I have been researching the topic of high growth businesses now for a number of years and developed the 14 principles of high growth businesses as a way of explaining how high growth occurs.
This framework has been published in several books (Winning Ventures, Ultimate Growth Strategies and Venture Growth Strategies) and many articles. In developing this body of work, I am constantly confronted by the influence on growth of the productivity of the marketing and sales activities. The ability to secure sales transactions directly impacts the rate of growth.
The sales transaction is a fundamental building block in business. Without sales, you are not in business. Unless you have enough sales transactions, you go out of business. If you don’t do enough of them at a healthy profit margin, you cannot fund growth.
If we set out to grow, in revenue terms, we need to do more sales transactions, assuming our product and prices are constant. To maintain growth, we need to secure more and more sales transactions. So, “How can we secure more sales transactions?”
The simple answer to growth is to do more of the same. You might think of this as a linear approach to growth. In fact, this is how most businesses approach growth. They throw more resources at the activity with the expectation that the outcome will be more sales. In some cases, this is certain to work, but it is not the most efficient way to create growth momentum. For the entrepreneurial firm limited by access to funds, throwing resources at the problem is not a feasible solution.
Most firms do not have a theory or framework of growth to guide their actions, which is why they throw resources at the problem rather than look for growth drivers which they can implement with less expenditure. My objective has always been to find proactive ways of engineering growth by examining the underlying drivers of growth. Using our understanding of growth drivers, we can find underlying principles which can guide our marketing and sales strategies. We can use these principles to examine our own marketing and sales operations and identify areas of improvement.
One of the underlying principles of growth is that we need to improve the productivity of our resources. When we apply this to the sales activity, we need to focus on what generates sales and how we can improve the rate of sales. Instead of thinking about the sales transaction, we think about the way in which we use our marketing resources to convert needs to sales. We have to examine the process which brought about the sale, that is, the sales cycle. By examining the sales cycle itself and what determines its characteristics, we can uncover ways to improve it. The next step is to think of sales cycles over an extended period of time, especially in relation to the length of the sales cycle for successive transactions. In order to drive growth, we have to reduce the sales cycle over time.
We can achieve greater productivity if we can support more sales cycles with the same resource level. Our examination of buyer behaviour will identify ways in which we can handle an ever increasing number of sales cycles with the same level of sales and marketing resources.
By reducing the sales cycle time and undertaking more sales cycles with the same marketing and sales resources, you have a very powerful growth driver. My high growth marketing framework will help to bring focus on what determines the length and frequency of sales cycles and this will provide a pragmatic means for implementing changes to your business which will harness its power as a facilitator of growth.
When we think about sales growth, we usually expect part of our fixed cost to grow as well. We put more in infrastructure to support the expected increase in growth because we assume a constant level of productivity. However, in conventional marketing, sales growth often comes with lower net margins as we bring in more marginal sales. While growth increases net profit, it often does it at a decreasing rate.
For example, each sales person might contribute a certain number of sales per month. This contribution adds to our net profit. In practice, additional sales staff are often less productive as they chase more marginal business or are simply less experienced at the task.
If, however, we were able to achieve increased sales, that is more sales cycles, with the existing sales personnel, this will have a dramatic impact on net profit.
Any reduction in the sales cycle time will also have a dramatic impact on net profit if the infrastructure costs can be held constant. The objective of a high growth marketing framework approach to sales is to actually increase the productivity of sales and marketing resources over time so that the net profit ratio to total costs increases.
“An example of a realistic goal for an auto dealership should be 4-5 generated appointments per day per person; selling one. This represents 120 + appointments each month, 80 +/- that show up and an additional 20 units per person per month based on a 25% closing ratio.”
This type of ratio analysis is very common in sectors where telesales, lead generation or demonstrations are given. Improve the conversion ratio and you achieve a dramatic improvement in sales for the same level of sales and marketing resources. But what if we could improve the quality of the appointments, that is, they are more receptive to our products or services before they arrive for an appointment. Our conversion ratio would increase. If we could reduce the amount of time we needed to spend with each appointment because they were more familiar with the firm and its products, we could handle more appointments which would also improve the rate of sales.
We need to understand how to achieve these types of sales cycle improvements across a wide range of possible products and services.
Ask these questions…
What would the sales and net profit outcome be if we:
If everything else is constant, these are questions which will challenge our current performance. Of course, the real problem is “how do we achieve these new levels of productivity on a sustainable basis?”
As vendors, we all have sales cycles, whether they are years or seconds. Every person or corporation which makes a decision to purchase will go through a number of steps to confirm the decision to buy. Most of us have a basic understanding of the buyer decision process, but do we have a strong enough understanding to break the process down, examine its underlying concepts and build a better framework from which we can significantly improve our sales processes?
Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. A series of free eBooks for entrepreneurs and angel and VC investors can be found at his site here.
Smart Company is the leading online publication in Australia for free news, information and resources catering to Australia’s entrepreneurs, small and medium business owners and business managers.
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