Do the maths: how to achieve a 20:1 Return on Relationship (RoR) – a working example
by Kevin Vaughan-Smith, Joint MD, Mutual Value
Elgiva: a business services firm
This example illustrates the value of the 20:1 challenge in the accompanying article. https://mutual-value.com/do-the-maths-how-to-gain-a-201-return-on-relationship-ror/ . Elgiva is a business services firm. We set out here the details of its current sales performance, and then demonstrate the challenge through the analysis below. What this shows is that whichever lens you look through, the benefits of focusing on relationships not deals result in much higher returns.
Size of sales force 40
Budgeted revenue per sales person £2m
Pipeline consisting of 4 stages:
Leads 33% conversion to opportunities 100
Opportunities 33% conversion to bids 33
Bids 33% conversion to wins 11
Wins Conversion rate opps to wins 1:18 4
Typical bid margin (fully loaded) 50%
Achieved margin (fully loaded) 38%
Top 20% sales performance £2.8m
Middle 60% sales performance £1.7m
Average sales value £125k
Average cost to bid – new business £25k
% of repeat business in existing clients 40%
Conclusion 1: New wins make a loss
Let’s start by understanding the full cost of winning the 4 new sales in the pipeline model above. We will ignore the marketing cost of getting 100 new leads. Elgiva has pursued 33 opportunities and made 11 bids.
From industry experience, each bid has a minimum internal cost of £25k – so the 11 bids have cost at least £265k. We have had at least one meeting per opportunity, and one more at the bid level – so for ease of calculation let‘s assume 50 meetings at £500 per participant in internal costs. The total there is £290k – which is clearly a highly conservative cost figure give the numbers of likely meetings and participants.
However, even at this level every piece of new business loses money as the following shows:
Bid margin: £125k @ 50% = £62.5k
Cost per win: £290k / 4 = £72.25k
Loss per win: £9.75k – and that is if Elgiva makes its optimal bid margin of 50%. See below how this is often not the case.
While this may sound like a remarkable outcome, I can say that from my extensive experience this is too often the reality when you do the full analysis. It’s clear in this case that only by building relationships with new wins and generating extra revenues from those accounts can Elgiva turn them from loss making to profitable.
Conclusion 2: you make less than you planned in delivery
The planned gross margin for this business would be:
- Planned revenue per sales person x number of sales people x 50%
ie £2m x 40 x 50% = £40m gross margin
Assuming the revenue is achieved the actual margin is:
- £2m x 40 x 38% = £30.4m gross margin
To make up this difference in margin the team needs to overachieve its sales target by over £20m – ie because 38% is achieved, not 50%, they need to get the extra £9.6m in gross profit from additional revenue.
The obvious conclusion would be not to budget for 50% margins if they are not typically achieved. However, experience shows that many firms in bid mode are overly optimistic, despite any previous experience, and collectively remember the projects where the higher margins have been achieved. So the model remains based on the higher margins.
Conclusion 3: Move the Middle 60
The gap between the top 20% of the salesforce and the middle 60% is £2.8m – £1.7m = £1.1m
The Move the Middle calculation is based on moving half of the middle 60% half the way to the success of the top 20%.
Thus if Elgiva can achieve this, the additional revenue is as follows:
- £1.1m x 24 x .5 x.5 = £6.6m
That’s a great start. But the financial Return on Relationship goes much further than that.
Conclusion 4: improve pipeline conversion rates.
Relationship focus improves conversion rate at all levels but primarily at bid to win conversion.
Leads (100) 100
Improve conversion to opportunities to 40%
Opportunities (33) 40
Improve conversion to bids to 40%
Bids (11) 16
Improve conversion to wins to 50%
Wins (4) 8
So, the conversion rate of opportunities to sales has moved from 1:8 to 1:5 – and this is again a conservative expectation about the difference made by better relationships.
So, Elgiva has doubled the number of sales generated by the same number of leads. In other words, at an average value of £125k per deal, improving relationships and conversion rates generates an extra £500k for every 100 leads generated.