Course 12. Investing in Sales Cycles

Generating, cultivating and closing a sales cycle requires an investment.  It's an investment in time and resources, which is money. 

Each sales person carrying a sales funnel has an investment portfolio.  The sales person decides which sales cycles to spend resources on and which sales cycles to ignore.  It's a game of risk and reward. 

In this course, you'll learn about:

1.  How to calculate the cost of acquiring a customer;

2.  The characteristics of sophisticated sales funnel investor; and

3.  Chasing a Bad Deal

Sales Cycle Investment

Let's look at an example of sales cycle investment. 

We have a construction company as a client.  The company recruits new customers using a personal sales team.  Each person is responsible for generating his or her own leads.  The primary method of lead generation is referral and telemarketing.  Each sales person visits the client to do the initial presentation and subsequent negotiations and closing.  A sales person earns an hourly rate of $30 per hour and receives a commission of 10% of gross margin when a sale is closed.  In our example, a $10,000 project with a 40% gross margin is closed.

1.  Cost of Lead Generation

Creating a first contact with a lead and generating response costs money.  If a sales person dials the phone 50 times in two hours, contacts 10 decision makers and generates 5 sales cycles, the 5 sales cycles costs $60 in labor plus the overhead of the sales person for two hours of work.  Let's say there's an overhead for space, equipment, support, etc., of $5 an hour.  So 5 sales cycles costs $70 to generate or $14 a sales cycle.  To generate 500 sales cycles is going to cost $7,000.

2.  Cost of a Sales Meeting

A personal sales meeting costs money.  Mainly its labor costs.  Start with the drive time.  How long does it take to drive to and from the meeting?  How much time are you at the meeting?  If a sales meeting takes 45 minutes to drive to and 45 minutes to return that 1.5 hours for a cost of $45.  There's probably $10 for gas and mileage costs as well.  If the sales meeting lasts two hours, that's a cost of $60.  Our sales meeting has a cost of $115. 

3.  Multiple Sales Meetings

Often a prospect will require multiple sales meetings to complete a transaction.  Use a rule of thumb of five meetings.  There's the first, introductory meeting.  There's another meeting to deliver the proposal.  There's a negotiation meeting and a closing meeting.  Lastly there's a follow up meeting.  That's a cost of $575 for meetings for five meetings at $115 per meeting. 

4.  Telephone and Email. 

It's very common to spend several hours on telephone calls and emails with a prospect to close a deal.  I use a rule of thumb of twice the hours of sales meetings.  In our example we're spending 10 hours in meetings with the client.  The rule of thumb of twice the meeting hours for calls and emails says there is 20 hours to spend. That's a cost of $600. 

5.  Marketing and Sales Material

How much marketing and sales material is used in the creation, development and closing of the transaction?  For our example, let's say we use a couple of product brochures, several flyers, a nicely bound proposal and a contract.  Let's assume there's a cost of $25.

6.  Management Time

Often a sales cycle will require the involvement of management.  Let's assume there's a management cost of $50 an hour and there's two hours of management time involved in the sales cycle.  That's a cost of $100.

7.  Overhead

A sales person has fixed costs.  There's the cost of office space.  There are payroll costs.  Let's assume fixed costs per hour spent are $5.  We're spending about 18 hours on this sales cycle example.  That's a cost of $90.

8.  Company-wide Marketing Costs

Companies typically have a budget for generating marketing and advertising.  The total cost of this general expenditure is divided by the number of new customers.  The result is added to the cost of a sales cycle.  For our example, let's say the company is spending $80,000 a year in general marketing and advertising expenditures.  Two hundred new clients a year are being created.  That's an additional customer acquisition cost of $400.

9.  Sales Commission

In our example, a sales person closes a transaction for $10,000 in revenue with a 40% gross margin.  A commission of 10% of gross margin equals $400.

Total Costs

For our simple example of a sales person creating a sales cycle by telemarketing and following up with personal selling, we have a total cost of $2,260 from lead generation through to closing.

1.  Cost of Lead Generation - $70

3.  Multiple Sales Meetings - $575

4.  Telephone and Email - $600

5.  Marketing and Sales Material - $25.

6.  Management Time - $100.

7.  Overhead - $90.

8.  Company-wide Marketing Costs - $400

9.  Commission - $40

In our example the company will close 200 new accounts,  but not every sales cycle worked will close.  Let's assume 25% of the sales cycles reaching the negotiation stage don't close.  The company would need 250 sales cycles to reach maturity to get 200 to close.  There's a cost of $465,000 to get 250 sales cycles to maturity.

The company would need to budget $545,000 for customer acquisition costs for the year. Now that's an investment!

Creating sales cycles take an investment.  Companies should take the time to determine the investment required to generate sales.  To a certain degree, all customers are bought.  Find out how much it costs to buy them.

The Sophisticated Sales Funnel Investor

In our sales funnel management model, sales people are investors.  They manage a portfolio of sales cycles that require resources to reach a successful conclusion.  Here are the primary characteristics of a sophisticated Sales Funnel Investor.

Characteristics of a Sophisticated Sales Funnel Investor

· Able to manage hundreds of sales cycles

· Understands the sales funnel belongs to the company and manages it professionally.

· Understands "actions speak louder than words" and reduces risk of investing in a sales cycle by managing milestones.

· Works a variety of sales cycles from different sources to hedge the bet.

· Wants financial freedom and is willing to work hard to get it.

· Focuses on financial education. Understands mistakes are part of learning.

· Willing to pay for financial information.

· Looks for future indicators – trends, market conditions, company health, changes in management and products

· Values personal self-confidence and independence

· Makes sure to have enough quality in the funnel to meet quota.

· Identifies a sweet spot where the most margin is generated in the least amount of time

Chasing the Bad Deal

It's not uncommon to chase a bad deal.  Every sales cycle that is engaged has some potential of reaching maturity and closing.  Some deals shouldn't be chased. Chasing bad deals costs money. 

Back to our example. 

If you chase a bad deal a quarter of the way and lose it, you lose $465 of investment.

If you chase a bad deal half of the way and lose it, you lose $930 of investment.

If you chase a bad deal three-quarters of the way and lose it, you lose $1,395 of investment.

It's impossible to know in advance what deals will close and which won't, however, improving systems, developing proven strategies and tightly managing customer acquisition can reduce the investment costs.

Summary

In this course, we looked at the cost of building a sales funnel. We identified nine types of costs associated with acquiring customers. 

1.  Cost of Lead Generation

2.  Cost of a Sales Meeting

3.  Multiple Sales Meetings

4.  Telephone and Email. 

5.  Marketing and Sales Material

6.  Management Time

7.  Overhead

8.  Company-wide Marketing Costs

9.  Sales commission