Justin Roff-Marsh argues that since salespeople have no direct influence over delivery, pricing, or product performance, it makes no sense for them to be responsible for that money.
If your sales department is solely responsible for revenue, your company’s growth will be hampered. If you want your company to develop, revenue should be the responsibility of operations, but new business should be the sole responsibility of sales.
Let’s deconstruct the notion that revenue should be the responsibility of operations first.
Operations are in charge of revenue.
If your company is typical, existing clients will likely account for more than 70% of your sales in any given year. The transactions that make up this 70% can be thought of as yours-to-lose. You don’t have to win these deals; all you have to do is process them well.
The strength of your existing clients’ relationships is almost likely a reflection of how well you handle these lose-lose situations. We know this because (in descending order): poor on-time delivery performance, uncompetitive price, and poor product performance are the most typical reasons why consumers defect.
It’s not a reach to argue that operations should be in charge of revenue — and, by extension, the transactions that generate income. Because your sales department has no direct impact on-time delivery, pricing, or product performance, it makes no sense for it to be in charge of revenue.
The Sales Department’s Role in Growth
If revenue becomes operations’ duty, operations will also be responsible for a variety of functions that have previously been handled by sales. To mention a few, there’s solution design, quotation, order processing, and issue resolution.
So, what should sales be in charge of?
Sales should be in charge of pursuing just yours-to-win sales. To put it another way, your salespeople should concentrate on capturing business that is now being given to your competitors. That’s all they should do if they’re serious about growing!
To be more explicit, salespeople should be in charge of earning new client transactions as well as existing customer transactions in new product categories. They should not be involved in any deals where you stand to lose money.
This Will Angry Salespeople!
This line of reasoning is unlikely to please your salespeople, as you might expect. They’ll claim, without evidence, that your yours-to-lose money is a result of the personal relationships they’ve built with individuals in your customers’ firms.
Count your salespeople are almost definitely wrong on this, but they do have reason to be concerned. They recognize that they are currently executing a huge number of vital customer support jobs and that abruptly shifting their emphasis elsewhere would have disastrous consequences for the firm.
You have two options here:
Before focussing your salespeople on growth, you can strengthen your customer service and engineering teams.
You may turn your existing salespeople into customer service specialists and start from fresh with a new sales department.
(For the record, at Ballistix, we usually do the latter.)
The New Business Economics
There are two sorts of revenue in your company. And because these two sorts of income are so dissimilar, they should never be combined – unless once a year, when you file your taxes with the IRS.
I’m referring to revenue generated by yours-to-lose transactions versus revenues generated by yours-to-win transactions.
The number at the bottom of the invoice represents the value of a yours-to-lose transaction. A yours-to-win deal, on the other hand, is worth the annuity linked with the initial invoice.
Consider it this way: When a customer makes their first purchase from you, there’s a strong possibility they’ll come back for a second and third. A customer, in economic terms, is essentially a future stream of money (an annuity). And the net present value (NPV) of that future payment stream represents the customer’s worth.
I’ve already argued that operations should be in charge of revenues. As a result, sales should be held accountable for the value of the annuities they obtain. This means you should agree on a formula to account for net present value when grossing up first-time transactions. You should also refer to the result of your formula with a phrase other than revenue (new business dollars, perhaps?).
If you must pay commission to salespeople — which I strongly discourage — they should be paid a modest proportion of new business dollars and no revenue.
It’s vital to keep these two metrics distinct if you’re serious about growth. To add them up is to treat them as if they were all the same when they aren’t. The total invoice value of new business transactions in most firms is less than the average variance in total repeat transactions. To put it another way, unless you report on new business dollars separately, your growth signal will be lost in the shuffle.