In understanding where your company stands, sales may seem to be an obvious indicator. More sales means you are doing great, right? Well… maybe. A solid grasp of where your sales are can tell you a lot about your company, but it requires a deeper dive than just looking at volume.
As the business leader, your most fundamental role is to build the value of the business, and value is increased in three areas as it relates to sales: new, renewal, and growth. At Arc, we divide revenue types into these three categories, and often recommend further tracking within each type by major customer category (such as large v. small, public v. private, and so on). This allows you to better see how effective sales channels are in each category, compare them to your plan, and identify areas may need investment or modification.
So what exactly do we mean by these categories?
- New means accounts (district-level or other entities) that are purchasing for the first time. Measure the number of deals, total dollar volume, and average deal size for each category.
- Renewal covers current customers renewing a contract. Here, you should measure percent of dollar volume AND number of deals against the potential of both numbers. It’s completely fine to renew only 75 percent of your clients if they account for 90 percent of your revenue, as this shows your most valuable customers are renewing. The reverse ratio, however, would be cause for concern. In looking at potential, start with 100 percent of all clients, then deduct any that have pre-paid. What’s left is your universe. As investors, we aren’t looking for 100 percent renewal – we understand that sites close, personnel change, and things happen – but we do want to see that you know what happened to the ones that are lost. You can keep track of renewals in a simple chart like this:
- Potential can also be tracked by account – by examining what percentage of sites are purchasing, and how much. For example, if an account has 50 sites that could each purchase $20k for a total potential of $1 million, and 10 sites are maxed out at $20k with another 10 purchasing at a $10k level, then you have reached 30 percent of potential. Accounts that fall in the 10 to 80 percent range of their potential are usually worthy of concentrated sales efforts.Growth covers current customers who are increasing their commitments, either through new sites or new product purchases. In addition to measuring total dollar volume and number of deals, also look at the potential for further growth, both in number of customers that grew, and in the average amount that accounts grew over the previous years. For example, if 20 of your 50 customers grew from $20k to $22k annually, that would be a 40% count and 10% average size increase.
By delving into your numbers a little further and categorizing them intelligently, looking at your sales offers you significant insight into the health of your business. If you’re looking for more ways to understand where you’re at, contact Arc to see how we can help.