How to Focus Your Sales Team on the Right Effectiveness Metrics

1. Revenues are often disconnected from profit and your firm’s cost of capital. Sales growth is good for firms that earn positive returns on invested capital, neutral for a firm with returns equal to its cost of capital, and bad for firms with returns below their cost of capital. After the financial crisis of 2008, CFOs increasingly know this and sales leaders should as well.

“Cost effectiveness is a complex relationship between selling costs, revenues, sales margins and customers acquired.”

2. It’s important to distinguish between efficiency (doing things right) and effectiveness (doing the right things) in measuring sales. Depending on the strategy, some salesforces require efficiency (usually cost-efficiency) measures, while others require effectiveness metrics. Probably the most commonly used efficiency metric is the sales expense-to-revenue ratio. But cost effectiveness is a more complex relationship between selling costs, revenues, sales margins and customers acquired.

3. Performance metrics should change as the market or your strategy changes so that, in their reviews, sales managers are motivating the right things for today, not yesterday. In subscription-based businesses like software and many consumer web services, for example, key metrics early in the life cycle are about customer acquisition. But as the market matures, more relevant metrics are about account management, reducing churn, and up-selling or cross-selling additional services.

4. Knowing the difference between price and cost-to-serve. Profit is the difference between the price a customer pays the seller and the seller’s actual cost to serve that customer. That cost-to-serve can vary dramatically. Some of your customers require more sales calls than others; some buy in a few, big, production-efficient order quantities, while others may buy more in overall volume but with many just-in-time custom orders that affect setup time, delivery logistics, post-sale service, and other elements of cost-to-serve.

Frank V. Cespedes
Frank V. Cespedes teaches at Harvard Business School and is the author of Aligning Strategy and Sales: The Choices, Systems, and Behaviors that Drive Effective Selling (Harvard Business Review Press), from which this article is adapted.