Understanding Cost of Sale

Posted by eLaunchers on Mar 15, 2018 4:25:00 PM


shutterstock_333006347.jpgWait. Cost of Sale? Don’t sales make us money? How can it cost us? Coming from the hypothesis that God does not make direct deposits, the fact that they gold rush is over, bitcoin possibly but it’s up in the air, and stealing is unacceptable -- getting money effortlessly is nearly impossible. It takes effort to turn prospects into long-term customers. You must focus on generating awareness, establishing trust, building a relationship, and creating a conducive environment where people are ready to buy from you.

Cost of sale is the actual cost of transition from the top of the funnel through the middle of the funnel and then getting those prospects all the way to the tip of the funnel without them slipping out through any cracks. Transactions will not magically appear. They have to be triggered. Some are triggered by your customer but most have to be triggered by you. When talking about life insurance and annuity, a friend of mine jokingly said annuities are not bought and they’re sold. While that was funny the reality is that many things are not bought and they are sold.

The whole ritual of selling itself has a cost. There are monetary costs, emotional costs, time costs, and opportunity costs. Not every led will turn into an opportunity, not every opportunity will turn into a deal, and not every deal with turn into a multi-transactional relationship. It is a moving target and you need motivated, mathematically savvy, hardworking, and persistent salespeople working the leads to turn them into deals. That costs money.

It must all be choreographed, built-out, funded and it must be worked on otherwise you will only make the money that your customers triggered. If you hold other variables constant, the success of your conversion theater will determine your cost of sale. In reality, most people measure cost of sale in terms of a percentile of closed deals. How much money did I make? 1 million dollars. How much did I give to the sales people? 5%. How much to my conversion theater? 5%. Therefore, my cost of sale is 10%. But, that is only half the system. The bigger math must be compounded in what my friend Russel Martino calls fortune not made. At eLaunchers, we have a program called “Diamonds in your Database” where we harvest unconverted leads and lost opportunities. We go after them and see if we can get you a second chance.

In your cost of sale, there is your fixed cost and variable cost. Fixed costs can be the funnels and the tripwires. The variable costs are where you are giving commision to the sales team for the leads they generate. Every salesperson wants new leads and new brochures. Marketing is under a lot of pressure to generate a steady stream of leads for the salespeople and bring traffic to your data receptacles. Most sales people will close what they easily can without breaking a sweat and the rest are conveniently sweeped into the trashcan called unconverted leads.

 If you make a conscious effort to reach out to your unconverted leads and lost opportunities, you have the chance to tap into potential revenue that was hiding in plain sight. For a dentist, that would be people who made an appointment but didn’t show up. For a service provider, it could be someone who listens to a pitch but doesn’t buy. Of course, in some cases, the leads are gone on the spot. At a car dealership, for example, if a person walks off your lot without a car, then they are most likely lost to you.

I had a discussion once with a client who ran a weight loss business. He told me that he shows all prospective clients video about how horrible it is to have fat around your heart or waist. The video essentially makes you feel terrible about living the way you have been and makes you excited for the next step in your life. My client claimed that if prospective clients could watch that video and not buy then it was over; they would never buy in his mind. I disagreed.

I countered that if three months from now, my doctor wanted to put me on insulin but gave me one more chance to change my weight myself, then I would be scrambling for his number. But, if he does not believe in follow-up then his number is lost to me and I will find another weight loss company. Spending so much money on the top of your funnel will limit you to only doing business with a small fraction of the leads you harvest. Unfortunately, he didn’t see it my way. He fought me on my core prescription that you should be mining for diamonds in your own database.

On the other side of the spectrum is Dr. Charlie Martin. When I told him about my diamonds program, he thought that it was something everyone should have for their company. Not only did he buy it, but he also introduced me to dentists in his coaching project who also bought it.

One day I asked him, “Am I really that good of a salesman or were you just that impressed with me?”

 “Neither Parthiv,” Dr. Martin said, “No, you are not an amazing salesman and if you were, I probably would have thrown you out. Yes, I am impressed because you work hard and are good at what you do. But the real selling point for me was that you came to me with a pre-packaged system that brings me exactly what I wished I had in my office. Parthiv, you have an easy job in my office. You are going after people who already know me, like me, and trust me but for some reason did not buy. The appeal was that if you can get me a second date with them, then I can offer them a deal to get them past the door.”

The moral here is that if you have a good follow up system in place, your cost of sale will go down because you will sell more for the amount of money that you have already invested in your sales theater.

Everyone should have a retention and ascension strategy in their business because a buyer is a buyer no matter what. There is an excellent book that comes to mind which talks about persistence and then results yet is also very easy to understand. It shows how to get magnificent results with every up-sale and down-sale. This book is Green Eggs and Ham by Dr. Seuss. The sales person here is selling quite the oddball product -- who eats green eggs. But, he keeps pitching and selling, and selling here and there and everywhere. Eventually, the buyer buys and likes it. That was his trip wire; it was the first transaction that broke the dam and let the floodgates spill open. The buyer now buys here, there, and everywhere.

Imagine what would have happened if the seller was not tenacious. Not every story is as miraculous as the princess and the frog. Some transactions are meant to happen -- the buyer meets the seller and it’s an automatic match. But most transactions require work an effort.

Growing your business is something that you must mathematically calculate. You will lose some customers through attrition, difference of opinion, and competition. Until you replace what you lost, you can't grow. Your growth budget must take into account the churn and then sell to replace AND grow. If you are at a million dollars in sales and you want to make it to 1.5 million dollars, then the logical step would be to increase sales by $500,000. But, if you are also predicting a loss of $300,000, then you must have a sales target of $800,000 in new business.

In order to get all of that new business, you will need a strong sales theater and a capable marketing theater. That is what I call compensating for churn. Most people don't think about it until it happens. If you can anticipate churn and budget to compensate for it, you will be prepared before the loss happens. Of course, this does not mean that you have to helplessly watch churn happen. By all means, fight it. Do what it takes to keep the customer one more day, month, or year.

If they won't buy anything, don't kick them out. Give them “alumni privileges.” Express your gratitude for their business. A happy “graduate” from your business is a potential returning customer or a means of getting excellent referrals. Any money you can save from death row will add to your growth pool.

You have three friends in marketing: arts (optics and visuals), linguistics (content, copy, salesletters), and math. Art aims to please. Linguistics aims to persuade. And math aims to prevail. Keep track of cost of sale. Keep track of your pipeline. Most importantly, keep track of the fortune not made. If you need a little help, is one of my funnels. I have five videos, go watch them. There are some funny stories but the last video in there is a formulaic approach to a fail-safe follow-up. It is about using the phone to stay in touch with people who are not ready to buy today. That is where rubber truly meets the road. 

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Topics: Blog, profit, finance, fiscal responsibility

 parthiv shah


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