Monday, October 13, 2014

Some Advice to Salespeople (and Managers).... Selling vs. Making Money

Couple points for you salesfolks and account managers, particularly the newer ones, or people who have converted to sales from another discipline...

  1. Fire your customers. If a customer is costing you more than they are making you, stop serving them. Don't stop selling to them... If they want to keep giving you money anyway, fine... but DO NOT put more time or effort into them.

    Most importantly, DO NOT WASTE YOUR TEAMS TIME on them.
  2. See that guy? The one who knows everything about the product, and the customers, and the competitors, and all the strategic plans, and the market space comparisons, and the advantages and disadvantages and competitive analyses off the top of his head?

    Oh and he actually knows how to write and present?

    That guy whose involvement can close a sale all by itself? Or who can move you past the decisioning phase and into the negotiation phase?

    Yeah, he's an awesome resource... In fact, there's a strong temptation to just LET HIM DO YOUR JOB FOR YOU.

    Yeah...DON'T DO THAT.

    That guy is your chief architect or your product manager, he is not your  junior sales engineer. DO NOT WASTE HIS TIME.
Do you see the commonality here?

To be a good salesman, you need to know how to sell.

To be a great one, you need to know how to make your company money. 

These are not the same thing. 

Revenue is important, but generally, PROFIT is more important.

Every dollar earned, has a dollar cost associated with it; meaning the direct and indirect cost inputs into gaining that dollar. 

In information technology, as in many other industries, the costs of the sales process are often the single largest component of the marginal costs of each sale (yes, more than the amortized costs of development, and more than the cost of manufacturing and distribution. Generally the baseline run rate i.e. the amortized fixed costs related directly to the product... is the largest marginal cost component, and the customer acquisition and sales process is the second largest marginal cost component). 

Every minute, and every dollar, you spend on that process has to be weighed against the expected return (and by the way, unless you desperately need the revenue, or there are externalities at play, you need to have a minimum 4x expected return on gross totalized marginal cost including amortized fixed costs, just to break even on a sale). 

You have to understand the cost/benefit of the elements of your sales process, at least as well as you understand how to execute that process. 

Also, and in big picture terms more importantly; every dollar earned has an opportunity cost associated with it. 

You have to understand these inputs not just as direct costs, but as opportunity costs. Could you or your team be spending their time in more efficient or more effective ways? Could they be making you, and your organization, more money, doing something else?

Some advice to managers and organizations...

Everything I said above?


Stop working against yourselves, by process and metric capture, and suboptimal incentive structures.

People will respond to their perceived incentives. We generally create incentives to sell unit volume, or gross revenue; and sales people respond to that, by maximizing the elements by which they are measured and incentivized.

Yes, we should encourage more sales, and greater revenue, but not at the expense of profit.

The mission isn't to sell more... it's to make more money.

If we want to make more money, we need to create metrics and incentives that will drive profit not revenue.

That doesn't mean don't measure sales, or revenue... It just means that it shouldn't be our key metric, nor should it be the key component to anyones compensation.

We need to start creating metrics and compensation plans that measure the efficiency and effectiveness of the sales process.

My suggestion? 

Create a primary metric and incentive structure based on total cost accounting of each realized dollar.

Totalize the amortized fixed costs, the marginal cost inputs, and the sales process inputs, and compute that as a ratio against realized dollars.

With that, you end up with a somewhat different set of metrics to work and manage against:

  • Total sales closed
  • Total unit volume
  • Average unit volume per sale
  • Total realized revenue
  • Realized revenue per sale
  • Realized revenue per unit
  • Totalized cost per sale
  • Totalized cost per unit
  • Totalized dollar cost per realized dollar
  • Total profit per sale
  • Total profit per unit
  • Total realized profit
  • Ratio of totalized cost to revenue per sale
  • Ratio of totalized cost to revenue per unit
  • Ratio of totalized cost to total realized revenue

These metric sets allow you to tune your process better, to define your requirements better to product management and marketing, to train your people better, to truly evaluate their strengths and weaknesses and help them improve and refocus as needed...

Fundamentally, they help you understand who is really making you money, how, and why; so you can compensate them appropriately, and both replicate and improve on their results.

Remember though, you cannot focus any single one of those metrics to the exclusion of all the others. Each metric tells you one single thing, one single area that is exceptional or could use improvement.

Oh and by the by... It's not just for managers... You should collect these metrics on yourself, and strive to improve them.

... and here's the really BIG secret...

Even if you're not a salesperson, or a sales or account manager; you should understand, and if possible, collect these metrics on yourself (and your team if you are a manager or leader) as well...

You simply change the word "sales" to "tasks" or "goal" or "product" or "accomplishment"; the word revenue to "benefit" or "achievement"; and the word "profit" to "value".