Sales & Profit
“Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.”
— John Wanamaker
For newcomers, we’re in the middle of a 4-part series on the intersection of profitability with sales & marketing.
- Overview of the “sales & marketing system”
- Setting sales & marketing strategy (the 5 W’s)
- Measuring sales ROI (efficiency and efficacy) [today’s newsletter]
- Using data to drive decisions (the “feedback loop”)
In Week 1, we set the stage for this series, in Week 2, we covered a very brief outline for building a simple sales & marketing strategy, and today’s discussion is all about measurement.
…but before we start “measuring stuff,” here’s a quick polling question — what is the purpose of sales & marketing?
Yes, to generate sales! And where do sales come from? A few key drivers:
Revenue = traffic (prospects) x conversion (close rate and retention) x sale price (average order value)
- Traffic (prospects) — We need potential customers visiting us (traffic, leads, prospects, etc.). Ads and marketing typically bring them in the door.
- Conversions (customers) — Through an effective sale process, we want to convert those prospects into paying customers (and then committed customers and then evangelicals).
- Products (sale price) — Our products and services are measurable too. From the average sale price to our average discount rate.
Measuring these things…
Last week, we laid out the “actions” and “things to do.” Now we’re simply measuring how those actions are working.
Here are some useful metrics when it comes to analyzing S&M performance:
For starters, some of this data is not easy to come by… when was the last time you actually counted how many prospects came through the door (or website)?
This is your best starting point. If you don’t have a way to track inbound prospects and converted customers, then most other metrics will fall short. (Remember, some of the best KPIs and financial metrics are the hardest to capture, you may have to gather it by manually.)
Next, not every business applies to each metric… you may not have a backlog of booked revenue like a construction or accounting firm might have; and not every business is spending money on advertising like an ecommerce firm might. That’s fine, just pick a few that work for you and your situation. (Hint: marketing efficiency ratio works for just about every business/situation.)
Last, let’s split these metrics into 2 buckets:
1) Front-end — Leading indicators of future revenue performance.
- Traffic to your website, store, or inbound/outbound prospects
- Sales quotas
- Backlog
- Pipeline
2) Back-end — Lagging indicators telling us how we did
- Marketing efficiency ratio (MER)
- Customer metrics (CAC and LTV)
- Closing rates (conversion rate and churn)
- Average order value
- Total marketing costs ($)
It helps to to track a mix of both. Businesses generally have a problem in 1 area or both, rarely neither. Once you know how well your sales tactics work (i.e. conversion and retention rates) plus the number of visitors you’re getting, it becomes easier to predict where revenue is headed.
A case study…
Example: You are CEO of a sales-driven B2B company selling safety equipment to manufacturers and notice total marketing expense as a % of revenue is trending higher over the last 6 months (not good).
After digging in, you find:
- your discounts are climbing each month for 10 straight months, meaning your sales team might be aggressively promotional; and
- your customer acquisition cost (CAC) has jumped 25% over the same period, even though lead quality hasn’t improved. In other words, you’re spending more to win each deal, and giving away more margin once you get it.
This is a double hit!
Higher costs to acquire customers and deeper discounts to close them. And it suggests the real problem isn’t just “marketing spend” but a breakdown somewhere in the sales process, pricing discipline, or customer acquisition (i.e. marketing) tactics.
“If you can’t precisely track and measure every component of a campaign, you’re not marketing—you’re gambling.”
— Dan Kennedy