Partner, YFM Equity Partners
Most private equity investors invest across a whole range of small and medium UK businesses, across most industries and at various stages of a company’s life cycle. The one thing they all have in common however, is a team with a desire to grow and create equity value. There are a whole range of growth strategies, but they are all reliant on increasing sales – and to do that they need good sales and marketing strategies; here we concentrate on the sales focus.
It is rare these days to come across a business that does not have some data around customer lifetime value –this concept was first mooted in the 1980’s and focuses on a pretty basic calculation centring upon:
- the cost of acquiring customers,
- the attrition rate of those customers, and
- the lifetime value of those customers.
Not many businesses however measure the same data around their Sales team – which is odd as they are the ones tasked with delivering that sales growth and its easy data to find:
- how much does it cost you to recruit a sales person,
- what is the annual attrition rate of sales people,
- what is the lifetime sales value of those sales people.
Most businesses do closely monitor the “performance” of individual sales staff with some basic KPI’s around sales funnel and conversions. But not many are looking at the wider drivers around successfully recruiting and retaining their staff. A McKinsey study published in July estimated that the cost of an employee who leaves within a year can be as much as c£40k to a business when factoring in lost productivity, customer relationship damage, recruitment and training costs.
Various “thought leaders” are now talking about how to take performance management for sales professionals to the next level and quantify the cost and value in the same way they do a customer – if we look at a very basic example for “ACME Ltd”:
|A||How much does it cost ACME to recruit a sales person||£20k|
|B||The attrition rate in the first 12 months||33%|
|C||Average compensation including bonus, PAYE etc||£50k|
|D||Gross profit generated by an average sales person each year||£100k|
|E||Average tenure for those who stay past the first year||5|
Based on the above numbers it costs ACME
- £60k for every 3 people they recruit
- 33% of the recruits will leave in the first 12 months and add no little to no value during that time
- ACME Ltd pays c£50k pa in total salary / commission for each sales person
- The 2 sales people that do stay past the first year generate £100k of GP each year on average
- There is on average 5 years of £100k GP generated from a sales person before they leave
Using the above we can work out the lifetime value of a sales person:
- Total cost of recruitment = £60k (3 people at £20k each)
- Each person costs £50k pa = £550k (1* £50k for the person who left in year 1, and 2 * £50k * 5 years for the 2 who stayed)
- The 2 who stay generate £100k GP pa each for the 5 years they stay = £1m (£100k pa * 2 people * 5 years average tenure)
Based on the above it will cost ACME Ltd £610k of recruitment costs and salary to have 2 people stay an average of 5 years and generate £1m of GP. Which is a 1.6x “lifetime value return” on the investment in recruiting 3 new Sales people.
Most Sales Directors are focused on how to get their Sales people more efficient and generate more GP which would definitely help the calculation. Just increasing the average GP per employee by 10% increases the “lifetime value return” on investment in the same 3 sales staff to 1.8x.
The really pro-active Sales Directors however are thinking about increasing their team’s sales performance, and they are driving that performance by putting just as much focus on the other levers they can pull in their teams. For instance:
- If ACME Ltd recruited better and only 15% of people failed and left in the first 12 months, but everything else stayed the same, then the “lifetime value return” also increases to 1.8x
- So, increasing the people who stay from 66% to 85% is the same as adding 10% more GP every year for every sales person
- If AMCE Ltd increased the average tenure for a successful recruit to 8 years instead of 5 years, and kept everything else the same, then the return on investment increases to the same 1.8x
Obviously if ACME Ltd could do all three;
- increase GP performance by 10%,
- reduce year 1 attrition to 15%, and
- extend the average length of an employee to 8 years
then the “lifetime value return” increases to 2.0x!
So next time you are in a board meeting looking at sales performance make sure you spend as much time thinking about how you can improve sales staff retention rates and increase the average tenure of sales people, as well as pushing the Sales team to just sell more.