A better approach to understanding the factors impacting sales cycle length and those affecting overall sales processes is a calculation known as Break-Even Sales Volume.
Shortening the sales cycle with break-even volume: Shortening sales cycle length is a top priority for organisations who aim to increase sales volume, decrease the cost of sales, or both.
One way to accomplish this is to reduce the number of activities that lead to the close of a sale. Sales representatives are encouraged to ask themselves, "How many sales calls do I need to make in order to close a deal?". But this question only captures one dimension of the problem and can lead to incomplete conclusions.
What sales to avoid: Break-Even Sales Volume combines the number of significant activities required to close a deal with cost-per-activity and total sales costs. The output (or break-even) is the maximum number of sales activities needed to generate revenues. Any sales below the break-even point should be avoided, as they do not provide a return on your valuable resources.
Calculating Break-Even Volume (BE(sv)): The formula for Break-Even Sales Volume remains unchanged, regardless of industry. However, values it generates can vary considerably by industry and within industry. The formula is:
BE(sv) = (CPC x NCC) / (1-C(s))
Where:
CPC = Cost per Call ($)
NCC = Number of Calls to Close (#)
C(s) = Cost of Sales (expressed as a % of sales) (%)
Understanding Cost per Call (CPC): Cost per Call measures the total amount spent for every call made to customers and helps executives determine the cost-effectiveness of each dollar of revenue generated.
To determine CPC, first determine the number of calls (face-to-face appointments, phone calls, virtual meetings, etc.) made over a given time period, typically at least a quarter. Then determine the selling expense during that same period and compute to find CPC:
CPC = NC / SE
Where:
NC = Number of Calls (#)
SE = Selling Expense ($)
Understanding Number of Calls to Close (NCC): Number of Calls to Close is based on the number of times a sales person has to meet (face-to-face, via phone, virtually, etc) the customer before a sale is completed. There is no optimal value for NCC.
Understanding Cost of Sales (C(s)): This input is determined from total expenses incurred in the overall selling effort (as opposed to the input value SE) and is expressed as a percentage of revenue. Even within industries where practices tend to be similar, companies are likely to allocate percentages differently for each expense category, including direct selling expenses.
Board expectations should be factored into the break-even analysis. For example, a high-growth company hoping to capture market share may accept a negative break-even analysis. Alternatively, organisations can calculate sales costs for each salesperson. While it's more time consuming, it's also more accurate, since the answer reflects a more realistic assessment of each salesperson.
Determining Break-Even Volume: Using the approach below as a guide, input the numbers that apply to determine your organisation's Break-Even Sales Volume. For example: Look at the data from fictitious hospitality and food service company, Surface Above, Inc.
CPC = $131.60
NCC = 6.8
C(s) = 3.7%
Since, BE(sv) = (CPC x NCC) / (1-C(s)), we can now calculate the Break-Even Volume for
Surface Above, Inc., an "average" food services industry company:
BE(sv) = ($131.60 x 6.8) / (1-0.037) = $929
Putting it all together: Rising above the sometimes drenching costs of sales requires dedication to careful account planning. In addition to understanding the required sales volume to break even on new accounts, a performance benchmark, like Break-Even Volume, may also reveal the need to drag underperforming customers above the break-even threshold.
Nevertheless, it provides a minimum acceptable standard for determining the attractiveness of a customer account. It helps executives focus on those business opportunities that represent the best potential and reduce the number of less profitable customers. From this point, organisations can begin the more rigorous phases of account planning and ensure they stay out of the deep end.