The KloudReadiness Playbook. Step 5: Continuous Success Measurement. Turn Sales and Marketing from an Art into a Science

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1 ai Step 5: Continuous Succ Measurement Turn Sales an Marketing from an Art into a Science The fifth an final succ factor for builing a succful C an Manage Service Provier (MSP) busin is to continuously measure your succ with Metrics That Matter. In the previous four (4) chapters we investe consierable time an energy into the areas of go-to-market strategy, busin moeling, content evelopment an proc management for your sales an marketing functions. Clearly these are critical ingreients for succ an areas in which you shoul feel very confient about your approach an your execution. However, we want you to be much more than confient. We want you to be in control of your progr an convince of your succ. We believe it is just as important to measure progr towars meeting your goals as it is to measure your final achievement against those goals. So in this chapter we are going to provie you with key performance metrics that will not only allow you to measure the results of your har work, but also the leaing inicators that show you are moving in the right irection. We will take you through the metrics that matter most an escribe how to use them on a aily, weekly, monthly an yearly basis. Let s start by builing on the concepts covere in Chapter 4. Recall that we began Chapter 4 with a escription of the lea funnel an the sales pipeline an we emphasize the importance of measuring your marketing an sales effectiven separately. Measuring an managing the lea funnel allows you to focus on how well your marketing ollars are being spent an where your ollars are being investe for greatest impact. It also lets you track the number of leas you are generating by program an then applying a lea qualification proc to quickly sort those leas into convenient buckets. That way, your sales team will chase leas they are most likely to close an leas that match your ieal customer profile. By comparing the cost, response rate an qualification rate of your marketing programs, you can easily ientify which ones are worthy of continue investment an which ones are not. Measuring an managing your sales pipeline is a separate proc an one that has very ifferent goals an benefits. Your sales proc must efficiently convert highly qualifie leas into customers in a consistent an preictable manner. To that en, we escribe a pipeline management proc in Chapter 4 that assigns stages to the sales proc base on milestones an win probabilities. This allows you to measure the size an maturity of your pipeline opportunities so you can forecast the high percentage eals an focus your attention on improving your chances in the lower probability eals. Copyright 2018 KReain, LLC Page 1 of 22

2 How to Measure Marketing Effectiven We will assume that you are now completely comfortable with these concepts an are reay to put them into practice. Let s start by looking at ways to track your lea funnel in more etail. ai We have create a Lea Funnel Tracking Worksheet an it can be foun in the appenix of the Playbook. In this worksheet you will learn how to use the key performance metrics for tracking the effectiven of your marketing programs. You can use the worksheet to measure the performance of your marketing programs by entering the number of contacts, leas (total of unqualifie leas, qualifie leas an marketing leas), the number of eals close from each program, the average sales value an the total program cost. These inputs are highlighte on the worksheet as yellow boxes. For each program that you analyze on the worksheet, be sure to name the program in the yellow box provie in column C. The worksheet will calculate the remaining values an isplay them in the gray boxes in columns H, K, L an M. Use your prospect qualification worksheet to rate the value of each lea an classify them as qualifie, unqualifie or isqualifie. If you on t have qualification scores for your leas, then estimate the number of leas in each category as best as you can. Recall that Qualifie Leas are those prospects with a score of 20 or more, Marketing Leas have a score between 10 an 20 an Disqualifie Leas have a score l than 10. Now enter the number of Deals Close from each marketing program an the Average Sales Value (ASV) for these eals. The worksheet will calculate the average Incremental Pipeline value that is generate by your program an the average Incremental Revenue that was generate. Copyright 2018 KReain, LLC Page 2 of 22

3 ai Finally, input the total Program Cost for each marketing program an compare this cost to the average Annual Revenue that resulte from each marketing program. The worksheet will calculate the Revenue Multiplier (program cost x multiplier equals annual revenue contribution). It s a somewhat crue ROI inicator, but it provies a quick an consistent way to compare the effectiven of your programs by comparing cost to revenue - the higher the revenue multiplier, the more effective the program. You can also use this worksheet as a planning tool. You can create what if scenarios for your programs by keying in the expecte values for various programs to see what kin of eal volume an revenue contribution will be create by them. You can also plan the cost an frequency of your marketing programs base on your revenue targets for the coming month, quarter or year. How to Measure Sales Effectiven As your marketing programs generate leas, the highly qualifie leas are reay to enter the first stage of the sales pipeline. Let s take a closer look at the pipeline management proc with a Sales Cycle an Pipeline Tracking Worksheet that you can also fin in the appenix of the Playbook. In this worksheet you will learn how to track your sales pipeline. This will allow you to manage the sales proc more efficiently an remove the guwork when projecting the 30, 60 or 90-ay revenue performance of your busin. The pipeline tracking worksheet follows the KReain 4-stage sales proc which tracks the sales cycle using 4 major milestones: (1) quotation submitte, (2) making the short list, (3) becoming the selecte supplier an (4) getting a signe contract. Each stage has an assigne win probability an Copyright 2018 KReain, LLC Page 3 of 22

4 ai they are 20%, 50%, 75% an 90% respectively. You can change these values in the worksheet if you want to assign ifferent percentages. There are three aitional categories that allow you to classify eals that are Close within the forecast perio, eals that you place On Hol an eals that are Lost. The On Hol status is meant for opportunities that are neither won nor lost but are stalle for some reason that prevents them from progring through the sales cycle (e.g., the funing is put on hol or a ecision-maker is unavailable for an extene perio of time). To use the worksheet, start by keying in all of your current sales opportunities. Remember, qualifie leas are NOT opportunities. A lea becomes a sales opportunity only after a rep visits the prospect, unerstans their requirements an prepares a quotation. Your sales pipeline is not a prospect list - it represents viable an closeable busin for your company. For each opportunity that you a to the worksheet, provie the initials of the sales rep assigne to the account, the projecte close ate, the value of the monthly recurring revenue (MRC), the contract term an the appropriate pipeline stage (1, 2, 3 or 4). The worksheet will then calculate the total contract value base on the contract term an the factore revenue value base on the pipeline stage. There is also a comments section where you can a remarks such as the marketing program that generate the lea, key competitors, current status an critical next steps. After you have entere all of your sales opportunities, you might fin it helpful to sort the list base on the pipeline stage (column H). This will orer your list of opportunities from the earliest stage to the latest stage an provie an interesting visual representation of your eal flow an istribution of eals by stage. On the bottom of the worksheet you will fin Totals an Averages for your Unfactore Revenue, Average Deal Size, Factore Revenue, an Projecte Close Ratio. Unfactore Revenue is a total of MRC values for all eals in play (not counting eals won, lost or on hol). Factore Revenue is the total MRC value of your eals multiplie by the win probability base on the opportunity stage (20%, 50%, 75% an 90%). The Close Ratio is the ratio of Factore Revenue to Unfactore Revenue. In the final analysis, the revenue you forecast for your busin must inclue your jugment an intuition on which eals will close an which eals will not. Use factore revenue an close ratio metrics as a guie for guiing an refining your own jugment before committing to a forecast number. These metrics are not meant to be a replacement for this important management ecision proc. Copyright 2018 KReain, LLC Page 4 of 22

5 Optimizing Your Marketing an Sales Efficiency Now that we have looke separately at succ measurement proces for sales an marketing, let s look at these two methoologies sie-by-sie an see how they work together to optimize your marketing an sales efficiency. ai The iagram above illustrates one funamental point. Sales an marketing efficiency is all about maximizing your conversion rates. By conversion rate, we mean the percentages associate with converting suspects into prospects into opportunities an finally into customers as they progr through your lea funnel an opportunity pipeline. The first conversion rate illustrate in the iagram is the response rate you realize from your marketing campaign. What kin of response rate is typical an customary? Well, of course, that epens greatly on the nature of the marketing campaign, its mage, target auience an call to action. Response rates can be uner 1% for an campaign or postal mailer or well above 10% for an auience where you have bran recognition. A typical response rate to aim for is about 5%. Do you know the response rate for each of your fune marketing programs? The response rate will etermine the number of raw leas that enter your lea funnel to be qualifie by your newly implemente qualification proc. This is the next type of conversion rate that is critical to measure. Like response rate, the qualification rate varies wiely base on the type of marketing campaign involve. Expect the qualification rate for lea responses to a campaign promoting a free ipa giveaway to be low. On the other han, leas from a source such as a referral program can qualify at an extremely high rate. Which Copyright 2018 KReain, LLC Page 5 of 22

6 ai of your marketing programs has the highest lea qualification rate? You shoul expect a typical marketing program to prouce leas where about 30% of them meet your qualification criteria an can be hane off to sales as a newly qualifie opportunity for the sales pipeline. Now that you have establishe a flow of leas into the funnel an pipeline, you will want to maximize your sales efficiency an convert a healthy percentage of them into customers. This is where your pipeline tracking proc comes into play. At the en of your pipeline time horizon 30, 60 or 90 ays you will want to attain the highest close rate possible. We have foun that a close rate of 30% is a typical conversion rate. That means that you shoul expect to close 30% of the qualifie leas hane off from marketing an convert them into customers. What is the average close rate for your sales pipeline? Is it consistent from month to month or quarter to quarter? Is it also consistent from sales rep to sales rep? The text box shown above provies an example of these conversion rates in action. Hypothetically, lest assume that you have execute a webinar like the one escribe in Chapter 3. You have taken the time to buil compelling content for your webinar, invite your attenees from a list that represents your target market segment an presente a strong call-to-action at the en of the webinar. If your list containe 500 contacts an your conversion rates matche the typical values escribe on the previous page, you can expect the lea volume, sales opportunities an newly acquire customers (eals) we have calculate in the example above. These are conservative estimates. Copyright 2018 KReain, LLC Page 6 of 22

7 ai Now let s go one step further an examine the ROI for this webinar base on these conservative numbers. If each of the two eals close from this webinar represent an average value of $1K per month, then over $24K of annualize revenue will be realize from this one webinar. If the cost of proucing an executing the webinar was $3K an your margin from the incremental revenue is 40%, then you will recover the cost of the webinar in l than 4 months of revenue from these new customers ($2K x 40% = $800 an $3k/.8K = 3.75 months). If each of your reps hel two webinars per quarter, they woul rive 16 new eals per year, or $192K of incremental sales, from this marketing activity alone. Now ask yourself these questions: What if you coul ouble your average eal value by targeting a new market segment or by selling more bunle services? What if you experience a higher response rate or qualification rate than these very conservative numbers? What if you coul improve your close rate by managing your pipeline more proactively? This is the power an the benefit of tracking conversion rates across the marketing an sales proc. You are suenly able to see where you have efficiencies an where you have inefficiencies. You are in a position to replicate what works an iscontinue what oes not work. You can ientify areas for continuous improvement in either the marketing function or the sales function. Accurate an consistent measurement of these key metrics is the key to builing an effective marketing an sales machine to grow your busin. Measuring the Cost of Customer Acquisition In Chapter 2 we talke about the importance of measuring the cost of service elivery for your IT solutions so you can track your total service costs as well as the cost for each bunle service offering separately. Doing so will allow you to (1) set cost targets esigne to meet your gross margin objectives, (2) manage your service costs against those targets an look for cost reuction opportunities an (3) unerstan which of your services are high margin proucers an which ones are poor performers. This enables you to maximize your gross margins. Because your sales an marketing expenses are fune by gross margin ollars, we want to apply the same kin of iscipline to measuring an managing these costs as well. This helps you to maximize the net profitability of your busin an this is your ultimate en goal. Higher net operating margins translate to three funamental benefits: (1) you get to keep more of the ollars generate by your busin, (2) you are better able to invest in the growth of your busin an (3) you will increase the valuation of your busin if an when the ay comes that you wish to sell it. For these reasons, we will measure the costs associate with sales an marketing together. We will look at them in the context of your total cost of customer acquisition or COA. Copyright 2018 KReain, LLC Page 7 of 22

8 COA is a holistic measurement of all marketing an sales expenses that are require to grow your busin by attracting prospects an closing new customers. That means all of the salaries, bonuses, commissions an overhea to fun your marketing an sales staff as well as the program expenses to promote your busin an generate leas. Before you can even begin the proc of minimizing these costs, you have to start by measuring them on a regular basis. Then you have to set realistic targets for these costs an manage your expenses to hit the targets. ai The screen shot above is taken from the Cost of Customer Acquisition Worksheet that can be foun in the appenix of the Playbook. It is esigne to help you better unerstan how your customer acquisition cost compares to the customer value they prouce. By customer value, we mean the revenue an profits generate by new customers on a monthly basis an over the life of their service agreements. At the top of the worksheet you will fin yellow boxes to input values that rive the calculation of your COA metrics. The worksheet will compute your lea generation expenses base on your average cost per lea an the conversion rates you specify for lea qualification an eal closure. It will also estimate eal volume an total revenues prouce base on the average number of customers/rep/month, the average orer value an contract term. Input your average gross margin for new eals an the worksheet will calculate the gross margin ollars that will fun your customer acquisition cost. Below these input boxes are two sections labele Monthly Acquisition Cost an Customer Value. The first section has some more yellow boxes for you to input the number of Copyright 2018 KReain, LLC Page 8 of 22

9 ai heacount you have employe, or plan to employ, for various marketing an sales positions along with their annual salaries. There are also cells for you to specify a percentage for estimating any overhea expenses require to fully buren these salaries. Overhea inclues the cost of benefit programs an a facilities expense allocation if you maintain an office for them. In the marketing expense section you will notice that the lea generation expenses are calculate for you base on average cost per lea an the volume of leas require to rive the customer acquisition rate. The lea volume require on an annual basis is calculate an inserte in the Qty column an the annual lea generation expenses are foun in the next column over. Other Expenses refers to any marketing buget ollars that are not irectly associate with lea generation. This woul inclue the cost of your website, marketing literature, outsie contractors, trae association fees, etc. The worksheet estimates these expenses as a percentage of your lea generation expenses. The efault value is 20% but you can change this percentage, or the actual ollar value, to reflect your own situation. The sales expense section has areas to capture the cost of the various positions in your sales organization. We have use positions that make up a typical sales organization as escribe in Chapter 4. They inclue outsie sales rep, insie sales rep an pre-sales systems engineer. Input the heacount values for each position as well as overhea an epartmental expenses. The epartmental expenses shoul inclue any buget for iscretionary spening items such as travel, entertainment an office supplies. After you input values into all of the yellow boxes, you will see a total customer acquisition cost that inclues all marketing an sales expenses calculate on an annual an a monthly basis. For the purpose of measuring COA metrics, we are only intereste in the total monthly acquisition cost. You will see this number on the bottom right han sie uner the first section of the worksheet. This number is use in the secon section of the worksheet to compare your monthly COA with the amount of customer value those COA ollars generate. The section labele Customer Value shows the revenue an gross margin value that is prouce by all of the customers generate by your sales an marketing resources uring the course of one year. In other wors, the number of customers/rep times the number of reps times the average orer value rives the total revenue value. The monthly value of this incremental revenue is calculate along with the gross profit (base on your average gross margin percentage). Because these gross margin ollars are use to fun the COA, we are intereste in the number of months it will take to payback this investment. You will fin the Months to Breakeven value in the bottom cell of the Monthly Value column. Your goal is to have the number of months to breakeven be l than 12 months so that all of the investment require to acquire a long-term customer is pai back within the first year of the contract. Lower numbers inicate a more efficient customer acquisition moel an higher Copyright 2018 KReain, LLC Page 9 of 22

10 ai numbers inicate a l efficient moel. If your COA is recapture in 6 to 12 months, you are running very efficient sales an marketing organization. Next to the Monthly Value column is a secon column labele Total Contract Value. This column measures a COA metric that reflects the long term value of your customer acquisition moel. It compares the lifetime value (i.e., profitability) of your customers to the COA require to prouce it. The total contract value of new customers is calculate base on the average contract term specifie. The total gross profits are then calculate base on the average gross margin percentage. The gross profits are then compare to the COA an expre as a ratio. If the ratio of total lifetime value (total gross profit) is three times the acquisition cost or greater, you have a very efficient customer acquisition moel. These principles for measuring COA an the metrics calculate by the worksheet to measure the efficiency of your customer acquisition moel are use by many succful monthly recurring revenue busines. From Software as a Service (SaaS) an c computing companies to manage service proviers, any busin that must invest short term ollars to acquire customers with long term value must have metrics to evaluate the return on their COA investment. This is the methoology they use. It is also the methoology use by prominent venture capital firms an investment bankers when they consier making an xmsp investment or when facilitating an MSP acquisition. In aition to the size of your installe customer base an the tangible assets you poss, the valuation of your busin will be base on these two very important criteria. Do you have a scalable an repeatable busin moel? Investors an acquirers want to know that their investe capital will generate a low risk return in the form of profitable growth. Your busin moel will come uner intense scrutiny to ensure it will prouce a healthy return on investment. By implementing your own best practices for managing the lea funnel an sales pipeline, along with a cost effective, preictable an scalable moel for sales an marketing, you will be reay for this level of scrutiny. What is the net profitability of your operation? The ays of assigning valuation base on a multiple over sales are faing fast. The more prevalent valuation methos place a strong emphasis on net profits, or more specifically your Earnings Before Interest, Taxes an Amortization Expenses (EBITA). The two most critical, controllable an costly elements affecting EBITA are your cost of service elivery (see Chapter 2) an your cost of acquisition (see Chapter 4). Cost of service irectly impacts your gross margin while COA irectly impacts your net margin. Take the necary steps to optimize both an it will pay huge iviens in the en. As you begin to examine the Cost of Customer Acquisition Worksheet, you will notice that there are two tabs one labele Partial Territory an the other labele Full Territory. Copyright 2018 KReain, LLC Page 10 of 22

11 ai This allows you to create a before an after comparison of a partial sales territory that has only one or two sales reps with a full sales territory that has a complete staff of insie/outsie reps, technical pre-sales support an a eicate marketing resource. The screen shot provie earlier in this chapter represents a partial territory scenario. This scenario assumes that you are just getting starte with builing your scalable sales an marketing operation an you nee a baseline, or starting point, for measuring your COA metrics. This is an important first step. It will tell you where you are in-control of your customer acquisition expenses an where you are not. It will tell you how efficient your current sales moel is performing an what level of improvement you may want to target for the future. Is your current COA being recovere within 12 months? Is the ratio of gross profit generate over the life of the contract relate to the customer acquisition cost 3 times or more? If not, you shoul carefully ass your current marketing an sales costs an performance levels to ientify areas for improvement. The proven best practices that are presente in this Playbook are esigne to optimize sales an marketing performance. The more succfully you implement them, the greater the impact they will have on your COA metrics. The beauty of COA metrics is how they point out which factors matter most in controlling your acquisition cost an maximizing customer value. What are these factors? They are all on the worksheet an represente by the yellow boxes that rive the COA formulas. For example, your average cost per lea bears a irect correlation to the amount of lea generation investment neee to rive sales. Similarly, your conversion rates have a irect impact on the volume of raw leas that must be generate to sustain the eal volume require. Your average orer value rives the amount of revenue that will pay back your acquisition cost. Your gross margin percentage etermines profitability an how fast you break even. It also etermines lifetime profits realize over the full contract term an is reflecte in the ratio of long term customer value to its acquisition cost. To improve your COA metrics, focus on these critical efficiency rivers: cost per lea, conversion rates (lea qualification rate an customer close rate), average orer value an gross margin percentage. An, of course, hol own the cost of labor an closely manage your epartmental expenses an overhea. We will summarize these an all of the key Metrics That Matter later in this chapter. After you have input your current values into the worksheet an have a baseline for your current COA metrics, you are reay to moel these metrics with a fully staffe an rampe sales territory. This is the purpose of the secon tab in the worksheet. It contains the cost factors for an up-an-running sales organization that is manage accoring to the sales an marketing best practices provie in this Playbook. Copyright 2018 KReain, LLC Page 11 of 22

12 A screen shot for a full territory is provie below. We will use hypothetical values to illustrate how you can monitor the impact of a scale an well-manage marketing sales operation on your COA metrics. In the first version of the worksheet, we moele a partial territory having only two (2) outsie sales reps. In this version, we have ae a full complement of sales territory personnel. Notice that we ae two aitional revenue proucers bringing the total outsie sales reps from a heacount of two to four reps. However, we also ae four non-revenue proucing employees to the territory (ISR, SE an marketing). At the same time, you will notice that our COA metrics improve. The Months to Breakeven actually roppe from 9.4 months to 8.6 months an the ratio of Total Profit to COA actually increase from 3.8 to 4.2. ai Why i this happen? How i we a cost an at the same time improve our COA metrics? First, let s look at what we i NOT change. We hel constant the average cost per lea an the conversion rates for lea qualification an conversion. That oesn t mean that you can t reuce your cost per lea or increase your conversion efficiencies. We simply chose to illustrate other improvements that might be a irect result of a better prospect targeting an qualifying proc. Those improvements result in higher sales volume an an increase in the average orer size. We increase the volume of customers acquire from 2.0 customers/rep/month to 2.5 customers. We also increase the average orer value from $1,500 to $2,000. These improvements can reasonably come from a better proc that helps reps to focus on the right eals combine with better sales management of their time an efforts to move eals through the pipeline. Copyright 2018 KReain, LLC Page 12 of 22

13 ai Notice that by focusing on these two improvements, we were able to generate more sales to support the growth of our sales organization while, at the same time, establishing a sales an marketing engine that is infinitively scalable. Imagine the improvements if we were also able to reuce our cost per lea or lea/customer conversion rates at the same time? Now imagine that we are concurrently managing own our cost of service elivery to improve the gross margin percentage. Then imagine the impact of those gross margin contributions on our COA metrics. There are many opportunities to improve efficiencies. As you will probably agree, measuring COA metrics is a powerful way to monitor an manage continuous improvements in the efficiency of your sales an marketing engine. You can measure your COA for your busin as a whole or for each one of your sales territories iniviually. COA provies a framework for you to preetermine the profitability of a stanar sales territory an allows you to invest in new sales territories with confience. The framework also provies a mechanism for you to compare the operational efficiency of one sales territory against another territory or against the baseline metrics of a stanar territory. Succ measurement base on COA is an ential part of the formula for builing a scalable xmsp busin. It helps you to establish a preictable sales moel an provies the means by which you can measure an manage its operational efficiency. As we have been saying throughout this Playbook, succful sales an marketing is not an art, it s really all about the science. Your Sales an Marketing Dashboar We have covere a number of metrics in a variety of areas relate to cost, efficiency an performance. Of course, metrics can be establishe for almost any aspect of your busin an you can measure them constantly, but there is a point of iminishing returns when it comes to metrics. There comes a point when there are simply too many numbers involve an you fin yourself looking at reports that on t help you run your busin. They become metrics for the sake of metrics. We on t want that an you on t want that. So we have efine the key metrics that represent the most critical elements of running a succful sales an marketing operation. We call them the Metrics That Matter. At this point in our iscussion, it is important for you to take stock of these key metrics an thoroughly unerstan how to use them on a regular basis. As the owner or management executive in charge of managing sales an marketing, the goal is for you to have the ingreients for a management ashboar that helps you rive your busin effectively an efficiently. You will want to monitor some of these key metrics weekly as you manage your sales reps on an iniviual basis. Some metrics will be more appropriate to measure on a monthly or quarterly basis as a rolle up measurement of the sales an marketing function. An some of them will be important to compare annually to track your busin against your annual growth targets. Copyright 2018 KReain, LLC Page 13 of 22

14 ai The Top Fifteen (15) Metrics That Matter In the pages that follow, we will review the top fifteen metrics that matter. These are the metrics that have the most impact on builing a preictable an profitable sales an marketing engine for your xmsp busin. You will recognize most of them from the worksheets covere in the five (5) chapters of the Playbook. Use these worksheets, an the key metrics they contain, on a regular basis to manage your sales an marketing engine. You can also buil these metrics into reports generate by your Customer Relationship Management (CRM) or Profional Services Automation (PSA) systems. Lea volume: This metric is use to track the quantity of leas that your marketing function must generate within a given timeframe to prouce the pipeline volume require to meet revenue targets. Lea volume can be a monthly, quarterly or annual objective but it shoul always be measure on a monthly basis to ensure a consistent flow of leas into the lea funnel an ultimately the opportunity pipeline. Lea qualification rate: If lea volume is your measure of quantity, then lea qualification rate is your measure of quality. These two metrics are complementary an shoul be measure at the same frequency. High lea volume is not helpful if the quality is low an, conversely, high lea quality is nice but you nee sufficient quantity to rive pipeline volume. A qualifie lea is a lea that meets the majority of your criteria for entering the sales pipeline. We recommen that you measure only the highest qualifie leas (qualification scores of 20 or higher). These are your A leas. Leas with a lower score are either B leas (scores between 15 an 20) or C leas (unqualifie leas). Leas that are isqualifie are simply iscare. Cost per lea: The first two key metrics provie concrete measurements of quality lea prouction. The cost per lea metric etermines the cost of proucing each qualifie lea. It is simply the total cost of the marketing programs use to generate all leas ivie by the number of qualifie leas. So, if a lea gen program cost $5,000 to execute an it prouce 25 qualifie leas, then your cost per lea is $200. All of the other leas generate by the program are not counte as they woul artificially reuce the cost per lea. We only care about the leas that have the ability to convert to the pipeline as opportunities an rive incremental revenue an new customer acquisition. Pipeline Deal Volume: As the first in a series of sales metrics, pipeline eal volume is your primary measure of the sales activity that has the potential to create revenue. You always want to have a soli unerstaning of how many eals are in your pipeline on a sales rep basis, territory basis an for the total sales force. To use a baseball analogy, eals in the pipeline, are your at-bats. The more at-bats you have, the more opportunity you will have to score runs in the ballgame. The sales function operates the same way. Copyright 2018 KReain, LLC Page 14 of 22

15 ai Pipeline Revenue Value: While pipeline eal volume is a measure of sales activity, you will also nee a metric to measure the potential revenue value for that activity. Pipeline revenue value is a measure of the factore an un-factore revenue value of your pipeline. Factore revenue is not a forecast; it provies an at-a-glance measure of the revenue value containe in your pipeline by factoring in the win probability base on the stage of each opportunity in the sales cycle. This prevents a false sense of security that can result from assuming that 10 eals each with a potential value of $2,000 is going to result in $20K of new revenue - even if they are all at the first stage of the sales cycle. You may only win 25% of those eals, so if you factor the value accoringly, you will have a more realistic view of the pipe. At the same time, you may want to compare the factore revenue with the un-factore value to have both perspectives of your pipeline. Opportunity Close Rate: Similar to the marketing metric for the lea qualification rate, the opportunity close rate is a conversion metric that tells you how many sales opportunities are close, or converte into new customers. This is your measure of sales efficiency an one that you will want to compare between iniviual sales reps an across sales territories. You can also use this metric to evaluate the type of eals that are close. For example, your close rate for one vertical market segment might be higher than another segment. The magnitue of the eal can also be useful to compare to close rate. If you are succful at closing small, short cycle eals but unsuccful at closing large eals with a long sales cycle, then you have an issue to ar or a ecision to make either figure out how to win the major eals or stop chasing them. Average Customer MRC: This metric is important for projecting the growth of your xmsp busin. It is the average monthly sales value of a new customer orer. Increasing the average customer MRC is an important goal an one that is often ientifie by xmsps. If your average MRC is low, say $500 to $1,000, then you must run a high volume busin with a very low COA in orer to scale profitably. As you increase your average MRC you will accelerate your growth an profitability ramatically. A low average MRC can also be an inication of a problem selling the value of your xmsp service or bunling together more of your services to upsell the total eal value. It can also be an inication that you are competing with another xmsp that is able to win those larger eals at your expense. Monitor your average MRC an constantly look for ways to maximize its value Customer Acquisition Rate: This metric is sometimes referre to as eal velocity. It is a measure of how many customers you acquire within a span of time. Put another way, it is the rate that your sales staff can close eals in the pipeline an a new customers to your busin. This is a key metric for tracking the scalability of your busin. If your customer acquisition rate is 2 customers/rep/month an your average MRC is $2,000, then with two reps you can grow your busin by $8k per month in recurring revenue uring the first Copyright 2018 KReain, LLC Page 15 of 22

16 ai year. As a result, your busin will realize $1.15 million in annual revenue from those eals uring the secon year after they all prouce a full 12 months of recurring revenue. Customer acquisition rate is a key metric use to plot a trajectory to meeting long term growth targets after one year, three years, five years, etc. Average Revenue per Rep: This metric represents the monthly recurring an annualize revenue that your sales reps generate for your busin. It is an important metric for setting your growth targets an establishing resource requirements. It is also important for efining performance goals in your sales compensation plans. If your sales force oes not generate sufficient revenue per rep, then one of two unesirable outcomes will occur: (1) your COA will be too high relative to the value of new customers acquire or (2) your busin will scale at a low rate of growth. Your average revenue per rep shoul result in COA metrics that fall in the ranges outline in this chapter 6 to 12 months to breakeven an a ratio of COA to lifetime value (gross profit) of 3x or more. Cost of Service Delivery: To maximize total gross margin, you must have an accurate measurement of your cost of service elivery. This metric inclues all of the cost elements require to eliver the c an manage services represente by your MRC. That means all of the labor, facilities an overhea costs as well as any outsource or white label services that are inclue with your solution. These costs were etaile in Chapter 2 an also in the Pricing an Packaging Worksheet. You can measure your cost of service elivery as an aggregate cost for all c an manage services or separately for iniviual IT Solutions (service bunles) that have been price separately with their own MRC. Gross Margin Percentage: Gross margin percentage represents the total gross profit generate by your newly acquire customers after subtracting the total cost of service from total revenue. Measure your gross margin percentage for all services across all customers to get an aggregate value. Then measure it for each IT solution that is elivere to your targete customer segments to etermine your most profitable customers. Calculate your gross margin percentage on both a monthly an an annualize basis. That way you can see trens that occur uring the year to unerstan if your gross margin is trening up or own. You can also track the blene gross margin for your busin on an annual basis. Copyright 2018 KReain, LLC Page 16 of 22

17 ai Cost of Acquisition: As etaile in this chapter, your cost of acquisition is the total marketing an sales investment that is require to acquire new customers for your busin. It is a key metric for managing the efficiency of your sales an marketing function an it is also a vehicle to maximize the value of your net operating profits. Two COA metrics are important to measure: (1) the months require to breakeven (payback) the COA investment with gross margin ollars an (2) the ratio of life time customer value (profitability) to the COA investment. The first COA metric shoul be l than 12 months an the secon COA metric shoul be a ratio of 3:1 or greater. Average Contract Term: The average contract term of the customers you acquire is use to compute their lifetime value in terms of revenue an gross profits. Longer contract terms translate to a higher lifetime value while shorter contract terms will reflect a lower lifetime value. If you are like most xmsp busines, you probably offer several options for contract terms ranging from 12 months to 60 months - with 36 an 48 month agreements being most common. This metric represents the average term for all of your agreements an it is an important metric for representing the value of your busin. If you can maintain a high average contract term, it signals to future investors an potential acquirers that you have built a very soli an stable busin with a customer base that is locke own by long term contracts. However, this metric is not the sole inicator of customer retention nor is it the most accurate measure of lifetime customer value. After all, we expect a very high percentage of your customers to renew their agreements. An there will probably be some small percentage of your customers who, for whatever reason, o not complete a full contract term. For this reason, we have ientifie a secon metric to provie a more complete assment of customer retention. That metric is the customer churn rate an it is escribe below. Average Contract Value: A metric that closely parallels the average contract term is the average contract value. This metric is the average customer MRC multiplie by the average contract term. For example, if your average MRC is $2,000 an your average contract term is 36 months, then your average contract value is $2,000 x 36 = $72,000. In the calculation of COA metrics, we take your average contract value an multiply it by your gross margin percentage to compute the average lifetime value of a customer. Then we compare the lifetime value to the cost of acquiring that customer. This is also a metric that investors an acquirers look at when assing your busin an assigning a valuation for its worth. If your busin combines high average contract value with high gross margin prouction, your valuation will reflect this very strong financial position. Customer Churn Rate: As state above, average contract value is a stanar metric that allows us to compute the COA metrics that gauge sales an marketing efficiency an position the strength an stability of the busin to potential investors an acquirers. Copyright 2018 KReain, LLC Page 17 of 22

18 ai However, a separate an more accurate assment of your customer retention is to measure your customer churn rate. Customer churn is the number of customers that either cancel their service or are terminate by the busin within a fixe perio of time. The churn rate is the percentage of lost customers to total customers an is often expre as both a monthly an an annual value. If your monthly churn rates are l than 1%, you will be consiere to have a very loyal an satisfie customer base. This metric, combine with a strong contract renewal rate can be use to augment assment of lifetime customer value, which only consiers a single contract term. Builing Reports That Matter Now that you unerstan the top fifteen metrics that matter, your next step will be to integrate them into a aily, weekly, monthly an yearly management an review proc. You will want to look at some of these metrics weekly (perhaps even aily). Your sales pipeline reports are a goo example. Changes in pipeline status can happen at any time an the availability of your reps to review the status of their iniviual accounts can be a moving target. So you will want to have acc to the most current pipeline ata at all times. Metrics That Matter Weekly Monthly Qtr/Annually Lea Volume Lea Qualification Rate Cost per Lea Pipeline Deal Volume Pipeline Revenue Value Opportunity Close Rate Average Customer MRC Customer Acquisition Rate Average Revenue per Rep Cost of Service Delivery Gross Margin Percentage Cost of Acquisition Average Contract Term Average Contract Value Customer Churn Rate Copyright 2018 KReain, LLC Page 18 of 22

19 ai Other metrics are more appropriate to review on a monthly or annual basis an most likely with a wier auience, like your executive management team or your boar of irectors. We have create the table above to provie our recommenations for translating the Metrics That Matter into Reports That Matter. The table inicates which metrics you may want to buil into reports that are generate on a weekly, monthly or annual basis. Integrating some or all of these reports into your management proc is ential to achieving sales an marketing succ. Once you have an unerstaning of the concepts behin these metrics an how to apply them to your busin, on t stop there. Take the next step an use them. Take avantage of the worksheets in this Playbook for tracking as many of these metrics as possible. Yes, we create them as an instructional ai for teaching sales an marketing best practices. However, we also esigne them to provie you with interim reports - a brige to builing your own automate systems for tracking these critical metrics within your own CRM or PSA. In fact, starting with a manual proc is the best way to efine the metrics, methoologies an management reports that matter most to you an your busin. We have aie the manual proc with our worksheets. Use them an refine the proc an busin logic before builing a fully automate system. Then automate the proc by customizing your existing internal CRM/PSA systems. Weekly Reports That Matter The weekly metrics an reports that you shoul focus on can be base on the lea funnel tracking an sales pipeline worksheets. Simply upate these worksheets as escribe at the beginning of this chapter an you will be on your way to tracking all of the key metrics for your marketing an sales function. Upate the lea funnel tracking report whenever you start or complete a lea generation campaign. It has inputs for you to provie values for lea volume an the number of qualifie leas (base on the qualification score). The worksheet will tell you the lea qualification rate for each of your programs. It also has space for you to inicate how many customers were close from each campaign an it will provie a program ROI base on cost versus revenue. Upate the sales pipeline tracking worksheet whenever you get status upates from your sales reps or better yet, make each rep responsible for their own upates an have them sent to you once or twice a week. The upate worksheet will act as your aily ashboar an your weekly pipeline report until you ecie to take the necary steps to integrate the worksheet into your CRM/PSA to fully automate the proc. The worksheet provies a number of key metrics that are ential to succfully manage the sales proc incluing the eal volume, the factore or unfactore revenue value an the average customer MRC. It provies all of these metrics by sales rep an totals these values for all sales reps. Copyright 2018 KReain, LLC Page 19 of 22

20 ai Monthly Reports That Matter Once you are regularly upating your lea funnel an pipeline tracking worksheets, you can review the status of your sales an marketing operation on a monthly basis. With a 30-ay view, you will have more ata for analyzing lea generation results an pipeline opportunities. It will be valuable to take a snapshot of these metrics (lea volume, conversion rates an eals close) to compare them month to month. Other metrics that will be useful to compare on a monthly basis inclue the average cost per lea, the eal size an customer acquisition rate, the average revenue per rep an the customer close ratio by rep. Each month you can ass how each sales rep is oing in meeting their targets an how the sale force as a whole is performing against your company growth targets. Other metrics that are valuable to track an review on a monthly basis with the executive team inclue the cost of service elivery an your gross margins. Are your costs staying within their target range? If so, are your margins on target as well, or has there been heavy iscounting from the sales team to meet their sales goals with a negative impact on margin performance? Finally, calculate your COA metrics base on the previous month s operating ata. You will have monthly ata for each of the key metrics require on the Cost of Customer Acquisition Worksheet. An this will provie you with another important snapshot to compare month to month. How are your COA metrics trening? Are they improving? If not, why not? Which of your key metrics are own? Is pipeline eal volume own? If so, you may nee aitional lea generation programs. Is average MRC own? If so, your reps may be chasing smaller eals. Are your margins own? If so, you will want to unerstan why costs have gone up or why your average selling price has gone own. Use these monthly snapshots to ientify key trens either positive or negative an take the necary steps to repeat the positive trens an turn the negative trens aroun. Copyright 2018 KReain, LLC Page 20 of 22

21 ai Quarterly/Annual Reports That Matter Your annual reports shoul enable a high level strategic assment of how well your busin is scaling quarter to quarter an year to year. If you have been consistently taking monthly snapshots of your sales an marketing performance, then preparing for an annual review will be a relatively straight forwar proc. Like any goo analysis of operating results, you will want to compare your sales an marketing performance metrics on a yearover-year basis as well as unerstan the sequential, month-to-month trens that have taken place uring the year. Has there been continuous improvement in the conversion of leas to opportunities to customers? Has your cost per lea hel steay or gone own? Has your average customer value hel steay or has it increase? Are all of your reps consistently meeting their goals for eal volume an revenue per rep? Is your busin seasonal or is it constant throughout the year? This ata will be ential for your planning proc as you set targets for the coming fiscal year. You will want to measure some aitional metrics only on annual basis. For example, measure your average contract term an average contract value. Are they where you expect them to be? Measure your customer churn rate on both a monthly an an annual basis. Is it more or l than 1% per month? If it is more, fin out why. Do you have customer loyalty issues an are they associate with either service quality or functionality? Are there pricing issues or competitive prures that are causing customer efection? Have you terminate customers for lack of payment or poor profitability? Use these metrics as part of an annual check-up of your busin an then take any corrective measures that will help to improve to health of your busin an its prospects for a healthy future. Copyright 2018 KReain, LLC Page 21 of 22