Client acquisition cost is the cost per new client.

When we calculate this figure, we only take into account the variable costs associated with the promotional campaign that acquired each particular client relationship.

With a promotional campaign, variable costs are typically media costs. We do not factor in the fixed costs associated with that promotional campaign (the cost of creating the campaign). Nor do we include the fixed costs associated with the rest of the sales process (e.g. the cost of managing the relationship with the potential client).

We ignore fixed costs because these are the cost of operating your sales process, rather than process inputs.

Our client acquisition cost is most useful for monitoring the performance of our relationship acquisition campaigns. It’s important to remember that, unless you have a very short sales cycle, client acquisition cost tends to be longer-term performance indicator. (The term sales cycle refers to the average time span between the acquisition of a relationship and the consummation of a sale.) We’ll uncover a short-term indicator when we examine the relationship acquisition step of the sales process.

This is actual number of forward-booked appointment slots

This is the percentage of the lifetime value of a client relationship (gross profit) are you prepared to invest to acquire that relationship in the first instance. When determining this figure, be sure to consider the lifetime- rather than the transactional-value of a typical client.

For example, if the lifetime value (GP) of a typical client is $4,000, you may be prepared to spend (say) $1,000 to acquire such a client. In this case, you will be best served to manage your campaign such that your ‘average cost per sale’ is as close to $1,000 as possible. Spending more than this will reduce the value of the clients the campaign attracts. Spending less will fail to attract the optimum number of clients.

This is your total promotional expenditure over a given time divided by total number of sales. This figure should be compared against your allowable acquisition cost.

An appointment is a meeting between a client (or potential client) and a salesperson, performed with the express purpose of progressing a sales opportunity.

Because the appointment is the sales process’s unit of constraint, we are very particular about what is (and what isn’t) an appointment.

Accordingly, any client meeting conducted without a clear and obvious objective does not qualify for the term appointment. (This includes account-management visits with no fixed agenda.)

As mentioned previously (see sales opportunity), an appointment pre-supposes a sales opportunity; and a sales opportunity pre-supposes an objective, a value and a strategy.

There are two types of appointments.

Initial: This is the first appointment conducted by a salesperson with an opportunity.

Subsequent: These are the additional appointments conducted to win, lose or abandon an opportunity.

This is the number of estimated appointments, from the current opportunities, that have already been consumed by past activity.

Formula:
Appointment slots consumed = total number of appointments done for all current opportunities

This is the number of appointment slots you can expect to fill based on the total number of current opportunities open.

Formula:
Appointment slots estimated = Appointment slots per opportunity x current opportunities
3 x 197 = 591 estimated slots remaining.

Activity by Source report is a worksheet that enables you to determine which promotional campaigns are commercially viable, and then rank the viable campaigns in other of their cost-effectiveness.

The Activity by Source report works by comparing your acquisition cost (the amount of money you spend on promotion to generate a sale), with your allowable acquisition cost (the amount you’re prepared to spend).

Account Management is the function of:

1. Extending service utilisation (increasing share-of-customer).
2. Procuring repeat orders.

This is the number of appointments slots that are consumed by an average opportunity.

Formula:
Average appointments per opportunity = Total appointment slots consumed / total closed opportunities 62 / 234 = 0.26 (average apps slots per opportunity)

Tip: There are a few hidden columns called appointment slots done. If they need to know total appointment slots done you can unhide these columns and get total slot count. (Hema can help.)

In process inventory, time or budget allowance used to protect scheduled throughput, delivery dates, or cost estimates on a production process or project.

In a sales process, it is the number of opportunities queued in front of the Sales Coordinator for appointment scheduling.

In process inventory, time or budget allowance used to protect scheduled throughput, delivery dates, or cost estimates on a production process or project.

In a sales process, it is the number of opportunities queued in front of the Sales Coordinator for appointment scheduling.

Conversion rate is the percentage of sales opportunities that convert into sales.

A constraint is the system bottleneck that is constraining the output of the process of a whole. For example: If one machine can stamp just 20 housings an hour, your manufacturing process can produce no more than 20 complete units an hour.

Eli Goldratt defines a Constraint as, ‘Anything that limits a system from achieving higher performance versus its goal.

Critical chain

Critical Chain Project Management (CCPM) is a project management method derived from a management methodology called the Theory of Constraints (TOC). Critical Chain combines insights into both the nature of uncertainty and human behaviour to result in significant improvements in project performance.

This is the actual number of appointments currently open in all stages of the Opportunity Register.

This is the total number of available appointment slots in a typical week.

Formula:
Default capacity = Number of appointment slots per day x number of days worked per week.
8 x 5 = 40 available appointment slots

Tip: One slot equals 30 minutes of time.

Applications used by large organizations to manage inventory, resources, and business processes across departments in the enterprise. ERP is a successor to MRP that brings into play all the business functions of an enterprise. The next generation after ERP is the Virtual Enterprise.

This is an estimate of the total number of appointment slots that can be filled by the total number of current opportunities.

Formula:
Estimated appointment slots pending = Appointment slots estimated - Appointment slots consumed
591 – 433 = 158 estimated appointment slots pending

The purpose for the existence of a system; or the single end that the system seeks to maximize.

For profit making companies, the goal is to make money now and in the future. Most organizations have a set of necessary conditions required to achieve the goal.

Lifetime value is the annuity income you receive from a typical client.

To calculate the lifetime value of a client, determine the gross profit you earn in an average year from an average client, then multiply this by the number of years you retain this average client.

Necessary conditions are those prerequisites that must be met for the achievement of your objective to be valid. For example, if the goal of the organisation is to make money, one of the necessary conditions may be to satisfy customers now and in the future.

The objective of a sales opportunity describes that which you are attempting to sell. In an environment where there are multiple objectives (product lines), it is common for each objective to be assigned a standard strategy and a standard value.

The typical objective is either account acquisition or account development.

Opportunity

An opportunity is any prospect that you have allocated — or intend to allocate — to a unit of a salesperson’s time.

This is the average number of (work) days for which an opportunity is open (not including days’ suspended).

Formula:
Average opportunity cycle time = Total number days open (closed opps only) / total number of closed opportunities

4719 / 234 = 20.2 days

Tip: Weekends, public holidays and suspended opportunities must be removed from the calculation formula (divide by 7 x 5). You can use total opportunity cycle time as a basis for calculating max days for each stage. (Total max days stages should be average opportunity cycle time plus 50% buffer).

Opportunity management is the process of (project) managing a sales opportunity from its inception through to its closure. (A sales opportunity is closed when it is won, lost or abandoned.)

The objective of the opportunity manager (typically a sales coordinator) should be to progress the opportunity through the steps determined by the designated strategy so as to close the opportunity in the minimum time possible. (As debts, sales opportunities reduce in value as they age.)

The term (opportunity) pipeline refers to the queue of open sales opportunities. A pipeline report indicates the number (and the dollar-value) of sales opportunities at each stage in the opportunity management process.

Generally speaking, a pipeline is healthy when there is an inverse relationship between the number of opportunities at each stage and the probability associated with each stage.

For simplicity, this relationship is usually expressed by multiplying the total value of the opportunities at each stage by the probability associated with that stage. Accordingly, the pipeline is healthy when the discounted value of each stage is roughly equal.

This is illustrated in the following example. As the pie chart indicates, the discounted value of each stage is roughly equivalent. (The % column in this example expresses the discounted dollar values as a percentage of the total — not the probabilities. Because the optimal duration of the associated step is zero days, it is appropriate for there to be no opportunities at the Proposal Pending stage).

This is an estimate of the number of opportunities that are required to keep the salesperson fully utilised with a safety contingency added.

Formula:
Opportunity queue size = Default capacity x average opportunity cycle time / average number of appointments per opportunity x safety 42 x 26 / 3 x 1.5 = 546 (opps required)

The term source in this context refers to the origin of the sales opportunity.

Specifically, source refers to the promotional activity that generates the opportunity.

It is important not to confuse opportunity source with relationship source. (The latter refers to the origin of the relationship with a contact.)

In many cases, the first opportunity that is attached to a contact will share the same source as the contact itself. Subsequent opportunities, however, will each have their own source.

It is essential that a source is allocated to every opportunity. This enables you to monitor the effectiveness of your promotional (relationship-acquisition and relationship-management activities)

An opportunity can be current, won, lost, abandoned or suspended at any stage within the opportunity management process.

Current:
An opportunity is considered current if an action is scheduled against it or a dialogue against the opportunity is in motion.

Suspended:
If an opportunity is still ‘alive’, and the prospect indicates that they would like to be followed up at a later date for whatever reason, the opportunity can be suspended. The opportunity would only ever be suspended if there is a definite date set in the future whereby the opportunity will become active again. For example, an end user may not be purchasing until a definite date in the future.

Won:
An opportunity is logged as won when the last step of the sales process is achieved. Usually this is a signed document that provides an instruction to proceed.

Lost:
An opportunity is lost after meeting with a sales person at which point the prospect has signaled that they are not ready to purchase typically for one of the following reasons:

• Lack of product features
• Too expensive
• Conflict of interest
• Lack of response from client
• Logistical reasons
• No potential
• Not preferred supplier

Abandon:
An opportunity is abandoned if the sales coordinator / customer service officer deems that the opportunity is not responding to relationship management tactics.

For example, if a consultant contacted an opportunity four or five times without receiving any response from the contact person, they would abandon the opportunity.

This is the number of optimal appointment slots required to keep the salespeople in the process fully utilized within the average opportunity cycle time.

Formula:
(DailyCapacity x OppCycleTime) / ApptSlotsPerOpp x (1+ ProtectiveCap)

Where protective capacity is likely to range from 24-50%

This is the optimal number of forward-booked appointment slots required to keep the salesperson fully utilised.

Formula:
Optimal forward-booked slots = Optimal forward-booked days x default capacity 10 x 40 = 400

This is the optimal yield per appointment slot expressed as a dollar figure.

Tip: Our default value for most clients at the start of the project is $600 per available appointment slot. To calculate optimal throughput per appointment slot-consumed at the start of the project add up calculate throughput for a typical month and divide by all available appointment slots.

Opportunity Queue: This is the number of pending appointment slots booked compared to optimal expressed as a percentage.

Forward-booked days buffer: This is the number of forward-booked appointment slots compared to optimal expressed as a percentage.

A prospect is any non-zero probability customer (anyone with any potential now or in the reasonable future).

A process is a sequence of value-adding steps that transforms a set of inputs into an output. A typical sales process should be designed to optimise volume not conversion.

This determines the amount of protective capacity you’d like to add to the Optimal Opportunity Queue Size calculation (typically 50%) to allow for cancellations, sick days and so on.

Tip: Default protective capacity is 50%

This is the initial transaction undertaken to acquire a new relationship. This transaction typically consists of the offer (and provision) of a document of some kind. (A white paper or a manifesto.)

This is the process of ongoing transactions with a prospect or client. For the former, it typically consist of the provision of an e-mail periodical and events (seminars and workshops).

All sales opportunities are given a weighting based on the likeliness of becoming a sale. Relative value is a method of ranking opportunities in importance.

Four variables are used in the formula to sought opportunities based on relative value:

1. Opportunity Value (T) (The amount of throughput)
2. Probability (which is determined by the stage)
   Pending Appointments (number of additional
3. ppointments required — determined by stage)
4. Overdue Days (has it been open longer than the sum of the Max Days associated with each stage?)

The formula is as follows:
Throughput * Probability / Divisor

If Max Days > Days Open, then Divisor = ApptsPending
Otherwise, Divisor = ApptsPending + Days Open – Max Days

Relative Value = Expected Return / Expected Resource Expenditure where time and appointment slots are the resources being measured.

Tip: The easiest way to understand the concept of relative value is to imagine that you are a sales coordinator, responsible for programming appointments into a salesperson’s diary. You want to program these appointments so as to maximise the yield on that salesperson’s time.

The relative value of an opportunity increases as it progresses from one stage to the next — but it decreases the longer it is open.

It’s important to note that the figure returned by this formula is a relative ranking — not a dollar figure.

A sales opportunity is a potential sale, to which a salesperson’s time is being applied. This sale could consist of a single transaction, or it could consist of a longer-term relationship subsuming many smaller transactions (each of which can also be regarded as a sales opportunity).

A sales opportunity can relate to a potential client or to an existing client.

A sales opportunity has the following preconditions (in the absence of any of these preconditions, it should not be considered a sales opportunity — and, accordingly, a salesperson’s time should not be applied to it):

1. An objective
2. A value
3. A strategy

In line with the definition of sales opportunity above, if we choose to apply a salesperson’s time to a potential client, we deem that potential client to be a sales opportunity.

Accordingly, at that point, we use our best guesses to fulfil the three preconditions above. If, at the first appointment, the salesperson discovers that there is, in fact, no opportunity, the opportunity is simply abandoned. (This approach contrasts with standard practice, where a salesperson attends an initial appointment to determine whether or not there is a sales opportunity.)

This is the source of enquiry for a new opportunity. Every opportunity must have a source allocated. Your source of opportunity can differ from your source of relationship.

For example, your source of relationship may be ‘relationships under management’ with your source of opportunity as ‘direct mail’.

This is the source of your relationship. In other words, how the prospect was added to your database the very first time. Unlike source of opportunity, source of relationship is ever only allocated once.

Stage references the location of a sales opportunity within the designated strategy. Accordingly, a stage is analogous to a milestone in project management parlance.

In a simple sales process, the terms step and stage may be synonymous. However, in a complex process, the treatment of each step as a milestone is likely to introduce an unwarranted degree of complexity.

An opportunity’s stage is used to determine probability. Specifically, each stage will have a probability associated with it, where that probability represents the probability of a win, calculated from historical data. (Probability should not, under any circumstances, be assigned to opportunities on an arbitrary basis.)

We do not treat the outcome of an opportunity as a stage. This is because an opportunity may close before it has navigated all of the strategy’s steps. (As illustrated below, it makes sense to record the stage at which opportunities are closed because this intelligence may assist with the fine-tuning of the relevant strategy.)

Stages are named by adding the word pending to the name of the subsequent (critical) step in the strategy.

The following is an example of a typical set of stages.

1. Best-practice Briefing (first appointment) Pending (8%)
2. Executive Briefing Pending (20%)
3. Proposal Pending (25%)
4. Proposal Customisation Meeting Pending (30%)
5. Instruction to Proceed Pending (80%)

Status references the current standing of a sales opportunity. There are two levels of status. At the first level, an opportunity can be either open or closed. At the second level, an open opportunity can be current or suspended; and a closed opportunity can be won, lost or abandoned.

Steps are the activities that make up a strategy. Accordingly, they are analogous to tasks within a project plan.

Steps typically consist of appointments (of various types) as well as the preparation of proposals, feasibility studies and similar.

A strategy consists of a standardised sequence of steps designed to produce the greatest yield on the salesperson’s time. (Obviously, it doesn’t make sense to design a strategy to maximise the probability of a win without regard for the load on the salesperson’s time.) A strategy is analogous to a project plan.

Where major transactions are concerned, it is appropriate for the customisation and approval of the strategy to be one of the initial steps in the strategy itself.

A system is a set of interdependent processes. TOC recognises that the output of any system is determined by the system’s constraint (or bottleneck). It also points out that:

1. Every system has a constraint (if it didn’t, output would be infinite).
2. At any one point in time, every system has only one constraint.
3. A stable system is one where the constraint remains in one location.
4. Because the constraint is the sole determinate of system output, every management decision should reference the constraint.
5. The investment of resources in any non-constrained process or activity will produce absolutely no return (contrary to the assumptions that underpin cost accounting).

Theory of Constraints (TOC) is management philosophy developed by Dr. Eliyahu M. Goldratt based on the principle that complex systems exhibit inherent simplicity.

In other words, even a very complex system made up of thousands of people and pieces of equipment can have any given time only a very, small number of variables – perhaps only one (know as a constraint) – that actually limits the ability to generate more of the system’s goal.

The Theory of Constraints states that every system must have at least one constraint limiting its output.

Consequences of the Theory:

1. The more complex the system, the less independent process paths exist, so the lower the number of constraints. (Usually, complex systems have only one constraint at a given time.)
2. A system of optimum processes can not be an optimum system.
3. An optimum system runs the constraint (or bottleneck) at optimum capacity (focused on the goal of the system), and all other process steps must have excess capacity.
   In recent years, Goldratt and others have developed TOC applications for logistics, project management (Critical Chain), management accounting (Throughput Accounting), and strategy (the Thinking Processes).

   Ballistix is the first organisation (internationally) to create a comprehensive TOC application for the sales process.

Throughput, technically, means the same as contribution margin. It’s the revenue generated by a sale, minus (only) the totally-variable costs (TVC’s). TVC’s are only those costs that vary in direct proportion to sales.

Typically, these include just:

1. Raw-material costs
2. Transport costs
3. Sales commissions

The key point is that Throughput includes no allocation of overhead costs. Throughput is important because it is the bottom-line contribution made by one more sale (it’s rare that one more sale will trigger an increase in operating expenses).

This is the measure of throughput contribution from the salesperson expressed as a per available appointment slot dollar figure over a six week rolling average.

Note: The 6 week rolling average is an option to ’smooth out’ lumpy sales cycles where there are infrequent, large value and long duration opportunities. In your average sales cycle, this may not be applied.

Formula:
Throughput per appointment-slot-consumed = Total slots consumed over the last 6 week period / total throughput over the same 6 week period.

Tip: When the objective is account acquisition, the throughput contribution must be grossed up to include future lifetime value. Generally speaking, throughput is the pure gross profit contribution the sale will make to the organization (sale price – total variable costs). Fixed operating expenses are not considered.

Value refers to the financial contribution that the opportunity will make to your organisation if it is won.

Our preference is that value expresses the Throughput (or pure gross profit) of the opportunity (and not its gross revenue).

If the win results in an ongoing revenue stream, it makes sense to express value as the net present value (NPV) of that annuity. (This calculation is pictured below for a series of $5,000 purchases over a three-year period. Obviously, both of these figures are likely to be estimates.)

It is redundant to preface the term (opportunity) value with the words probable or potential. This is because the word opportunity already implies probability.

Discounted value

Discounted value refers to the value of an opportunity, discounted for the probability associated with the opportunity’s current stage.

Discounted value can be used (along with the expected close date) to make sales projections only in high-volume environments. To claim (as many sales managers do) that a single $250,000 opportunity with a probability of 50% represents future revenue of $125,000 is clearly fallacious!

Discounted value is far more useful for calculating the relative value of opportunities.

Relative value

Relative value indicates the ranking of a current opportunity, with respect to other current opportunities.

Relative value is used to arrange opportunities into a logical order, based upon the relative return expected on a salesperson’s time (an appointment slot).

The easiest way to understand the concept of relative value is to imagine that you are a sales coordinator, responsible for programming appointments into a salesperson’s diary.

You want to program these appointments so as to maximise the yield on that salesperson’s time. Accordingly, you need to be able to sort current opportunities in descending order of relative value, and then allocate appointments in this order.

We typically use the following formula to calculate relative value:

As is obvious from this formula, the relative value of an opportunity increases as it progresses from one stage to the next — but it decreases the longer it is open.

It’s important to note that the figure returned by this formula is a relative ranking — not a dollar figure.

The following extract from the tool typically used by our sales coordinators to programme salespeople’s appointments shows this formula in action.