When talking about money, it’s important to keep in mind what ultimately makes a business run. From a sales and marketing perspective, the economics of generating revenue in the B2B market are quite simple: You must spend money to make money, although some business owners evidently don’t quite understand it.
For example, many companies allocate a fixed percentage of current or past revenues to fund their marketing efforts. However, this makes little sense because revenue is a consequence of promotion, rather than a cause of it. Expenditures for lead generation should always be viewed as an investment, even if it is funded from prior earnings.
Other companies throw money at sales and marketing, but never get the orders. (In other words, they waste their money.) They may forget to ask for the order, or may not have a good, competitive, or worthwhile product. Or they may simply make it too difficult for the customer to buy. (This is often referred to as “the Sales Prevention Department.”) But there are a lot of ways to fail in business, which is why so many businesses fail. Other things being equal, though, the two basic equations for calculating the economics of the lead generation and sales process in the business market are as follows:
[The Number of Targets] x [The Appointment Rate] = Appointments
[The Number of Appointments] x [Close Rate] = Sales
What this tells us is that if you select a particular number of targets (say, 100 companies that you want to try to get into, or a territory that has 100 suspects,) you then develop a prospecting campaign to contact the targets, uncover needs, generate interest, and set appointments with decision makers from among those companies. (The usable forms of these equations are a little more complicated than this but are easily done with a spreadsheet: If you target a group of, say, 100 companies, you have to estimate the number of dials that it’s going to take to get through to a decision maker, say 4 dials-per-contact, for a total of 400 dials. You can then calculate the number of hours it’s going to take to make the dials by dividing the number of dials required by the number of dials-per-hour that you can do, say 5 dials-per-hour, for a total of 80 hours. You then multiply the number of targets (100,) by the appointment rate (say 20%,) to get the number of appointments, e.g., 20. And then you divide the number of hours, 80, by the number of appointments, 20, to get your hours-per-appointment, in this case four, and your cost per lead, or four hours times $40/hour, or $160 per appointment.)
The fraction of the time that you’re successful getting appointments (say, 20%,) is your appointment rate. So, if your appointment rate is 20% on a base of 100 companies, that means you get 20 appointments. (Your involvement, if you’re just the appointment- setter, often ends here, defining the lead generation phase of the sales cycle.) Then, for every one of the 20 companies that you get into, the fraction of times that the salesperson closes successfully (e.g., say, 25%,) is the close rate. This determines the company’s sales (100 x 20% x 25% = 5 sales,) while the revenue forecast is simply this number multiplied by the average revenue per-sale.
Thus, if your average sale is, say, $20,000, and the close rate is 33% (because the leads are good,) your company will book $133,000 in revenue from the effort. Not bad for a $3,200 cold calling campaign. If the gross profit is 35%, your company will have cleared $43,000, a 1300% ROI on its telemarketing investment! Viewed at a macro level, this is all you need to know to understand the economics of sales.
Unfortunately, many people confuse activity with results, and so they count and measure things like dials and send-outs. For example, many people think that getting others to interact with you on LinkedIn is helpful, when most of them are just trying to sell you something; and so, they count connections. Or they think that suspects who accept a white paper are legitimately in their sales funnel, and so they count recipients in their prospecting model.
But if you look at the actual close rates on these suspects (they’re not even prospects,) you realize they’re just a waste of time and money because the close rate is so small. In B2B, the only thing that matters is the appointment (or serious expression of interest) as those are the only things that are going to close.
Obviously, there are additional factors that you can include in a spreadsheet forecast such as pricing, the quality of an appointment (i.e., the intensity of the need), margins, and the length of the sales cycle that impact profitability. However, the formulas describe the basic economic environment in which you operate and are really the only things you need to worry about.
You target a certain number of companies, and the better your appointment rate is, the more appointments you get. You then hand the leads over to the salesperson (or to yourself, if you’re a salesperson doing his own telemarketing,) who tries to close them.
Then the higher the close rate, the greater will be your revenue.