What Your Close Rate Tells Me

“Here’s the deal,” the owner of a mid-sized company explained to me, “we are only seeing bid work these days. Low-profit RFPs. We have to do it. We have to keep busy.”

I asked, “What’s your close rate on this low margin work? Doesn’t it require a lot of energy to put together the proposals? Isn’t your business focused on high-end, custom work?”

“Our close rate is pretty low. Maybe 20%. But it doesn’t take a lot of resources.” He was suddenly comfortable with his situation, “We can put a budget together quickly. We just are not seeing much custom work out there.” It is as if he had given this speech many times. It was a practiced rationalization I have heard from other owners too.

Close rates tell me a story. If they are too high it is often an indication that the company treats every job as its last. Margins get slashed, value is given away, and win at any cost is the mantra. If the close rate is too low, it suggests that the seller is bidding on too many jobs without a clear understanding of margins, brand, and therefore, value.

There is no ideal close rate: there is simply too high or too low.

When I finally persuade the owner to tell me what would be ideal, his reply was also quite familiar, “We want to do custom work. It’s what we are best at and that’s where we make the most money. The bid work is great for filling in the calendar and those are often large jobs, which help keep our numbers up with our suppliers. We need a mix of work.”

The owner and I agree on a target 50:50 mix of custom and bid work. “OK,” I change direction, “What are we going to do to encourage more custom work with the sales team?” Then I move into my practiced list of how to shift mindset:

1. Use Separate Processes

Treat bid work like its own business unit. If it is truly tender bid, then eliminate any sales functions and customized treatments. Send the opportunity to an estimator desk. Their job is to look for the potential efficiencies in RFP, leverage your buying power with suppliers, and stay tightly within the proposed scope of work. When the estimate is ready and you have applied an acceptable margin (you know, to “keep you busy”), determine whether you have room – based on your brand power, suitability for the project, and guts – how much more margin you should be willing to add and risk not winning. It’s very unsexy and doesn’t involve salespeople, so it should go more quickly.

2. Compensate Appropriately

I still come across companies that pay sales commission on bid work at the same rate as high-margin customized projects. The argument (yes, I have heard it many times) is that, “The lower margins inherent in bid work should encourage sales people to seek custom jobs in order to earn more commission.” All I can say is, “If that were true, we would not be having this conversation.” The counter-argument from sales is, “2% of something is worth more than 2% of nothing.”

Ask yourself, “What is the ROE – Return on Effort?”

Public tender bids require no sales effort at all. The fact that a salesperson scoured the trades to uncover the opportunity is moot. You could hire an admin to do the same thing. Additionally, there is nothing to close. You are all but cut out of the process once you submit. And honestly, what does having a salesperson sit on the teleconference with a dozen other bidders have to do with sales?

On the other hand, there are projects that go out to bid, which required sales effort in order for your firm to be included. Good job! Really, I am not being sarcastic (we need a font for sarcasm). These are projects that in spite of a bid process, have weeded out potential suppliers and selected you as a contender. You have been invited to bid and assuming they didn’t invite everyone (they are obliged to share who was invited, by the way), you have a chance to shine. There is now room to improve how your submission is perceived. My key criteria to make this project commissionable is that the list of bidders be comparable companies, that you have the opportunity to present the proposal in person, and that the job is not to be awarded on price.

3. Have Too Many Choices

To have a 50:50 mix of opportunities – and this is important – that you act upon; you need to have an abundance of projects that you don’t pursue. To keep the math simple, let’s assume you need $1,000 worth of opportunities a year. You want a minimum of half to be high margin custom work and will allow up to half to be bid work. Custom projects will therefore take priority on resources. I would also expect the close rate on these projects to be higher.

All of your sales energy should be on custom work. Bid work is almost limitless in supply.

Bid work should be evaluated for timing and how suitable your company is for the project. You should be rejecting far more tender bids than you actually quote. If you have cut commissions for bid work, minimized the process used for responding to tender requests, and refocused sales efforts on custom, relationship-driven opportunities – then, you should once again be spending more time on higher-margin opportunities.

I want to leave you with a bit of economic encouragement. As I write this piece in June of 2016, corporations are sitting upon the largest piles of cash they have seen in decades. Profits are up, but expansion still seems throttled. The good news is that infrastructure projects and marketing initiatives are being funded, and that bodes well for my readers. There is an abundance of work available for those with a mindset for Intentional Success℠.

Tom Stimson MBA, CTS helps owners and management teams rediscover the fun and profit that comes from making better decisions about smarter goals. He is an expert on project-based selling and a thought leader for innovative business processes. Since 2006, Tom has successfully advised over two hundred companies and organizations on business strategy, process, marketing, and sales. Learn More at TRSTIMSON.COM