjust their approach and focus on the tactics that are most effective in driving later-stage pipeline growth.
What are the common mistakes to avoid?
Inaccurate data:
Incentivizing sales reps to have high early-stage deal conversion rates, even inadvertently, encourages them not to capture their leads and prospects in the system. For example, I often see marketing getting slammed for having very low conversion rates when an analysis shows that they’re just tracking their leads systematically (the entire denominator) while sales is only putting in the ones they deem high probability (partial denominator).
Misleading Calculations:
I see a surprising amount of conversion rate miscalculations. Most commonly, I see the sales funnel diagram presented as conversion rates - this is NOT a stage conversion rate, it is a percentage of the pie.
Not Cohorting:
Cohorting the data by various attributes such as time, lead source, territory, rep, age of the deal, size of the deal, company size, or industry is crucial to getting a like-for-like comparison.
Calculating too early:
Similar to a misleading calculation, ensure your calculation periods provide sufficient time for the opportunities to progress before you draw conclusions.
Faulty Assumptions:
External factors are challenging to account for, but when the factors are controllable, such as new product launches or changes in target company sizes, it's crucial to factor them into future conversion rate assumptions.
What are the true landmines of pipeline stage conversion rates?
I avoid conversion rates when possible for a few big reasons:
- Conversion rates often misrepresent the performance of sales reps. If a sales rep converts all their deals from stage one to stage four but loses them all in the end, they are not a high performer. They wasted resources, time, and likely botched the forecast for the quarter.
- In the example above, Johnny may convert 73% of his deals to the Proposal stage, but after spending Legal and management resources he ends up losing 29% of those deals. Never disincentivize a sales rep from disqualifying bad deals. When evaluating sales funnel performance, focus on reps with high win rates for late stage deals.
- Avoid incentivizing sales reps to achieve high early-stage conversion rates unless you have a clear understanding of what the appropriate rates should be. More often than not, such incentives result in biased data because reps input only the opportunities that are most likely to convert. Never discourage sales reps from entering data into the system of record.
- Be cautious when incentivizing marketing or SDRs based on SQL conversions. This can create tension between teams, and account executives may not want to bite the hand that feeds them.
- Conversion rates can be easily manipulated by simply changing a field in Salesforce. Ensure entry and exit criteria is based on customer reciprocation, and focus on win rates as the determining factor of success. Conversion rates are better used for testing the effectiveness of tactics.
Ultimately, never make conclusions based on Stage Conversion Rates alone, and always cohort your data.
In conclusion
Opportunity stage conversion rates can provide valuable insights into your sales process, but it's crucial to understand their limitations and potential issues. Remember, the goal is not just to optimize conversion rates, but to close more deals and generate happy customers and profitable revenue for your business. See our win rate analysis playbook for our recommended approach to measuring success.
