Many new companies like eCommerce providers and Saas-providers depending on self-service sales would never be able to scale and grow if they did not have control of the cost to recruit a new customer and how much time it takes to get the money back.
However, if you look into more traditional B2B sales, depending on traditional sales departments, the knowledge about the cost to recruit one more customer or close a deal is extremely low. That affects the company’s potential to both scale the B2B sales and grow the company.
Why your cost of sales formula in B2B sales is such an important KPI
Regardless what you are doing, selling, delivering, building etc. if you want more of the same you need to apply it in a systematized way. That includes processes, checkpoints for quality, KPIs etc.
If you are going to deliver more of a specific product or service you need to have control of how much it costs to both produce and deliver that specific product or service. Otherwise, it will be impossible to understand what is required to scale up production and indirect costs involved, especially for a small business.
The same thing applies to sales. If you want to double, triple or even grow your sales 10 times, you need to know how much it is going to cost to recruit one new customer on average, in different geographies, industries, accounting periods, etc.
You also need to know your cost of sales formula such as how long it will take to earn that money back, gross profit (depending on your production process or service delivery style). If it’s too long then it’s probably not worth it and you need to reconsider your strategy and see if it can be done in a more cost-effective way.
Once you get control of your cost of sales then you can also extrapolate your costs, growth, revenue, and profit. Unfortunately, most traditional sales departments don’t know their numbers including their cost of sales, customer acquisition costs, etc. Therefore, many traditional sales departments have a harder time answering the question; what is required to grow and scale up the sales?
You can also put it like this: a high cost of sales can indicate an inefficient team.
The usual cost of sales in B2B sales
Most of the B2B sales is, despite technological breakthroughs, still done by humans and will mostly be performed by humans for a long time. The way B2B sales work will of course be experiencing heavy improvements in efficiency due to the increased used of technology to assist the sales reps, sales directors, management groups, etc. in their work with sales, follow-ups, reporting, lead generation, collaboration, etc.
Here are some costs that most classical B2B sales organizations have:
- Basic salary for the sales rep
- Commission for the sales rep
- Traveling time (Of course part of the regular operations but could be used for other tasks than traveling and is, therefore, an extra cost)
- Explicit traveling costs
- Tools like computers, smartphones, phone subscriptions, company car, insurance, etc.
- Sales training
- Sales material
- Sick leave
- Parental leave
- Employment and any other taxes
- Support from colleagues (Pre-sales)
- The Sales director’s salary
- Office space
- Competition prices
- Other costs to keep the staff motivated
This all boils down to a specific cost per sales rep that needs to be bared, every month, just to be able to close the deals. These costs do not consider any other costs or profits within the company.
How to calculate the cost of B2B sales
To get the cost per sales rep, summarize all sales and marketing costs and divide it by the number of sales reps in the team.
Other metrics that are part of the cost of sales which can be valuable to identify are: conversion rate between leads and deals, how many leads do different channels produce, how long does it take in average for each sales rep to reach their targets, how many dials, calls and meetings do they need to reach their targets.
How to calculate the customer acquisition cost and payback time
When you know the cost per Sales rep then you need to find out some additional stats/numbers to be able to calculate your customer acquisition costs and payback time. This includes:
- Average deal size (actually the median deal size is a better value since it cuts away any abnormalities)
- Cost for production/delivery/products
- Deals per month per sales rep ( if you do deals per week, quarter, year, convert it to a monthly value)
Example – Subscription-based deals
|Example KPI values – Subscription deals|
|Monthly cost per sales rep (X)||Average subscription fee per month – Production and development costs (Y)||Deals per month (Z)||Payback time||Customer acquisition cost|
|Payback time = X / (Y x Z). For example, means it takes 10 months before the cost of sales is covered.|
|Customer acquisition cost = X / Z. For example, it costs 3000 to close one new customer, to cover the cost of sales.|
Examples – Service provider deals (e.g. consultant assignments)
|Example KPI values – Consultant deals|
|Monthly cost per sales rep (X)||Average deal size – average consultant costs (Y)||Deals per month (Z)||Payback time||Customer acquisition cost|
|Payback time = X / (Y x Z). For example, means consultant assignment needs to be minimum 5 months before the cost of sales is covered.|
|Customer acquisition cost = X / Z. For example, it costs 37500 to close one new customer, to cover the cost of sales.|
Examples – Cash upfront deals (e.g. resellers)
|Example KPI values – Cash upfront deals|
|Monthly cost per sales rep (X)||Average deal size – (product + delivery costs) (Y)||Deals per month (Z)||Payback time||Customer acquisition cost|
|Payback time = X / (Y x Z). For example, means the cost of sales is just covered since the payback time is exactly 1,0.|
|Customer acquisition cost = X / Z. For example it costs 4167 to close one new customer, to cover the cost of sales.|
How to scale your B2B sales and improve the cost of sales
Since technology is moving fast there are plenty of ways to increase your efficiency, lower the cost of B2B sales and therefore improve the payback time and customer acquisition cost.
Use video or VoIP instead of physical meetings in B2B sales
It’s still common among many B2B sales departments to claim that relation is the most important thing to close the deals. Therefore, they still want to meet every new potential or existing customers to qualify and close their deals.
Even though the relationship is important there are more efficient ways to meet new and existing customers early on when it comes to finding new deals.
The quality of video chat tools, expansion of high capacity broadband/4G networks have improved vastly in the last years. Some sales tools provide VoIP options that allow you to store data about your calls. This opens up new ways of interacting with customers, even located close to you.
If you also consider the fact that most people don’t want to spend a lot of time in unnecessary meetings, the environment, sales efficiency, etc.
It’s really recommended to only take the qualifying meetings over video, before meeting the customer in person in later stages of the sales process.
In many cases, it’s possible to conclude the entire deal without meeting in any other way than video meetings.
The acceptance from most customers for taking video meetings have increased vastly in the last 2-3 years.
If you are doing video meetings instead of physical meetings you will:
- cut out traveling time back and forward
- reduce the traveling expenses
- reduce the time spent in meetings (video meetings are in general more focused and therefore shorter. 30 min instead of 60 min is very common)
- make it easier to schedule your workdays
- increase the geographical area to operate
These things combined increases sales efficiency dramatically. Instead of taking 1-2 meetings per day, a sales rep can easily take 4-6 meetings per day. If you extrapolate this to:
- Week: 20 – 30 meetings instead of 5-10
- Month: 80 – 120 meetings instead of 20-40
- Year: 880 – 1320 meetings instead of 220-440
Regardless of what you are selling and the individual sales reps skills, applying video meetings will improve the number of closed deals compared to going to your customers’ offices to take the meetings.
Use end-to-end solutions to support your B2B sales
If you study how much time is spent on administrative tasks connected to B2B sales you will be surprised.
A lot of time is spent on prospecting, adding data to CRMs, summarizing email campaign results, discussing during follow up talks internally just to understand where you are on specific deals, etc.
Many also still spend a lot of time calling company switchboards based on purchased lists or database searches.
You probably also miss out on many great leads since you don’t convert your website visitors to leads.
It’s also common that time is spent on invoicing and reporting what has been closed during the week, month, etc. A heavy burden is also the monthly reports that are most likely produced manually by discussions and internal follow-up meetings.
To further increase your efficiency you should therefore consider getting an integrated end-to-end solution to support your sales and marketing department with completely digitized flows. Flows that automatically add data and trigger proper actions like:
- automatic task generation to qualify and take your leads to deals
Such a solution should also make it possible to
- easily import of leads from social networks like LinkedIn so you can call the right person directly instead of through a switchboard
- give smart individual reminders when it’s time to take the next step in processes
- be mobile and let you collaborate and work wherever you are
- collect and give you most of your KPIs values automatically
A complete digitized end-to-end solution that also automatically helps you to take the proper steps forward and keeps the team up to date as real-time has the potential to increase your B2B sales efficiency with up to 80-90%.
To be able to grow and scale your business it’s essential to know the numbers, otherwise, it will be hard to plan for the future and know the capacity of your organization.
By working with smart and modern tools you will dramatically improve sales. It will also make it possible to scale your B2B sales several times without even recruiting one single more sales rep. The customer acquisition cost and payback time per deal will as a result also improve dramatically by applying these few modern tools.
Applying modern tools and a digitized way of working also makes it easier to plan and get control over the KPI values, since its mostly collected automatically and does not require manual input from humans.