Too many people focus on the wrong things.
That’s an observation I have made over 30 years of sales consulting – working with over 500 sales organizations. In my world of B2B salespeople, sales managers, and sale executives, the pressure to produce short term numbers often eclipses a more thoughtful, long-term strategy.
One way to ensure that you are focusing on the right things is to thoughtfully establish the metrics that you will track. Put the right metrics in place, and you have the raw material to transform your sales efforts and dramatically increase the top line.
I’ve found one simple metric that is almost universally ignored yet is key to sharply focusing a sales team’s efforts. The metric is this: The number of customers the company or sales territory currently serves.
Measuring the quantity of customers
We have all heard about valuing our customers, so the concept is not new. What is lacking, though, is building that idea into the structure of our company’s sales efforts. With a little work, the idea of the value of customers can provide direction to the company and transform the company’s sales efforts.
Yet in my 30 years of sales consulting, I commonly ask this question of a new client: “How many customers do you have?” I can’t remember any sales executive answering that question with a definitive number. In other words, almost no one tracks this absolutely essential metric.
They are so focused on selling things that they neglect to remember that they sell those things to people. The people are more important than the transaction.
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They are so focused on selling things that they neglect to remember that they sell those things to people. The people are more important than the transaction.
Sales is ultimately about influencing and serving people. Companies who don’t track the number of customers often rely on metrics that ignore the people and instead track transactions. While transactions are important, keeping track of people is more important.
The value of a company is more determined by the number of customers it has than the amount of money in its coffers.
Here’s how to implement that concept.
1. Create a definition of a customer.
Most sales organizations have no objective measurement for what constitutes a customer. No wonder they don’t know how many they have.
Your definition should be objective and data driven. In other words, the computer should be able to spit it out.
It should reflect a relationship that extends beyond just a transaction. For example, if someone walks into your showroom and buys $100 worth of stuff and leaves, is that person a customer? Most companies would say no. In this case, one transaction doesn’t make a customer.
But what does?
One of my clients defines a customer this way: A qualified account that spends $1,500 each month for at least three out of four consecutive months.
That’s a great example, because it captures the repetitive nature of the transaction, and adds an objective dollar amount. With this definition, the computer can spit out how many accounts meet this criterion every month.
Quality of Customers
Your definition can vary by market segment. So, for example, if you sell high-end building materials to contractors and architects, you could have one definition for the contractors who actually buy your products, and a different one for the architects who specify those products.
You can also have classes of customers, based on historical performance. So, you can have “A” customers who spend more than X with you, “B” customers who spend between W and X, and “C” customers who spend less than that.
2.Track the measurements monthly and pay attention to trends.
If you have 100 customers at the end of January, 95 at the end of February, and 90 at the end of March, you better do something pretty quickly — regardless of the sales dollars. There is something in your sales system that is causing a negative,downward trend.
This is a forward-looking metric. Since it is always easier to sell more to a current customer than to acquire a new one, the number of customers indicates the likelihood of future sales. It is one of the most powerful measurements of the future health and prosperity of a sales organization. A healthy company see this number trending upward.
If you choose to use classes of customers, you can follow those trends as well. For example, if you use pure sales dollars as the definition of a customer, then you ought to see regular movement from “C” customers to “B” and from “B” customers to “A.” This will indicate your sales system’s performance in penetrating the customers and achieving the potential business in that account.
Ultimately, a sales organization needs to do two things: Acquire new customers and penetrate those it currently has. This customer metric allows you to measure both and is the ultimate measurement of the health and effectiveness of your sales efforts.
Now that you have those metrics in place, let’s add one more wrinkle.
3. Measure the lifetime value of a customer.
Now that you can measure how many, and what quality of customers you have, add another layer of sophistication by creating an objective measurement of the economic value of every customer.
You can start with a simple average of all customers. Use this simple formula:
- For all customers, determine the average annual gross profit per customer.
- Estimate the average length of time that a customer continues to buy from you, measured in years.
- Multiply line two by line one, and, presto, you have the lifetime value of a customer in your business. Here’s an example:
Average annual gross profit per customer: $6,800
Average number of years a customer continues to buy: 12
Total lifetime value of an average customer: $81,600
Once you establish an average, you can get much more sophisticated. You can calculate a LVC (Lifetime Value of a Customer) for A customers, B customers, etc. You can create an LVC for the average customer per market segment. So, our building material contractor may be worth $2 million, and our referring architect may be worth $5 Million.
4.Use these metrics to transform your sales force.
Now that you have two key metrics in place, you can use the information gathered from this to transform your sales force. For example, you can,
- Incent salespeople to create new customers. Now that you can track it, acquiring a new customer is measured by the computer, and should be one of the key activities your system pursues. Change the compensation plan. Move from commissions on sales to incentives on behavior – one of which is acquiring new customers.
- You can use the LVC to determine if a prospect is worth a salesperson’s time. If the LVC is below some number, for example, that account may never be profitable, and should be avoided.
- Salespeople can be encouraged to spend more time with the high LVC customers, and less time with the lower LVC.
- You can reward the movement of customers from one classification to another. So, moving a “B” customer to an “A” customer is a behavior that will likely be the most profitable of all. Why not create an incentive to encourage the salespeople to do that?
- If you track customers by market segment, you can encourage new customers in some market segments and discourage them in others, thus moving the sales teams’ efforts to more profitable areas.
Apply these metrics and you will have a system in place which focuses on certain key initiatives:
* Acquiring new customers (of specific size, in specific segments, etc.).
* Penetrating current customers
Now you can focus on building the system to excel at these key sales behaviors. For example, you can refine the collateral to support these efforts. Create one piece specifically for prospects and a different one to show customers what else they could purchase from you. You may rearrange your products/product lines to be more compatible with the new metrics. You can train the salespeople in the specific behaviors necessary to acquire new customers and penetrate existing ones. You’ll find multiple ways of supporting the sales force to enable them to do what you want them to do.
Truely, implementing a focus on customers can transform a sales force.
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For 30 years, Dave Kahle has helped over 500 B2B companies sell better. Reach him at info@davekahle.com.
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