Increasing Your ROSI by Understanding How You Grow

You looked in the Journal and saw that business is booming and companies are posting record profits. Or… is it simply that companies have been laying off large numbers of people amid their hangover from paying too much during the heady “war for talent”? That growth was so 2022… or is it still the trend in 2023? And which way are we going now?

Problem is, you may not be experiencing the growth part of those headlines. Why? Maybe you’ve been doing the same things you’ve always done, along with adding a pricier headcount to keep up with the market. But you haven’t seen the results. Why? It could be that what you’ve done in the past won’t get you where you need to grow.

Let’s explore that. As part of our exploration of improving your ROSI (Return on Sales Investment), in this month’s Rethink Sales Newsletter, I’d like to give you a tool you can use to better understand why you’re not growing.

The Balance Between Market Opportunity and Sales Capacity

In the spirit of increasing your Return on Sales Investment and productivity, let's take a look at one component of sales capacity: understanding how we grow. It's important to understand that how we grow depends on a balance of market opportunity that is addressable and sales capacity to capture that market opportunity.

So, if you are only looking at market opportunity, and saying something like “if we can capture just 1% more of the market…” and you’re not strengthening your sales capacity or doing the same things you’ve always done with your sales capacity, you are only seeing half of the equation. We’ll look at market opportunity in an upcoming newsletter, but for now, let’s look at sales capacity and why what continuing to do what you’ve always done with sales capacity may not get you to your goals.

At its essence, sales capacity is the ability of the organization to create revenue to attain its goals. A foundational truth is that revenue can come through only three sources: customer revenue retention (keeping the revenue we have), customer revenue penetration (growing our current customers), and new customer acquisition (winning new customers). That brings a few questions to mind:

• Do you know how you got to your current revenue level by adding up these three pieces?
• Do you know what your strategy is for growing these three pieces?
• Do you know how your organization and incentives align to these three pieces?
• Do you know what your ROSI (Return on Sales Investment) is for these three pieces and your best allocation to improve your overall ROSI?

Three Components of Growth

I want to take a look at each one of these because they’re going to be foundational for how we consider increasing capacity, which, in turn, will increase our Return on Sales Investment.

Customer Revenue Retention is simply about protecting our current customer revenue - it's holding on to what we already have. And it's impossible to retain more than what you currently have. This means that customer revenue retention from year one to year two can only reach a maximum of 100%. That sounds pretty basic. But keep in mind, the average company retains only about 82% of its current customer revenue each year. So to grow by 15%, for example, a company with 18% churn— meaning they're only keeping 82% of what they have— has to grow about 40% to make up for that churn. That's a Hurculean feat for the sales organization that ends up looking like only moderate growth because of the customer revenue churn leaking out of the bottom of their growth engine.

When I bring up retention, sometimes I’ll get a simplified answer from a CRO like, “We have tremendous customer retention, in fact, we keep about 95% of our customers year-over-year.” While the CRO makes this statement numerous times a year, she may not realize that they’re leaking lost revenue from many of those customers who may be shifting business to competitors, while they are still technically customers of the company. To avoid this mistake, look at the revenue within the customer.

It may not be the glamorous side of selling, but retaining revenue is playing good defense, and it can win the game for your organization. The most important thing to start with is determining how we hold on to what we currently have. Here are a few questions to ask about Customer Revenue Retention to increase your ROSI:

• What is our current customer revenue retention and revenue churn year-over-year?
• How has this trended historically?
• Is the revenue we’re churning (losing) more or less profitable than the revenue we’re adding from customer revenue penetration or new customer acquisition?
• What portion of our revenue churn is controllable by the sales organization (e.g., sales or service issues), controllable by the company (e.g., delivery or customer experience issues), or uncontrollable (e.g., market shifts, acquisitions)?
• What actions can we take to stem controllable churn?
• Drilling down below the company level, what does our customer revenue retention and churn look like by region and by rep? Do we have chronic issues with some regions or reps?
• What portion of our revenue should we retain from year-to-year?
• What is our plan to get there?

Customer Revenue Penetration comes from selling more to current customers. There are two basic types of penetration: buyer penetration and product penetration. Buyer penetration can come from increasing the number of buying points in the account, like new users or new locations, or from current buying points increasing their use of products they purchase from us. For example, if we sell our products to the headquarters location of the customer, buyer penetration could come from users at the headquarters location, either increasing their usage, or it could come from the company using our products at additional branch locations. In contrast, product penetration or selling additional products to the same buyers and the account can come from selling extensions, or add-ons of what they're already buying now. Or it could also come from selling new product lines to those buyers. For example, if the buyers at the headquarters locations of our customers bought licenses to our supply chain management system, product penetration could come from them purchasing our accounting system which might complement it. Here are a few questions to ask about Customer Revenue Penetration to increase your ROSI:

• What is our current customer revenue penetration rate year-over-year?
• How has this trended historically?
• Is penetration revenue more or less profitable than revenue we’ve churned from current customers?
• Looking at our top penetrated accounts, sorted in descending order by dollar and percentage size of penetration, how did we grow those accounts and what practices did we implement that we could apply to similar accounts?
• Drilling down below the company level, what does our customer revenue penetration look like by region and by rep? Do we have patterns of success with some regions or reps?
• What portion of our revenue should we grow with customer revenue penetration year-to-year?
• What is our plan to get there?

New Customer Acquisition is winning new customers that we have not worked with before. New customer revenue can come from competitive steals, or from acquiring a new customer in a new market, with something they haven't purchased before. For example, for a competitive steal, we may be working with new customer to convert them to our supply chain management system from a competitor. A new market sale could be addressing a need in an industry that hasn't been addressed before. New customer acquisition is usually defined as new logos that the company hasn’t done business with before or in the last three years, as an example. Here are a few questions to ask about New Customer Acquisition to increase your ROSI:

• What is our new customer acquisition rate year-over-year?
• How has this trended historically?
• Is new customer acquisition revenue more or less profitable than our current customer revenue?
• Looking at our top acquired accounts, sorted in descending order by dollar and percentage size of growth, how did we win those accounts and what practices did we implement that we could apply to similar prospects?
• Drilling down below the company level, what does our new customer acquisition look like by region and by rep? Do we have patterns of success with some regions or reps?
• Do we have clearly defined new customer acquisition roles, like hunters or Dobermans, or do we expect account managers, tasked with customer revenue retention and customer revenue penetration, to also win new customers?
• What portion of our revenue should we grow with new customer acquisition year-to-year?
• What is our plan to get there?

The first step in building your sales capacity is to understand how you grew and charting your plan to grow by breaking down the organization's historical growth into these three pieces. Ask the questions above and understand what you might change to improve your customer revenue retention, customer revenue penetration, and new customer acquisition performance. Identify what portion of your goal is going to come from retention, penetration, and new customer acquisition. This analysis and questions about each component will give you a lot of valuable information to improve your sales capacity and your Return on Sales Investment. Apply this thinking to your sales capacity and connect with me on LinkedIn and let me know how it works for you.

For a simple explanation of how to calculate your customer revenue retention, customer revenue penetration, and new customer acquisition, check out chapter 6 of my book, Quotas! available on Amazon.

Check out SalesGlobe’s insights page for more resources. Also be sure to catch up on the Freative Friday episodes of the Rethink Sales Podcast – where I talk about all things ROSI!

-Mark