There are several questions that Josh Melick’s co-entrepreneurs often ask such as “How to get more customers”, “How to make more predictable sales” , “Whether the plans are right”, “what channels to use”.
These questions are important in sales, Josh Melick says. As new sales and customers are vital components and are also worth mentioning alongside other “hot topics” like raising money, product fit, HR or legal issues but for today Melick focuses on sales. He believes that as founders, Sales should be a Science not an Art. But how do they get there?
If sales will be scientific, they need to understand their sales and economics first. Melick mentioned that since he has an Engineering and Math background, he became more of an entrepreneur and sales leader and advised that it was important for him to get the math right. As Melicks business is SaaS business, it’ll be mostly his examples, however these concepts apply to other models as well, quipped Melick.
First, Melick advised that a company should know their customers’ worth to them? Knowing their customers LTV – Lifetime Value. If customers stays with the company for 3 years and they pay $500 /month, that will total around $18,000 over a lifetime. However, they should take into account the gross margins too. Assuming that 80% is a healthy SaaS margin; the customer’s LTV is $14,400. In a non-conventional wisdom the business wants to have 3X Customer Acquisition Cost (CAC) to LTV at the least — making a maximum of $4800 tp play for the CAC which covers the very basic. There’s still a lot to consider though, like when will be the payback for the CAC or is the CAC “fully loaded”? Is marketing included? Sales overhead? The office space used by the sales team? What are ratio between the company’s sales comp plan ( Sales Commission Plans) and sales quota? Do the company end up paying twice the commissions anywhere (example – multiple reps, marketing contribution, SDR vs AE)? There’s a lot to be taken from these topics. Study them all and be consistent. The barriers of your sales machine are the information forms. It may seem dull but some of the best founders and leaders are aware of this, says Melick.
Marketing is a far more complex topic than Sales. Melick said that he is an advocate of including most marketing inside the company’s sales calculations. Most of the time marketing ideas get left behind. Business development is not that good. Usually sales is where SDR and BDR are located but can sometimes be out of place. Melick recommends making as many calculations. Know for certain what happens and if you include the changes or not, how wide will it be?
Bottoms up and top down, these are two different ways that Melick likes to do in CAC and Sales. The easiest (but perhaps the scariest) is Top down. You take your entire spend in sales, marketing and BD then divide it by the number of new customers and new dollars that you closed in that time (ARR/Annual Recurring Revenue) .The result that you have is 10 new customers on a $500k spend? Melick says. $50 per new customer. How to get $750k in ARR? In every $1.50 recurring revenue, there’s $1 in CAC spend. It could be real numbers and it may be bad or good. You may compare it with LTV to check.
Removing marketing and BD may make numbers improve twice – like $25k per customer and $1 for $3 sales. It’s not usual to see equal spend in Marketing and Sales of a company. Melick states that top down is instructive but when it comes to better knowing what is really going on, bottoms up is of use. Some might ask about “window” size. Is it gonna be used per week, month, quarter, year. They may say that for some reason, windows are not typical. But Melick says to just keep track of it and compare it over time. Take a period that makes sense for the business, usually 2-3 sales cycles. Exceptions will be clear as the business compares several periods. Investors would like to see stability and improvement as time passes than just a one time best performance.
Unit Economics is a type of approach that Melick likes to do for bottoms up. He was taught by his “professional” angels for weeks and he believed that it was worth it. You should be aware of the business commission rate, how much base salary per deal. The marketing the business spends when they allocate to each deal. What did the business pay for the leads? Is SDR present? Get the deals and compare the percentage from each channel and check how expensive these channels are. Businesses can use these to create a bottoms up budget. Compare how far the business bottoms up than the top down calculations. Keep a tab of the business spend and check buckets.
Once the business checked all these and math is working. Business can proceed with the channels. How is the SDR? PPC – pay per click marketing budget, did the channel expand? Is the channel too competitive or expensive for the business model? If the business increases the sales quota what will happen? Should they spend on marketing more or will the spend in marketing be dragging it down? The company should track the lead sources.
The biggest thing a business can do to win is to get their comp plans right. Melick prompted that he is all for incentives. He believes in sharing the burden of both sales reps and leads – which may lead to cheaper channels and cutting on expensive ones.
Get the finance team and ops to do a detailed tracking. Do the math. Give incentives where needed. Then sales will definitely be a science, says Melick.
Josh Melick, co-founded and is the CEO of a venture backed technology company Broadly, a company that helps small businesses on how to build their tools for effective communication with their clients and has already raised more than $20M. An engineer by profession, Melick has been with AT&T and Intuit in the executive leadership department.