Many startup CEOs think “if we build it (a sales team), they will come (customers/profits/success)”. Which is largely true, especially if you are hiring a great team and giving them the marketing support they will require to effectively do their jobs. But, I think it is missing a key point. Most sales teams are managed on their ability to drive revenues, not gross profits, which is a better metric to focus on, as detailed below. And, many startup sales managers typically do not focus on the key metrics that build up to revenues (e.g., leads, conversion rates, average ticket, upsells), which is even more important for growing and optimizing sales. This post will give you some helpful guidance in this area.
Firstly, why focus on gross profit, rather than sales as your key number to manage your sales team by? There are two primary reasons: (i) anybody can give products away at discounted prices, helping salespeople hit their sales targets for commissions, but hurting the company’s bottom line in the process; and (ii) helping to educate your sales team on your gross margins, the number their commissions will be driven by, will help them to bias selling higher margin products, further helping your bottom line profits. So, where you can, use gross profit, and not revenue, as your key driver of sales management and commission planning.
Secondly, revenues are not comprised of one number calculated in isolation; they are calculated based on a series of key drivers that build up to revenues. These key drivers include: (i) number of calls/unqualified leads initiated by the salesperson (base level productivity each month); (ii) number of qualified leads (prospecting rate on initials calls); (iii) number of proposals sent (engagement rate on qualified leads); (iv) number of transactions closed (conversion rate on proposals sent); and (v) average transaction size (upselling and cross selling rate). In addition, if you are selling more than one product, you will want to build in tracking for the mix of such sales, to identify key upsell and cross sell opportunities. These all build up to total revenues and gross profit, and each should be tracked by person and by department to identify key success stories and training opportunities within the organization.
And, this works for both B2B and B2C companies. As an example, I would use metrics similar to these when I was at iExplore selling adventure travel. I would study our initial contact rate divided by website visits (looking for web design or product improvement opportunities); our conversion rate on qualified contacts (to see how well our travel agents were converting leads into sales); our passengers per booking (looking for ability to talk traveler into bringing friends); our trip price (looking for ability to sell our highest ticket trips); our trip margin (looking for ability to sell our higher margin tours); and our sales of related products or services, like airfare or travel insurance (looking for upsell efficiency).
So, when building your sales organizations, not only look for great talent, but make sure your team truly understands your business/margins. Manage the key metrics that really matter to driving maximum financial success. And, be sure to incentivize your team based on them hitting the key metrics that matter most for your business.
This article was originally published on RedRocket VC, a consulting and financial advisory firm with expertise in serving the start-up, digital and venture community.
Image Credit: CC by I See Modern Britain