It was an awkward silence in the meeting room "Uproar." John Kowalski, the new sales manager, was not happy with the team's performance. After scribbling something in the notepad, he decided to break the silence,
John: I cannot believe you guys have been working like this. No reports, delusional forecasting, random targets, and no eye on the ball.
Kevin: We followed Richard's orders.
John: Well, Richard is not here anymore, is he?
John walked up to the whiteboard, and wrote in big bold letters: "TARGET - $50 MILLION". He then turned around to see the poker faces of his 6-member team and asked, "Thoughts?"
Kevin: Our last year target was $15 million, and yet we missed that by 20%. This new target of $50 million is almost four times what we did last year. Do you think it is practical?
John: Kevin, we make software for salons and spas. That's a 3-billion dollar industry. I'm asking you to capture less than 2% of that industry. Now, you tell me if that is impractical.
Kristin: But John, with the same team of 6, we'd need a magic wand to achieve that target.
John: Wand, not sure. Magic, well yes. We certainly need the magic of proper planning and reporting. We need to analyze relevant data and make strategies. What does our sales pipeline look like today?
Kristin: I can quickly check the CRM and let you know.
John: Please do.
Kristin (reading from CRM): We have 135 open deals as of today.
John: And what stages are they in?
Kristin: 93 cold, and 42 hot
John: Is that it? What about more granular stages? Those in the demo stage, or proposal stage for instance?
Team looked blank. John decided to continue.
John: Anyway, can you tell me who among you has the highest probability of topping the closures this month?
Kristin: That would be Kevin.
John: Kevin, how much is in your pipeline right now?
Kevin: I am about to close a 200,000 dollar deal, and have few more follow-ups to do.
John: Could you give me your sales forecasting for this month based on conversion probability?
Kevin: Well, if you give me sometime, I could pull that for you.
John did not know how to react. Perhaps, he was expecting more numbers from a team that brought 12 million in sales the previous year.
John: It's alright, Kevin. Team, let me show you how we are going to keep track of our leads and prospective deals going forward.
John projects the following image on screen:
John (continues): We'll have five primary deal stages - New (or cold leads); Talking (or showing interest); Meeting (or Demo); Proposal (or Quote); and finally Closed Won or Lost. This is how we'll prepare our sales pipeline. We'll also map probability percentages in these five stages based on our previous record. If we capture the appropriate data into our CRM in time, we can pull other important reports as well. Let me show you another example.
Conversion or Sales Funnel report is essential find out where our leads leak in the process, and then tighten the gap. Sales Funnel reports can also be pulled by regions, or lead owners. These are some useful metrics that we could use to streamline our approach. For instance, if we see a low conversion rate for some of you, I can work closely with you to help analyze and improve.. Any questions?
Kristin: John, few of my clients take too long to close and that affects my targets for that particular quarter. Can we also do something to reduce the conversion time?
John: That is an excellent question. It is important to learn about sales cycle time or velocity so that we can set realistic targets for everyone of you. Also, shorter sales cycles would mean more ROI for our team.
Kevin: John, I like to take time with my clients and build relationships with them. That is important because if they like the product and service, they are going to renew their subscription every month, for a longer period.
John: That's a great point, Kevin. Thank you for bringing this up. To monitor this, let's follow two more metrics - Monthly Recurring Revenue (MRR), and Customer Lifetime Value (CLV).
John walks up to the white board and starts writing MRR formula.
Net MRR = MRR at the beginning of the month + MRR gained from new customers for the month + MRR change gained from upgrading customers for the month - MRR change lost from downgrading customers for the month - MRR Churn from the month
John (continues): Recurring revenue is the lifeblood of any SaaS business. It’s what makes building a SaaS so appealing. You do not have to worry about one-off sales that may or may not return. If you have a solid product ,and like Kevin mentioned,, build a good relationship with clients, they automatically return for renewal. While new subscriptions validate our sales efforts, the Churn rate l lets us know where we went wrong.
Kristin: What about Customer Lifetime Value?
John: Customer Lifetime Value is simply the total revenue we make from a single customer over the whole period of relationship with that customer. It's an important metric as it costs less to keep existing customers than it does to acquire new ones, so increasing the value of your existing customers is a great way to drive growth. Marketing team would be interested in this metric as well, as they compare this with Customer Acquisition Cost (CAC), to calculate ROI.
Understanding CLV/CAC generally helps marketers unlock additional budget for their programs. For instance, it can help them determine whether they should be allowed to spend more on acquiring larger customers who'll likely stick around longer and pay more in their lifetime. This is what an “allowable CAC” represents. Allowable CAC is the maximum acceptable amount to pay for a customer. It's essentially a cap marketing team pre-negotiate with the finance team. They can justify a higher allowable CAC if CLV is higher.
Kevin: Sorry to return to where we started, John, but how are we going to divide the 50 million dollar target among ourselves.
John: All the reports, analysis and metrics that we spoke about, will help us set our goals and targets. Let's pull out all those reports from our CRM and come back for our next meeting tomorrow. We'll sit together and work out a target sales plan for each of us according to the insights we gain from reports. Sounds good?
All: Yes John
John: Alright then, see you. Hopefully, I'd get to hear from George, Lisa, Rajesh and Peter as well tomorrow, and not just Kevin and Kristin.
Everyone laughs and leaves the room. John left with a satisfied smile, as he believed he gave his team 50-million reasons to trust the sales reports and work with a plan.