For most companies, especially small organizations, sales force restructuring is viewed as a daunting task.  In this hectic business climate, the revenue and profit pressures of the month tend to take over, leaving sales management with little time to revamp old selling styles, and so the cycle continues.  We listen to managers complaining that there is never enough time, money, or support to change, and to salespeople griping that they need more products, more territory, and lower pricing to close more business.

Here are some interesting facts:

• Although selling is one of the oldest professions in the U.S., 80 percent of the sales in this country are generally made by 20 percent of the salespeople.
• Everyone will agree that central to a company’s ability to grow and increase value, is its ability to sell its products and services.  Yet, most sales organizations have neglected to define and implement sales processes that can be measured and improved.
• Many companies spend over 15 percent of revenues on sales and marketing activities, but struggle year after year to meet sales objectives.
• Studies show that only 56 percent of a salesperson’s time is spent on direct selling activities.
• Most professionals such as; doctors, lawyers, accountants, teachers, real estate agents, electricians, and plumbers are required to obtain some form of license or certification in order to practice their profession. When was the last time your sales force received sales training, not product training?  How often is it reinforced?

The point is that the old methods of selling are no match for customers who are tougher, smarter, and have more choices.  If you don’t focus on managing, tracking, and improving the factors by which your sales organization finds and retains customers – you will simply fail.

The evolution of communication and information access has dramatically changed the way in which products are bought and sold.  Years ago, customers had limited access to information without seeing a salesperson.  Not anymore.  Today, buyers experience information overload and face a myriad of product offerings from vendors coming at them through multiple media.  Every day buyers are using technology to empower their decision-making as they become more educated about the companies from whom they buy.  As a result, the role of the salesperson has shifted from information bearer to value creator, and this requires a major change in the way most salespeople sell.  At the same time, the role of marketing is becoming more and more important, but not in the traditional way.  Marketing needs to focus less on presenting products and more on creating demand and solving problems.  Companies capable of implementing problem-based marketing place their sales organizations in a much more advantageous position by enabling them to enter the sales process early and create value.  As communication preferences and the buying processes evolve, sales and marketing organizations must be in a position to adapt quickly and respond accordingly.

Recent studies show that although sales productivity is the number-one business initiative on CEO’s agendas, the sales and marketing practices employed today by most organizations are too expensive, too unpredictable, and generally inefficient. These studies show that the percentage of companies achieving their annual revenue targets has declined steadily since 2005 across all industries, among companies of all sizes, and the average number of individual sales people who miss their annual quota is over 46 percent and growing. In fact, over the past 18 months Tafaro & Associates interviewed over 50 presidents and CEO’s of technology companies ranging in sales from $3 million to $25 million. Over 82 percent of the executives surveyed were dissatisfied with the performance of their sales and marketing organizations. These companies are typically operating on thin margins, and adequate cash flow is critical. If sales and marketing are not performing, everything slows down, and the business can be placed at risk.

Many technology companies are choosing to deliver their solutions in the form of renewal services like SaaS. The value drivers may not be different, but different metrics need to be implemented to measure value.  For example, traditional software companies (those selling perpetual licenses) collect most of the revenue soon after securing a PO with a small portion of future revenue coming from annual maintenance.  In order to grow sales, these businesses need to outperform each year.  In the case of subscription-based businesses, there is little value delivered up front, so revenue is recognized over time month by month. These businesses have a whole different set of operational issues that have to be addressed: (1) they require more capital to subsidize the delay in payment, (2) they also need to build and operate a network required to provide their services, and (3) since they are providing a service, they are in constant contact with their customers, so processes that improve customer interaction, increase customer loyalty, and result in low attrition need to be implemented.  The engine that drives value for subscription businesses is recurring revenue.  Selling new accounts, securing long term service agreements, accelerating implementations, up-selling to existing clients, eliminating churn, are all critical components to recurring revenue and since they are indicators of future performance they become the metrics to assess value.  Many subscription businesses are still operating like traditional software companies.  These businesses must transition to a service-oriented culture and implement systems and processes that are required to build recurring revenue.

Although sales growth is the most important contributor to value creation in the short term, there are other “value drivers” that need to be incorporated and measured. For example:

• Gross profit and operating profit margins that consistently exceed industry averages will command higher values.
• Diversification of customers, repeat customers, customer satisfaction and customer growth are key value drivers. It is important that companies are not reliant on a handful of customers. Concentration risk occurs if any one customer accounts for more than 10% of revenue or if 5-10% of customers account for 25% or more of total revenue. For companies in a service-based or subscription-based business, the length of contracts and contract renewals are good predictors of future success.
• The depth, quality, experience, past success, and tenure of the management team, along with their willingness to remain with the business are all positive value indicators.
• Proprietary products, services or processes will generally contribute to higher value. Characteristics that differentiate your products from the competition also drive value.
• If your product or service offerings are sold into multiple industries, a higher value is justified.
• Market niche, market position, and brand awareness also need to be considered. If a company fills a definable niche, commands a special leadership position in a niche, or has strong and favorable brand awareness in its market, the business probably enjoys higher profit and growth rates.

There are also tactical and strategic decisions that may impact value like managing reseller channels, structuring partnership agreements, contract terms and many more.

In order for small and emerging companies to grow and scale in today’s market their marketing strategy and sales processes have to be in total alignment. One of the main problem areas we see with our clients is the way in which marketing and sales manage opportunities – sales leads.

Traditional acquisition strategies rely on marketing to generate leads and sales to close leads.  Marketing is delivered to prospects through the web, trade shows, direct marketing and various media. As interest is shown, a lead is created and passed on to sales for follow-up.  In our experience, this method of lead development has generally proven to be ineffective.

Experience shows us that not all leads represent prospects that are ready to buy, and the follow-up process is often lengthy and tedious.  Consequently, these leads are often set aside, lost in transition or languish in the pipeline while the sales team focuses on the ones they feel have the greatest potential.  In fact, studies show that 60% of leads are not being followed up by sales and actually expire in the first 6 months due to a lack of proper follow-up and development. How many times have you heard this: “I’ve left 4 or 5 messages and they haven’t called me back.  It just isn’t a good lead.”  ‘Left message’ is often the most common lead status in a CRM system.  Conversely, our own research shows that long-term leads (those prospects that are interested but not ready to buy) are extremely valuable and the greatest source of future sales. Companies can gain a distinct competitive advantage by engaging a prospect before a formal vendor evaluation process is initiated. They can discover valuable information that can be used in the sales process, gain access to key executives and can often help to design or influence the RFP.

The first thing we do to help our clients develop long term leads is to take sales out of the process. We firmly believe that sales people should be totally focused on closing business by working with prospects that are ready to buy. It’s much more efficient to have five good salespeople, with full pipelines, working 100% of their time managing active sales situations; than six or seven salespeople doing both sales and lead development. In fact, our clients pay for lead development by substituting the cost of a low producing salesperson with two or more lead developers.

We refer to lead development as “Nurture Marketing.” Essentially, we are nurturing and creating a relationship with the prospect prior to an RFP being issued.  We found that it is more efficient and cost effective to outsource nurture marketing to a firm that has specialists trained in executing the nurture marketing process and can be engaged on an hourly basis. About four years ago, we formed a relationship with M&L Marketing to provide this service and have been working with M&L to perfect the process.  Our clients have seen significant improvement in lead quality, pipeline development and lead conversion – and our clients’ sales force couldn’t be happier.

An M&L representative will typically engage a prospect by contacting the person who placed the initial inquiry. First, they determine the lead criteria such as: where the need originated inside the prospect’s organization, the prospect’s pain points and what they envision as a solution, decision time frames, buying team members and budget information. After researching the prospect’s organizational hierarchy the M&L nurture marketing specialist will reach out to relevant executives in order to gain further insight into the prospect’s business issues and challenges. Throughout the nurture process key people within the prospect’s organization are provided with our client’s informational tools, like white papers and product data, and “best practices.” As business intelligence is gathered, the M&L representative will update all internal databases and remain in constant contact with the sales person who will be assigned the lead. It is important that the nurture marketing specialist and the sales person, who will be assigned the lead, work closely together.

When the prospect is ready to engage in a sales process they are highly developed and passed to sales without disruption. The results – revenue and sales conversion rates are significantly improved.

For more information about M&L Marketing please contact Tafaro & Associates. The M&L website is: www.mlnurturemarketing.com.

For early stage technology companies, sales growth is one of the most important metrics of value accretion. Today an increasing number of companies are choosing to deliver technology in the form of renewable services or subscriptions, such as software-as-a-service (SaaS). In this business model, value is delivered over time as the service is used. So regardless of when cash is collected for these services, revenue is recognized month by month.  For companies using this business model, measuring sales growth can be quite challenging.

Subscription businesses have great appeal among investors and typically attract higher multiples due to the recurring nature of the business – subscriptions provide clearer visibility and predictability into future revenue. On the other hand, subscription services are hard to execute and require more capital to subsidize the delay in payment and the operation of the network required to provide the services. With more up-front cost and lower up-front payments, subscription businesses have a longer path to profitability, but once established they are unlikely to regress.

Metrics to Measure Sales Growth

Subscription businesses attract higher multiples because of the recurring nature of their revenue. So to accrue value, recurring revenue must be escalated over time. Here are two metrics to consider:  (1) monthly recurring revenue, and (2) contracted but unrecognized backlog.

1. Recurring revenue is the engine that drives value.  New accounts, higher pricing, low churn, accelerated implementations and up-sells all add to recurring revenue. It is advisable to measure recurring revenue monthly since it changes each month and can help facilitate cash management. Is monthly recurring revenue increasing or decreasing, and what is the rate of increase?
2. Contracted but unrecognized backlog measures the value of committed future revenue.  The “backlog” is primarily the value of the remaining contract term, including any extensions sold to existing customers. Obviously a contract with a committed term is much more valuable than month-to-month cancelable agreements. The size of the backlog in comparison to current revenue, the future recognition or the “roll forward,” and rate of backlog growth are metrics that are commonly used to measure the performance of subscription-based technology businesses.

It is important to note that neither metric should include non-recurring revenue from professional services, training and other one time support services.

To apply these metrics, business executives should answer two questions: What is our future revenue outlook absent new sales, if we keep all customers at a steady rate and realize our contracted backlog? How has that changed in the past month or quarter?

From a sales growth perspective, managing existing customers and acquiring new accounts become the highest priorities. Both require different competencies, sales and marketing practices and incentive compensation models.

Tafaro & Associates has years of hands-on sales, marketing and operating experience with subscription-based technology businesses. Please contact us and we’ll help you construct and implement sound practices to maximize sales growth and shareholder value.