by Scott D. Butcher, FSMPS, CPSM
Ah, the hit rate. The much-maligned, quasi-useful metric by which many firms live and die. Also known as win rate, this is a very simple formula to judge the “success” of marketing efforts.
The SMPS Foundation recently published Measuring for Success: A Look at Hit Rates & Other KPIs in the A/E/C Industry. Their definition of hit rate is “total number of proposals submitted to total number of proposals won,” and they found that 92% of design and construction firms use this metric.
So it’s safe to say that this metric is almost universal. But is it really valuable?
Let’s say you submit ten proposals, and win four. The math is pretty simple: 4/10 = 40%.
This can be useful when benchmarking your efforts, particularly when compared against yourself, like your hit rate for this year compared with last year. If your hit rate grows from 38% to 40% you are demonstrating improvement. You can also use hit rate to compare divisions, offices, or market sectors. So it does have some value.
It is when you try to compare this metric against other firms that you run into problems. When do you mark something as a win? Is it when you get the verbal confirmation that you won? Or when a contract is signed? Our when you send the first invoice (or receive the first payment)? Likewise, what projects do you count in your metric? Do you count every task order or delivery order under a contract? Do you count the small, non-competitive projects that your clients just hand you? Do you count only proposals to non-clients, or do you count existing clients as well? Do you count only those projects in which you are prime, or do you include subconsulting or subcontracting engagements as well?
Every firm has their own approach, so when you compare your hit rate to others, you are not necessarily looking at apples-to-apples data.
But my concern with hit rates goes deeper. Can a simple hit rate calculation be a useful metric for predicting backlog – or marketing success?
Let’s take those ten proposals, and dive a bit deeper:
Using the standard hit rate metric, we can see that we pursued ten projects and won four, thus our 40% hit rate. Based upon published industry surveys, this seems reasonable and fairly typical. (The SMPS Foundation research revealed an overall hit rate of 42%.)
Yet if we dig deeper, we can see a major problem. We’re winning work, but we’re not winning the projects with the largest fees.
- Dollar Value of Projects Won = $210,000
- Average Fee Per Project Won = $52,500
- Dollar Value of Projects Lost = $1,656,000
- Average Fee Per Project Lost = $276,000
Whoa! There’s a major issue here. We’re failing to win the large projects. Unfortunately, our hit rate doesn’t tell us that. It tells us that we are at 40%, generally aligned with hit rates of other A/E/C firms.
That’s why I’m a big fan of the dollar-based hit rate, which I refer to as “conversion rate” – in other words, the dollars proposed that we are converting to bookings (and eventually revenue).
So our conversion rate is total value of dollars won to total value of dollars proposed.
- Dollars Won = $210,000
- Dollars Proposed = $1,866,000
- Conversion Rate = 11%
A metric of 11% is vastly different than a metric of 40%. (Flip it around: with a conversion rate of 11%, you are losing 89% of the dollars you pursue!)
Per the SMPS Foundation, fewer than 40% of A/E/C firms use this second metric, which I find far more valuable. Using the standard hit rate metric, you could potentially see hit rates of 60% or 70%, and yet your firm could be gasping for air because not enough work is coming in.
Hit rate is easy to calculate, and there’s no reason not to track it, especially for trending purposes. But if you really want to know how you are doing and what workload is coming into your backlog, track conversion rate, or whatever you want to call it. That’s a better measure of marketing success and a metric that will provide greater value for your company. And remember that this Key Performance Indicator (KPI) is internal. Because of the myriad ways of choosing which data to include in hit rates / conversion rates, you will be challenged when trying to compare your stats with other firms. So track it and compare it year-to-year or quarter-to-quarter. Track it by project manager or division or office or market sector. Follow the trends to determine if there are certain types of projects you regularly win – or lose. Track it at least quarterly, if not more often, and take corrective action if necessary. The conversion rate (or dollar value hit rate) can be a very useful KPI, but you need to make the data work for you, and monitor it continually.
Are you tracking “hit rate” or “conversion rate”? Which metric do you feel is most valuable for your firm?
To learn more about the SMPS Foundation hit rate research, surf to www.smpsfoundation.org.
Connect with Scott
- LinkedIn: https://www.linkedin.com/in/scottdbutcher
- Twitter: https://twitter.com/scottdbutcher
You Might Also Like
- The Most Dangerous Words in Business
- Marketing Metrics: Hit Rates (link to Scott’s blog on ENR.com)