The ROI of Sales
Mark Frasco - President
My undergraduate degree is in finance, but I would not characterize myself as a practitioner. However, with some regularity, parts of my left-brain kick in now and then.
I’m asked often enough for it to provoke reflection, “What is your ROI?”
The concept for Return on Investment entered the scene in 1912. If you can believe it, Donaldson Brown, a salesperson who worked for DuPont, used it in an efficiency report. The intention was to find a measure that determined the value of the returns an investor would receive for investing in the firm.
I’m certain Mr. Brown would be stunned to learn how his model has proliferated our business thought. With all good intentions, our business schools, business consultants, and many water-cooler pundits gather data, evaluate it, calculate it, and make decisions based on ROI calculations.
ROI = (Gain from Investment – Cost of Investment)/Cost of Investment
We use ROI in many areas of our business, mostly because we can. What I mean is that it is relatively easy to gain clarity about the cost and benefit of the function or project, and complete the calculation using ROI.
Conversely, there are areas where using the ROI calculation doesn’t make sense. Obviously, it doesn’t strike us to use ROI to determine the effectiveness of a CFO, controller, or bookkeeper, each bringing varying skill levels, complimenting the other, with different cost structures associated with each, all working in combination to accomplish some deliverable, such as month-end reports. Generally, the evaluation of accounting talent is based on quality of work, and a leader’s perception. ROI would not come into play.
When I think of business growth in the B2B market segment, I think of stages or elements of work, where talent of varying skill levels and costs, are strategically assigned to produce optimal results, at each stage:
Leaders of organizations that are in growth mode, or further along, should think of business growth talent, activities, and deliverables (results) as necessary functions. At various stages of the sales continuum, talent is placed and developed: Attraction (Introduction), Propagation (Growth), and Maintenance (Maturity and Decline).
The talent applied at each stage is complimentary, requires different skill sets, and has different cost structures and measurement techniques. In accounting, you wouldn’t measure the work of the bookkeeper as you would the CFO. Both are working toward common goals. But, their deliverables and responsibilities are appropriately varied. Therefore, what we expect and pay for each varies.
So, let’s talk about measuring the sales system. Many start this process with the assumption that those promotion (sales and marketing) functions that the company invests in are wholly measured by the revenue they produce – often directly, some even individually. This thinking is a bit lazy, for my liking. This would be like evaluating a bookkeeper, based on the final financials a CFO produces. Of course, the bookkeeper is involved, but the CFO is responsible.
Is direct revenue the best measure of each deliverable produced by the promotion system? I think not. Remember, each function on the sales continuum has different skill sets, cost structures and measurements:
ROI might be appropriately applied to a promotion system, as a whole, but an important oversite of most sales ROI calculations is “timing.” Many B2B sales cycles have long sales gestations, meaning it could take six, twelve or even 24 months to move a prospect from awareness to revenue. Further on timing, what is the lifetime value of a new customer? Shouldn’t that total life value of revenue be part of the calculation? When do you assign the cost of producing revenue, and what period of cost do you use?How do you use ROI to measure these functions, or for the whole function of revenue generation? Is each function by itself expected to have an ROI? Are some functions “loss leaders” purely existing for the service of another? Do all functions have ample opportunity to create ROI?
ROI calculations struggle to accurately capture what the promotion system is producing… brand awareness, brand affinity, and brand adoption nuances. All of them have value, and each depends on the other. Today’s awareness and affinity (zero ROI) leads to tomorrow’s record sales performance. Unfortunately, ROI doesn’t capture all value that is created, in the timeframe that it is created.
So, if ROI isn’t the measurement to help us evaluate promotional value-add, what is? The answer is closer to performance management than investment calculations. Performance management is about the design and measurement of individual performance in systems.
In “Cracking the Sales Management Code” by Jason Jordan and Michelle Vazzana, the authors suggest a different measurement mindset in sales, away from “Revenue/Anything in the Sales Force = Revenue per Anything.” They argue that most often these measures end up measuring “something else” other than what was intended.
Setting out to determine the secret to measuring and managing sales performance, the authors researched scores of Fortune 100 sales forces. The identified 306 different measures that were being used to determine sales effectiveness. From the text, those 306 measures fell into three categories:
- Sales Activities (17% of measures) – measures used to quantify and track day-to-day activity of the sales force. These metrics are highly manageable and the associated metrics can be moved, at will. Examples include: making phone calls, completing strategic account plans, visiting prospects, and writing proposals.
- Sales Objectives (59% of measures) – these measures are considered guideposts for Sales Activities to ensure that they are pointed in the right direction for Business Results to materialize. Can be directly influenced, and associated metrics can be driven by managing certain Sales Activities. Examples include: new customers acquired, percentage customer retention, and percentage of target customers contacted.
- Business Results (24% of measures) – measures are a culmination of all the organization does. These metrics are high-level and are often influenced by functions well outside of sales – finance, manufacturing, and production. Also, these metrics are impacted by competition and the economy. These are wholly unmanageable, but associated metrics are determined by the achievement of specific Sales Objectives. Examples include: revenue growth, percentage share of market, and gross profit.
- Example of a reverse engineered chain of sales metrics:
- Business Results: to achieve 3% increase in revenue, we need to;
- Sales Objectives: drive toward 4 new customers per quarter, and;
- Sales Activities: manage 16 more prospecting calls per quarter
ROI measures business results. As Jordan and Vazzana discovered, for sales and marketing performers, business results are out of their control. There are several variables that can be discussed, none of which they control: competitive position, service quality, pricing and terms, availability, economic cycles, and product function/features.
After investigating the variables, it is desirable to determine the Business Results that you believe are attainable. With those in place, determine the Sales Objectives that will help accomplish that business result, while also guiding the Sales Activities that will need to be completed.
Measuring Sales Activities at various stages of the promotion system places all control to accomplish them in the hands of the job performers. As we’ve discussed over the years, when you think about business growth, process trumps technique.
In “Cracking the Sales Management Code,” the authors have identified five key processes that are under the control of sales and marketing performers, along with the purpose of their metrics and sample metrics that will measure performance leading to accomplishing Sales Objectives.
So, please don’t be offended the next you ask me, “What is your ROI?” and I respond, “What is your ROI today? If you don’t know, what ROI are you looking for? Do you have time to discuss the Sales Objectives that will help you accomplish your ROI Business Result? Once we determine the Sales Objectives, I will design the processes that will guide and measure our Sales Activity to accomplish those objectives.”
Questions or comments? Please contact Mark Frasco at mfrasco@teamCOACT.com