Mastering the Sales Formula

Every business’s sales growth is a formula. For a business to scale efficiently, you need to master the business’s unique sales formula. The complexity of a businesses sales formula may vary, and the variables and modifiers might change, but the basic formula structure is the same:

Leads * (% Qualified) * Conversion Rate * Median Deal size = Total New Customer $’s

The variables of the sales formula are simple:

  1. Leads = the number of leads received through inbound and outbound marketing.
  2. % Qualified = the typical share of leads that are qualified customers for a business.
  3. Conversion Rate = the typical number of qualified leads that convert into customers.
  4. Median Deal Size = the typical size of a deal (also known as Median Contract Value). In my last article, I explained why you want to use the median deal size and not the average.

For example, you may discover that, on average, 40% of the leads generated by your businesses marketing efforts are qualified to enter the sales pipeline. Once leads enter the sales pipeline, 30% of these qualified deals turn into closed deals. If your companies median deal size is $25,000, you can calculate the following:

100 Leads * (0.4) * (0.3) * $25,000 = $300,000

If your typical sales cycle is 30 days, you can confidently estimate that the 100 leads you receive now will convert to $300K of new customer contracts by the end of the month. Now let’s say your company improves its marketing, and now your sales team receives higher quality leads with a higher willingness to pay. Now, 60% of your leads are qualified. Simultaneously, you improve your sales reps’ training and develop new pitch materials, improving your conversion rate from qualified leads to paying customers to 40% and increasing your median deal size to $40.000. Let’s rerun the equation after the improvements:

100 Leads * (0.6) * (0.4) * $40,000 = $960K.

With these improvements, for every 100 leads, your company generates ~$1M in new customer contracts. With some tweaks, we have more than tripled the efficiency of the business! Now let’s consider how we use this in practice.

The first step toward using this information to improve your business is to understand its unique sales formula. Begin by writing down the steps in the formula for the company. It may be different than the recipe I wrote above. For example, if the company is selling software and providing a free 30-day trial, you may have an extra step where customers convert to free trials, and then a portion of those convert to paying customers. It’s essential to capture the business’s customer journey’s nuances, from the first contact to becoming a paying customer, in the formula steps.

Once you have the steps written down, fill in the percentages based on the companies sales pipeline’s historical data from its CRM (you are using a CRM, aren’t you??). I can hear you saying, “What historical data?” If you or your company have not been capturing historical pipeline data, or the company is a brand new startup with no data, do not fret. Instead, try to estimate the numbers based on your companies current traction conservatively. For example, if you have closed five customers for ~$3,000, you can assume that the companies median deal size is $3,000. Then, establish a process for capturing and recording the sales pipeline data so that as the business scales, you can update the numbers based on reality.

Your sales formula doesn’t have to be perfect; what is essential is that you understand the sales formula and continuously strive to improve it. While a business grows, the equation may evolve and change significantly. For example, suppose a business is closing $25K deals on average and begins targeting a new customer segment where the average deal size is $250K. In that case, the formula may change dramatically, and the old recipe may not be relevant to the evolving business. However, with the sales formula handy, any business leader can build a new formula and optimize new efficiency levels.

While businesses will start to reach a point of diminishing returns through sales formula optimizations, I have never encountered a business where extra efficiency was unattainable. By continually improving its sales formula, a company can push toward the unreachable frontier of perfect efficiency, gain a competitive edge, and close bigger deals faster.

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