Sales are the lifeline of your business, so it’s critical to know if the sales team you’ve built is succeeding at an optimal level. But what and how we sell is changing, and our metrics for gauging success need to be tracked relentlessly.
One simple metric I like to use is cost of sale (COS) as a percentage of gross revenue.
Achieving the ideal Cost of Sales (COS) to revenue ratio with your sales team
We’ve conducted significant research over the years with top performing partners and business process and business transformation consultants, and more recently with IDC, and one magic number keeps reappearing: 10 percent.
We’ve found that really strong partners tend to have their COS as a percentage of revenue in the range of 10 to 12 percent. If you can hit 8 to 10 percent, that’s ideal, but aim for 10 percent to begin.
Here’s how the math works: the COS = the complete cost of your sales rep (including base salary, commissions, and benefits) divided by the annual revenue they provide to the business. So to hit the sweet spot of 10 percent, if you pay them $100K, they’d need to generate $1M.
If your organization is not meeting the 10 percent metric, there are ways to begin moving your COS-to-revenue ratio in the right direction:
1. Raise your sales quotas.
This isn’t always a popular option with salespeople, since it entails them receiving the same pay while bringing in more deals, but it doesn’t have to happen overnight. You can keep their pay the same and gradually increase quotas over a year or two until you reach the magic 10 percent.
2. Reduce your number of “superhero” sellers.
There are several ways to reduce your cost of sales to help achieve the ratio you need, beginning with having a less expensive sales team. You can use the natural rate of attrition among sellers to replace more expensive employees with new, less-costly sellers.
In the past, we’ve seen partners frequently staff “superhero” sellers who could sell to a customer in the manufacturing space today, a distributor tomorrow, and a hospitality firm the day after. However, as partners focus more on verticals, it can be beneficial to hire inexperienced sellers, train them in one or two verticals, and have them really tailor their messaging to those target audiences.
An additional best practice we’ve seen among high-performing partners is to hire sellers directly from the verticals they target. This has included former real estate agents, teachers, and car sales reps.
3. Differentiate for operational efficiency.
Differentiation is key to success in cloud businesses these days. When you market to a vertical, for example, your messaging can be very consistent from customer to customer. You know who your audience is, where to find them, what their pain points are, and how to solve them. This can significantly drive down the cost of marketing.
Plus, when your focus is narrower, you can target your market and feed higher-quality leads to your sales team. In turn, they close more deals, and their contribution to revenue goes up. This also makes it easier to increase those sales quotas I mentioned before. If I’m a seller, and I’m told my quota is going to increase by 10 percent, getting solid leads that close quickly makes that news more palatable.
And as your messaging gets focused around your vertical, you can build more relevant online content, which allows prospects to educate themselves on your organization, solutions, and services. Sellers spend less time educating prospects and more time closing deals.
4. Encourage and enable virtual selling.
Every minute your salesperson spends travelling to the next customer is time she isn’t spending selling. Where once it was necessary to meet prospects in person for sales conversations and demonstrations, the Internet has made it much easier—and increasingly acceptable—to sell virtually. Virtual sales allow partners like Texas-based Catapult to sell into Alaska, or South Carolina-based Palmetto to reach all the way to Kuwait.
Here’s my challenge to you: Pay attention to how many in-person meetings your salespeople conduct this week and determine how many could have been done just as effectively in a virtual environment or via Skype for Business. By encouraging and enabling virtual selling, you could reduce the cost of business significantly.
5. Create the correct compensation structure.
I previously addressed the question of how to compensate your cloud sales reps, but I think there are a few points that merit a second look. Sellers break down into two categories: hunters and farmers. Hunters tend to be quick-sale, high-volume; farmers generally favor long-term relationships. You want to have the right balance of hunters and farmers to stay at the magic 10 percent.
As I’ve said before, not all revenue streams are created equal. Recurring revenue streams (managed services, packaged IP) produce higher gross margins, make your income more predictable, and are better for the long-term sustainability of your business. Encourage your sales teams to focus more efforts on selling these by paying a higher percentage of compensation for sales with recurring revenue streams.
Finally, pay out commissions on a monthly basis. When commissions are paid more often, they become part of the seller’s regular income, and they learn to depend on that revenue. This incentivizes them to continue performing at a high level to maintain their standard of living. It also normalizes your organization’s cash flow.
You can have a powerhouse, 10 percent cost-to-sales ratio sales team, but it’s going to take effort and investment both from your salespeople and from your organization. Demonstrate your commitment to meeting the metric by taking the necessary steps on your side to reduce costs and incentivize your team to focus on sales that generate recurring revenue streams.