The greatest thing about building an effective demand generation process is that the mysteries that used to plague growth efforts disappear. Growing a business becomes far more about understanding and applying, math. Projecting growth and allocating resources becomes far easier.
The fastest sign that you’ve got a growth problem is that you don’t understand your math. So here’s the acid-test question for predictable growth:
Do you know how many leads you need to create to crush your sales target?
Most mid-market executives that I talk to initially respond to this question as though it were child’s play. Of course, they think; who wouldn’t know this number. However when I ask them, they either mumble and give me everything but a number, or they give me a target that when quickly tested proves to be well below the number they actually need.
Underestimating the number of leads you need to drive results is a devastating mistake; probably the most damaging mistake you can make. When this happens you:
- Underinvest in growth efforts.
- Put your sales team in a hole because they never have a full, quality pipeline. This results in non-quality opportunities being purused and an ineffective and inefficient sales effort.
- You enter a vicious cycle that is difficult or impossible to break, as your demand generation efforts never get the momentum or scale necessary to break through. Thus you continue to underinvest in growth efforts, making growth more and more difficult.
If predictable and sustainable growth is your objective, note that you cannot have predictable or consistent sales growth without predictable and consistent lead generation. The most important metric that indicates sustained growth is lead velocity, a measurement of the lead growth an organization is experiencing.
RRINGG...It’s Time for Sales Growth Math Academy
Establishing the model to guide your actions and investments is not a particularly complex process. However, if you haven’t been tracking your metrics effectively for a period of time, or if you’re like most small and mid-market companies and have not implemented a comprehensive demand generation process, there are some assumptions you’ll have to make.
That’s okay. Start with assumptions and then track your progress. Within 12-18 months your numbers will be tested, your math will be reality based, and you’ll have a model you can count on.
It’s also important that you define clear targets and objectives. It is simply not enough to say, “We want to grow,” or “We want to grow as much as we can.” You must set a clear target (and have clarity on your current numbers) in order to create the environment that allows for consistent, predictable growth.
Don’t Forget To Factor In Churn/Customer Retention
The first step in developing your growth model is to determine two key metrics:
- How much new business are you attempting to acquire?
- How many sales does that represent?
While the first metric seems simple enough, most companies make a significant error that destroys their entire model (before it starts). They don’t factor in churn or retention into the new business calculation.
For example, let’s say you’re company is currently doing $12 million in revenue. Your three year objective is to hit $25 million. Calculating growth seems simple enough. Simply determine the difference...in this case you need $13 million of growth.
Uhm...not so fast. You must first factor in your churn or customer retention before you know how much new business you need. You must determine how much of your annual revenue you retain from one year to the next.
For purely transactional businesses, retention could be as small as 0%. Most B2B businesses retain at least some of their revenue from one year to the next. To show you the impact of retention, here are three examples of retention, and how much new business you need over three years to achieve your objective:
- At 90% retention you’ll need to add $17,991,144 of new business to meet your objective.
- At 75% retention you’ll need to add $25,864,865 of new business.
- At 50% retention you’ll need to add $40,285,714 of new business.
Figuring out the second metric is much simpler. Determine the average sale value and divide that into new sales number. For illustrative purposes, we’ll use the 90% retention rate and say that our average sale is worth $135,000 of revenue per year.
So in this case our sample company will need to make 133 sales over the next three years, or just over 44 sales per year.
Next, Work From the Bottom Up
If I know that I have to make 44 new sales/year, the next thing I need to know is how many prospects does my sales team need to make a proposal (or ask for the business) to meet that number.
This is where your closing ratio comes into play. If you close 40% of the people you ask to do business with you, then you’ll need 111 prospects to get to that point to hit your objective.
Next you need to determine what we call your fit ratio. This represents the number of qualified prospects your sales team needs to start the sales process with, to get one prospect to the point of making a proposal or recommendation to buy.
In our example, the ratio is 2:1, so our sample company needs to create 222 sales qualified leads (SQLs) to hit the target.
Move to the MIddle
This is where the calculations start to get serious (from a lead generation perspective at least). How many qualified leads, what we’ll call marketing qualified leads (MQLs), do you need to create engagement with so that you can start a sales process with 222 prospects.
This represents your MQL lead conversion ratio. If you need to create six MQLs for each prospect that turns into an SQL, then you’re going to need to create an MQL population 1,332 to hit your target.
Finally Look to the Top
Now your job is to determine how many leads you need to create to maintain a pool of 1,300+ MQLs. Depending on the strategies/tactics you use, the conversion rates for each will vary. However, with the clarity of what you need to maintain you can implement and manage those strategies with more confidence and effectiveness.
We’ve created a lead generation scenario calculator if you’d like to quickly determine how many leads you need to create to crush your target. Click the image below to download it.