2 numbers CEO’s should ask commercial executives to know19 min read
In the world of B2C every marketer needs to know their Customer Acquisition Cost (CAC) and Customer Lifetime Value (CLTV). If they don’t know these, scaling could very easily scale losses, which don’t reveal itself until a later point when it is too late. Every tech entrepreneur pitching to investors will also know these two numbers by heart, as it is often this ratio they are looking for funding to scale. Know you CAC and CLTV.
Translating this into a B2B sales world, sales leaders need to understand their Opportunity Acquisition Cost (i.e. what does it cost me on average to win an opportunity) vs. Opportunity Lifetime Value (OLTV), to understand if their sales machine is running profitably and which opportunities should be prioritized. Know you OAC and OLVT.
However, in our experience this is rarely the case and more often than not, the sales machine is being managed in the blind. As a CEO or business owner you need to ask yourself (and your commercial leaders), “What is my opportunity acquisition cost and how much can I expect in return on that investment?”. Here’s how you do it.
I have been warned that this blog post is too technical and nerdy, for broad audience appeal. And it is likely not for mass consumption, but aimed specifically at business owners, CEOs, Commercial & Sales Excecutives who need to build and manage a profitable and scalable sales machine. Now you have been warned too.
THE PROBLEM WITH NOT KNOWING YOUR NUMBERS
A few months ago I was in a meeting with a small IT company (60 person sales force), which was experiencing difficulties with customer retention, new sales and high employee churn. They had only realized 20% of their 2017 budget for new sales and sales morale was suffering. A new CEO had been installed just 2 months prior, to create a new product pipeline and to address the challenges in the sales pipeline. We had been invited in to talk about how the company might go about the latter.
Here’s a brief (paraphrased) summary of how the conversation went:
Us: “So, tell us about your target customers and how they buy”
Client: “We are targeting companies with 50-500 employees in 5 industries; public, healthcare, retail, professional services & organisations”. We are not sure how they buy, but I’m sure our sales people know”
Us: “Let’s talk about how you sell instead then. What does your sales process look like? Stages, conversion rates, and conversion costs”
Client: “We have 6 stages in the sales process with some brackets for estimated win rates at each stage. We haven’t checked the stage win-rates against actual data and we don’t know the cost of the activities to convert and opportunity at each stage”.
Us: “Ok. we did some research before coming here and saw you use videos and Youtube. Why do you invest in this activity? How much does a video cost to make?
Client: “We use videos to generate awareness and attract people to our website where we collect more information about the potential customer. It cost about €10k to make one of these videos”
Us: “And how many people visiting your site ends up as a lead (i.e. giving contact information)?”
Client: “Our data shows 1 in 20 visitors becomes a lead.
Us: “Ok. We can see from Youtube that your most viewed video has had 400 views in the past 6 months. Let’s be generous and assume a video click through rate of 5% (it’s only around 0.13% on average for B2B) That means those 400 views will turn into 20 page visits and that will turn into 1 lead. That’s €10.000 for a lead. Is €10.000 a reasonable cost for a lead in your business?”
And so we went through the clients main sales activities, put a cost to it and asked ourselves; “Is this a reasonable amount of money/time for the outcome that I can expect?” Does the sales investment make sense against estimated opportunity value x estimated win-rate? How much can I spend on a lead? How much can a spend on a sponsor meeting? How much can I spend on developing a customer tailored business case?
The first step to fixing their sales machine is understanding how it functions at that comes down to two questions
1) What is the estimated value of a sales opportunity at any given point in the sales process (i.e. OLTV x Estimated win-rate)?
2) How many resources can be spent on sales activities at any given point in the sales process, for that investment to make sense economically (OLTV x est. win-rate/OAC) > required payback ratio for sales activities (see suggested CLTV/CAC for SaaS companies here).
MEET THE COMMERCIAL EXECUTIVES OF SLELLO
Now, Imagine this scenario instead. The company behind Trello, is launching a new mobile productivity app targeted towards external consultants, in-house consultants lawyers and design agencies. The app allows you to simply take a photo of a sketch on paper and have it instantly transformed into a predefined PowerPoint template. Let’s call it Slello. Hours saved every week creating slides for proposals and customer presentations.
Over the past 3 months the commercial executives of Slello have been selling in a test market to learn how to build the sales machine for scaling. They’ve come up with the following information:
WHAT THEY LEARNED FROM THE EXPERIMENT
From the experiment they’ve tweaked the sales machine and come up with an average Opportunity Acquisition Cost (OAC) of €2.287/win and an average win rate of 4.56%. The most difficult parts of the sales process being (1) Get additional information on the lead captured by marketing (2) getting the meeting with the buying coalition of decision makers and (3) Mitigating commitment risks at investment case evaluation, stage 5). Through market research they’ve come up with an estimated Net Opportunity Lifetime Value of €12.000, meaning for every €1 they put in sales they generate €5.25 in net value, which in this case must cover the cost of marketing, potential future product investments and return to Slello shareholders. The unit economics were good and they were ready to scale the sales machine with additional investment.
However, being seasoned commercial executives they know that scaling fast means prioritizing. So they ask themselves, “even though it is generally a good business, with the limited resources we have, are there some opportunities we should target over others?”
They looked at the OAC and OLTV data and saw how it varied across their 4 target segments. They learned that with limited resources they should focus their sales efforts towards the external consultant’s segment as they had lower OAC (quick buying decision process) and higher OLTV (keep buying for longer as they are too lazy to switch to another solution, once they have gotten used to Slello).
Pleased with their work, the commercial executives went with their findings to the CEO and board of directors and were granted additional funding to scale the sales machine to new markets and capture value.
ARE YOU IN CONTROL OF YOUR SALES MACHINE?
Now think about Slello and ask yourself how well you understand the OAC and OLTV of your business? Are you really in control of your sales machine? Do you know -and trust your avg. conversion rates and stage processesing costs?
If you are experiencing problems in meeting your sales targets, chances are that you do not understand the handles of your sales machine and its key metrics. A 2015 study found that 74% of B2B companies that do not exceeded their revenue goals, didn’t know the key metrics that were driving their sales funnel (i.e. what activity level do I need to meet and exceed my target? How much does it cost me to run those activities? What value can I expect to generate from those sales activities?)
With only 1 in 250 sales reps estimated to exceed their sales targets, that is likely a lot of companies not exceeding their aggregated revenue goals and not being in control of their sales machine. That is our experience as well, when we meet with B2B sales organisations.
Here are some of the main reason we hear for why:
- Win rate pump: We don’t know our true conversion -and win rates. Our sales people have poor pipeline management discipline and don’t enter opportunities into the pipeline in the early stages, only once they feel it’s more certain to close.
- Negative sales overconfidence: We are poor at estimating opportunity win rates. Our sales people are consistantly overestimating how likely they are to close a given opportunity, how big the sales will be and how quickly it will close. So we can’t estimate the weighted value of a sales opportunity very well (i.e. negative overconfidence).
- ABC mission impossible: It is impossible to estimate the cost of conversion for each sales process stage. The sales process is just too complex and there are just too many different activities going on. (ABC = Activity-Based-Costing).
And they’re right! It is a challenge to get an accurate pipeline with accurate cost estimates for the sales activities that drive opportunities forward in it. But the solution is pretty straightforward.
1. Implement pipeline management meetings, driven by sales management, to a set rhythm (e.g. weekly).
2. Use customer verifiable outcomes along 4-5 dimensions, to accurately assess probability to win (Solution Selling uses Pain, Power, Vision, Value, Control).
3. Estimate OLTV for different opportunity types and calculate your avg. sales budget at each sales process stage (Weighted opportunity value / Required sales payback ratio (OLTV/OAC).
We will go further into depth with point number 3 here and leave the two others for later blogpost. Again, a word of caution. We’re smack down in the thick of the sales machine, things are getting technical and nerdy. And we would strongly advice the commercial leadership to hide all the complexity from the sales force and only present to them the conclusions. Let’s bring back the example of Slello to understand, in more practical terms, what we mean. How you design a highly profitable and scalable sales machine, using opportunity specific sales budgets, which increase as the opportunity moves forward in the sales process.
GIVE SALES REPS OPPORTUNITY SPECIFIC SALES BUDGETS AND HELP THEM INVEST THAT MONEY
There’s a rule that underline all logic of sales organisation activities: “As the weighted value of a sales opportunity increases throughout the sales process, so does the budget available to win that opportunity”.
Every sales rep will intuitively understand this to be true. You give a person a phone call to gauge interest and ability to buy before you invest in plane ticket and hotel to go visit the potential buyer.
At Slello, the commercial executives require a minimum OLTV/OAC ratio of 4.5, which means they have €2.667 to spend per opportunity (OLTV = €12.000). That budget must be allocated to activities along the sales process in relation to the weighted value of the opportunity
Based on their analysis, they can advise sales to spend no more than €48/opportunity on activities to convert the lead into an opportunity in stage 1. Max €320/opportunity to get a meeting booked and conducted with decision makers in stage 2. Max €640 to create and get approval on value proposition in stage 3. Max €711 to create and get approval on investment case in stage 4. Max €948 to negotiate and win opportunities in stage 5.
With these numbers, sales activities can then be designed along the sales process to match those budgets, ensuring a profitable and scalable sales machine.
Sales managers can now use these numbers to ask their sales people “given that you have a budget of x to convert an opportunity from the stage to the next, how do you think that money is spent best?”
(Note (for the VERY nerdy) that the unadjusted sales stage budget indicates the resources that a sales rep could spend on converting an opportunity to the next stage, if the cost of the whole process is not taken into consideration. For example, if a sales rep was in stage 5 (negotiation) and considered all cost incurred in previous stages as sunk cost, the rep would assume a budget of €2,403 to win the opportunity. However, if these numbers were used to design the sales process and its activities, total OAC budget would be €6.758 instead of €2.667.)
HOW IT’S USED IN PRACTICE
These benchmark budgets are especially useful in practice when sales managers conduct pipeline and deal coaching sessions with their sales reps. With these metrics in place, the commercial executives have not enabled sales managers to ask their reps, “You have a budget of €2.667 to win this opportunity, how do you think it should be distributed across the sales process? You have a budget of €640 to take this opportunity to the next stage, which activities, within that budget, do you think are most likely to do so?
It enables the CSO (Chief Sales Officer) or Sales Director, to design a sales process with activities that maximises profitablity and revenue growth. Avoid spending resources on expensive activities, where the potential return (weighted OLTV), does not warrent the sales rep investment in time and money.
Lastly, having these numbers enables the CEO and business owner to get or more full understanding of their business and the options presented in their commercial organisation. They get a more clear picture of the sales machine, and its underlying drivers. The sales machine that is going to determine whether the executive delivers profitable growth or losses and missed revenue targets.
Note: Authors have not explored the conceptual differences between CLTV and OLTV in this article, and why we distinguish between the two when dealing with B2B sales. Equally, how to estimate OLTV and OAC will be dealt with in a upcoming article. For any questions or comments, feel free to send the author a message.
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