Most common questions Josh Melick’s co-entrepreneurs center around sales. Queries like how to make sales probable, how to get more customers, or whether or not their comp plans are right or what medium they should be using effectively.
Since new sales and new customers are the lifeblood of any business, questions about sales are predominant. As a co-founder that faces challenges, hot topics include raising money, product fit, HR or legal issues, etc. Josh Melick wanted to focus on Sales to be a Science and not an art. How do we get there?
As an entrepreneur with a background in engineering and math, Melick says if sales is going to be scientific, it should be understood as sales economics. As an entrepreneur and sales leader, it is essential to get the math right. It should be the focus for any successful sales leader. His business has been Saas businesses and much of this concept applies to other revenue models.
To start with, Melick exhorted that an organization should know their clients’ worth to them- knowing their clients LTV – Lifetime Value. In the event that clients stay with the organization for a very long time and they pay $500/month, that will add up to around $18,000 over in a lifetime. Be that as it may, they should consider the gross edges as well. Accepting that 80% is solid SaaS edge; the clients LTV is $14,400 (80% of $18k). In a non-standard way of thinking the business needs to have 3X Customer Acquisition Cost (CAC) to LTV in any event – making a limit of $4800 tp play for the CAC which covers the fundamentals. There’s still a great deal to consider however, similar to when will be the compensation for the CAC or is the CAC “completely stacked”? Is advertising included? Deals overhead?
The workplace space utilized by the outreach group? What is the proportion between the organization’s business comp plan (Sales Commission Plans) and deals portion? Does the organization wind up paying double the commissions anyplace (model – different reps, showcasing commitment, SDR versus AE)? There’s a great deal to be taken from these subjects. Study them all and be reliable. The obstructions of your business machine are the data structures. It might appear to be dull yet probably the best authors and pioneers know about this, says Melick.
Marketing is a far more complex topic than sales. Melick has been a supporter of most marketing being included in sales calculations. Often a large part of marketing gets left out and labeled as branding or awareness. Business advancement is comparably terrible or more regrettable. SDR or BDR is usually located in sales but also can sometimes get lost or unaccounted for. He recommends to keep as much of this in your calculations as you can and know what happens or how wide changes are when you don’t include.
He likes to do CAC sales exercise in bottoms up and top down using spreadsheets. By using top down, here’s what you do: take your entire department’s spend on sales, marketing and BD and divide by the number of new customers you closed in that period as well as the number of new dollars closed (usually ARR / Annual Recurring Revenue generally). What did you get? Was it 10 new customers on a $500k spend? Okay, $50k per new customer. To get $750 in ARR? $1 dollar in CAC spend for every $1.50 in recurring revenue. These could be real numbers and it may be good or bad, we will need to compare it to LTV to know. Taking out marketing and BD maybe the numbers improve by 2x – $1 for $3 on sales only and $25k per customer.
It’s normal to see generally equivalent spend in marketing versus sales. The top down approach is instructive while the bottoms up method is what he finds more useful in understanding what really goes on, Melick explains. Intelligent listeners may also question about the “window” size. Inquiry like should they use per quarter or year or month or week? Whatever window period you choose, there will always be raised exceptions that that window wasn’t typical for some reason or another. His quick take about it is to pick a period that makes sense for your business, something on the order of 2-3 sales cycles and the exceptions will “come out in the wash” as you weigh in a couple of window periods. Investors want to see consistency and over time, more so than an one-off stellar month or quarter.
For bottoms up, he used a Unit Economics approach. He practiced it for multiple weeks and it was worth it. There’s a lot to tackle from your average commission rate per deal, how much base salary goes into each deal, how much marketing spend do you allocate to each deal, what did you pay for those leads? Was SDR in on it? Take your deals and see what % came from each channel and how much it cost. All of these create that bottoms up budget. $3k for base salary. $3k for commision. $5k to marketing. $3k for sales overhead. 80% product margins. 25% of deals through SDR at an average of $4k per credit card fees or other collections overhead. How much difference is your bottoms up from your top down calculation? What expense are you not including? You should also add up onboarding costs too. $2k to account management and $2k to your training/onboarding team. How much travel and entertainment do you spend on an average deal? It is important to keep track accounting for your spend and check the buckets.
Once we have covered this and the math is working, we have to check each channel if SDR and PPC concludes our marketing budget. Or if it gets too competitive, what happens if you were to increase the sales quota by 25%? Should you focus more on marketing or spending it there dragging it down? Look at lead sources and trace it back. To understand it further, you have to track this in the first place. Each channel has their own restriction. Just because you can get 10 deals a quarter through trade shows at a certain cost, doesn’t mean you can 10x that for 10x the cost. The more you want the channel to expand its purpose, the more cost balloons because you’re already gotten the low hanging fruit, Melick says.
He says comp plans need several posts unto themselves. Getting your comp plans right is one of the biggest things you can do to win. He’s all about strong incentive based plans, uncapped commissions and making sales reps share the burden of lead costs-it means better boost of cheaper channels and taking a cut on more expensive ones.
Does it all make sense? Search the terms you don’t understand. Push your finance team or ops team for more granular tracking. Go back and do the math and stimulate where it is needed. Incentives, promotions or extra cash always gets attention! With these kinds of offers, sales will truly be a science.