How well is your sales team producing? A good rule of thumb for a sales rep in a profitable channel provider is 2X the sales salary in margin revenue. For example, in a 20 point gross margin business, a $75K sales rep must close $750K in collected revenue and $150K in gross margin to profitably cover his or her costs. Obviously, a Channel Performance Index (CPI) benchmark of 3X is even better.
We have found that four major factors drive sales performance: The number of proposals written, the size of the proposal, the number of sales people in full-time equivalents (FTEs) and the numbers of contracts signed. Executive Conversation, consultants that train sales forces to sell to executive buyers, calls it The Sales Productivity Formula. Expressed in mathematic notation, it would look something like:
Proposals X Size X Close Rate X Sales FTEs = Revenue
It works like this. If two sales people each writes five proposals a month for an average of $50K per proposal with a 20% close rate, they generate $100K in revenue per month. (2 X 5 X $50K x 20% = $100K) That is $1.2M for the year or $600K per sales person. At 20 point gross, that is $120K in margin into the company—a CPI of 1.6X, or just under the 2X CPI benchmark minimum if the sales people have salary and bonus of $75K a year.
To improve sales performance, the organization must change one or more of the factors in The Sales Productivity Formula. Each factor can be impacted many different ways and even small changes sometimes make huge differences. Here is a partial list of things that will impact each of the four major factors:
- Proposal Volume—To increase the number of proposals you could create more leads, qualify existing leads better, implement a more explicit sales funnel, ask for the sale earlier, simplify your product offering, reduce buying complexity, create proposal templates, or form new partnerships.
- Proposal Size—Product positioning is one of the most common ways to increase proposal size. Additionally, positioning also may improve margins by differentiating the solution from competitors. Other ideas include selling to more senior executives, adding certifications, raising prices and including more add-on elements. Customers will pay more for business impact than for technology solutions.
- Close Rate—No factor has a bigger impact on sales productivity then the close rate. Just as much work goes into a deal you lose as one you win. Improving the close rate has an exponential impact on the ROI from sales and marketing expenses. Targeting the right customer, qualifying leads, proposal style, timing, and value proposition all impact the close rate. Often, the single biggest impact on the close rate is the business acumen of the sales person. Executive Conversation advises “Don’t waste time (and money) teaching sales people to ‘sell,’ instead teach them how (and why) businesses buy.”
- Sales FTEs—Often there are invisible sales people already in the company. Use reception and admin as inside sales. Reward customer support people who report opportunities. Train support engineers to link technology to customer business impact. Sometimes adding additional headcount is required, but only after other parts of The Sales Productivity Formula have been optimized.
The most important thing is to manage results by measuring the impact on each factor of The Sales Productivity Formula. Each company can choose from a wide array of actions that are appropriate for its unique situation, but to run a professional sales team requires a disciplined, structured process.