It’s nice to say, “I’d like to grow my business by X%.” However, if you come up with this number without first looking at what you’d have to do to achieve the goal, you might be setting up your sales team and yourself up for failure. As part of our Proving Marketing ROI blog series, we take a look at an example of why setting sales goals using the top-down approach might not be a great idea.
Set Realistic Sales Goals
“Our growth goal for next year is 50%.”
I remember the feeling of confusion that I felt at a yearly planning meeting after hearing this announcement. Shortly after that, the meeting became somewhat contentious as the head of sales, and I had to object to this goal.
It’s not that we didn’t want the business to grow by 50%. As marketing and sales leaders, our goal at any given day is to grow the business. We wanted the company to grow more than 50%. Since we are throwing out numbers, we would have loved for the business to increase sales by 150%.
The problem was, the sales goal announcement happened without first talking to us, to give us the chance to figure out if that was possible. In the meeting, without doing any extensive math, like I will in this blog post, we could tell that it would be near impossible to meet that goal given the current marketing budget and resources available.
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How to set sales goals
You might be wondering if you shouldn’t set sales goals at the top level, then how should you set goals? You should set sales goals at the bottom-level and then figure out what that looks like at the top. For instance, ask your sales team, how much more do you think we could sell, given our current resources? Then ask your marketing team the same question.
There are two reasons why this is important:
- You will get more ownership of the final sales goal number that you set because you involved both the marketing and sales teams from the start.
- The second reason is that you will save yourself a lot of time since you don’t have to keep reverse engineering your sales goal only to find out that it’s unrealistic, adjust the goal, then do the same thing over again.
If you decide to set sales goals using a top-down approach, then it must mean that your underlying business conditions have changed, and as a result, you can make up for any gaps. Meaning, let’s say last year you had a marketing budget of $100,000 and you grew your business by 25%, and then this year, you have a marketing budget of $250,000 you could assume that you could expand your business by 50%. However, that’s still not guaranteed because you haven’t had the chance to look at what you’d have to do to make that happen.
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Why Top-Down Sales Goal Setting Might Not be the Best Approach
The question remains, how should you come up with sales growth goals?
Firstly, make sales goals in the most cautiously optimistic way possible. You should push yourself to grow your business as fast as possible. In the process, however, you want to ensure that you don’t have a demoralized team that feels like they are not doing their job right because you set unrealistic sales goals.
If you are a startup, then you have to set up your sales goals without any precedent. In place of setting goals based on sales, you could set up goals for other activities that are related to sales. An example is to have a free subscription goal at the beginning instead of a paid subscription. Eventually, the goal is to have paid customers, but you can’t get there without having people willing to try your solution.
What is Top-Down Sales Goal Setting?
Top-down sales goal setting is the method of selecting sales growth targets based on how much you would like to increase sales revenue, and then, calculating the number of sales you would need to meet the set sales growth goal.
As mentioned, when you set big picture sales goals at a high level, you leave yourself with the work of figuring out if you can meet your sales goals. If generally, you prefer to set sales goals at the growth percentage level, then you have to be prepared to reverse engineer to ensure that you have a detailed estimate of that growth goal. In most cases, you may end up having to analyze multiple scenarios to get to a growth goal percentage that is attainable. Therefore, a more natural way to set sales growth goals would be to look at ways that you can increase conversions at a more granular marketing activity level and then calculate what that uplift would represent in growth.
Although we don’t recommend that you reverse engineer your growth goals, we’ll go through a practical example of this exercise. In the end, it will be easier to understand why this approach might be more work than it’s worth. Again, you should always calculate your sales growth targets with your marketing and sales teams. Involving sales and marketing in the process gives you a better chance of setting realistic sales goals.
Here’s how you go about this:
In this example, if you have a goal of about a 50% increase in sales. You’d first start by looking at what your growth was in the preceding years. Let’s say you’ve been growing at a 25% rate but now have the aggressive goal of wanting to double your growth, you have to know in theory that you’d have to amplify your marketing and sales efforts. Everything cannot be the same. You should not expect your team to provide different results with the same set of resources.
If you decide that it’s worth going for the goal of a 50% increase, I’d say not so quick. You have to look at what that means in terms of the number of sales deals. Meaning, you’d have to reverse engineer your original sales revenue goal to come up with the number of sales deals needed to meet the goal.
Remember, growth will often come from either selling to new customers or selling to existing customers. When reverse engineering your goals, you have to take a holistic approach by looking at the effect of your big picture goals on your existing customer sales and new customer sales. Current customer sales include upgrades or cross-selling new packages or products that customers don’t already have.
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Setting Sales Goal Example: Reverse Engineering
For this exercise, we’ll use the set of assumptions below for the fictional company that we’ll call Awesome AI Inc.
Awesome AI Inc: This Year’s Sales Goals
- This year’s total growth revenue goal: 50%
- Total Goal revenue: $7.5M
Revenue Breakdown at 50% increase:
- Total revenue (new business): $4.5M
- Total revenue (existing customers): $3M
Awesome AI Inc: Last Year’s Revenue
- Last year’s total revenue: $5M
- Last year’s new sales revenue: $3M
- Last year’s revenue from existing customers: $2M
- Total number of existing customers at year-end: 75
- Total number of new customers acquired: 25
- Total number of customers (new and existing): 100
- Average new business deal: $50,000
- Last year’s current customer revenue from upgrades: $1.5M
- Customer retention rate: 95%
- Customer churn rate: 5%
- Last year’s existing customer maintenance revenue: $0.5M
Awesome AI Inc: Existing Conversion Ratios
- Existing customer upgrade conversion rate: 75%
- Opportunity to new sale conversion rate: 25%
- Lead to opportunity conversion rate: 45%
- Prospect to lead conversion rate: 10%
- Website visitor to prospect conversion rate: 5%
Awesome AI Inc: Last year’s estimated Conversion Values
- Number of new customers: 25
- Number of opportunities: 100 (25% conversion from opportunity to sale)
- Number of qualified leads: 223 (45% conversion from qualified lead to opportunity)
- Number of prospects: 2230 (10% conversion from prospect to lead)
- Number of Website visitors: 44,600 (5% conversion from web visit to prospect)
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How to find out if your 50% sales increase goal is realistic
Here’s how to reverse engineer your goals based on the 50% sales revenue increase goal.
As shown above, Awesome AI Inc, in this example, has a 5% churn rate or 95% customer retention rate. Mostly, for every given year, you are likely to lose 5% of your existing customers. Knowing your churn rate is essential when setting sales goals. It allows you to account for lost revenue so you can make more accurate projections. In my example, since the business has 100 customers in total, a churn rate of 5% would leave the company with 95 customers.
An essential element to note here is that when calculating growth opportunities, it’s more conservative to assume that you’ll start the year off with only 95 customers instead of the 100. While this is not accurate in reality, it will allow you to account for your potential lost revenue. In fact, with a yearly 5% churn rate, you are unlikely to lose all customers at once. Perhaps a plausible scenario would be losing one customer every two to three months.
With that said, because you don’t have a magic crystal ball to show you when your customers could decide to not do business anymore with you, you have to assume that this will happen all at once. Meaning in all your assumptions, you are not counting 5% of your existing customers. It puts you in a better position, should you suddenly lose all projected customers at once or even if you lose fewer customers than expected.
How to Calculate the Uplift in Sales Needed for Your Set Sales Goal
Fun math calculations:
Revenue from Existing Customers: Maintenance Fee
- Since we have 100 customers, 95% retention rate = 95 customers
- Maintenance fee for 95 customers:
- If 75 customers = $0.5M
- Then, 95 customers = (95/75) *$0.5M = $633,333
- Therefore, approximate maintenance fee increase =$0.6M
Meaning, all things being equal, you will increase maintenance revenue this year from $0.5M to $0.6M.
Revenue from Existing Customers: Upsell and Cross-sell
- Conversion rate for existing customer upgrades: 75%
- Last year, 75% of existing customers = $1.5M in upgrade revenue
- Number of customers upgraded at a 75% conversion rate:
- 75%*75 = 56.25 ~ approximately 56 customers upgraded
- Average upgrade deal amount:
- $1.5M/56 = $26,785.71 ~ approximately $26,786
- Number of customers upgraded at a 75% conversion rate:
- This year’s projected upgrade revenue from existing customers:
- 75%* 95 (existing customers – 5% churn rate) = 71.25 ~ approximately 71 customers buy upgrades
- Therefore, projected revenue from upgrades to existing customers =
- (projected number of customer upgrades) * (average deal amount) = 71*26,786 = 1,901,785.41 ~ approximately $1.9M
- Projected increase in upgrade revenue = $1.9M – $1.5M = $0.4M or 25% increase
Total Projected revenue from existing customers:
Maintenance revenue + Upgrade revenue = $0.6M + $1.9M = $2.5M
Note that, after calculating our projected revenue based on our current existing customer conversion ratios, we are now expecting that we will make a total of $2.5M from our existing customers. As you may have noticed, this is $0.5M shy of our original goal of $3M. As a result, we need to adjust our new business revenue goal from $4.5M to $5M. At this point, you would already start to get an indication that your 50% growth goal might be too aggressive. One can make the argument that conversion rates can be improved. As such, you could increase a 75% upgrade conversion rate to 80% or 85%, which could increase your upgrade revenue. While this is true, you can have a goal of wanting to increase your conversion rate, but it’s not very prudent to calculate your company’s goals based on a metric that hasn’t happened yet.
How to Calculate Your Sales Goals for New Business
For the sake of the exercise, we’ll assume that you are still optimistic and decide to figure out what you’d have to do to get $5M in sales.
Here’s the math:
- New Revenue Goal (new customers): $5.0M
- New customers revenue increase: $5.0M – $3.0M = $2M
- New customers revenue increase percentage: ($2.0M/$3.0M) * 100% = 0.666 ~ approximately 67%
*** Take note that, we now have an increased growth goal from the original 50% to 67%, this is due to the limitation on how much we can make from existing customers. ***
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Number of New Business Deals Needed to Meet Your Sales Goals
Number of new deals needed:
- Average new deal: $50,000
- Total number of new deals needed to meet $5M goal: 5,000,000/50,0000 = 100 new deals
- New deal increase: 100 – 25 = 75
- New deal percentage increase: 300% [(75/25) *100]
As you can see, by now, it should be evident that the original sales growth goal is quite unrealistic. Expecting to get a 300% increase in new business deals is not impossible, but it’s not a conservative projection either.
Now that you know that you have to get 100 new deals, you also have to reverse engineer that to figure out the uplift in sales and marketing activities that you’d need to meet your set goal. In our next post on the Proving Marketing ROI blog series, we’ll take a practical look at how to accomplish this.
Setting top-down sales goals sound easy in theory, but the amount of reverse engineering work that needs to happen doesn’t make it worth it. Instead, it’s always better to take a bottom-up approach where you set goals at the granular level and then discover how this would affect your top-level growth goals.
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