The previous articles of our series "KPIs for Product Managers" describe the KPI basics in detail, as well as the KPI revenue, that is probably the most important one for sales, with associated key performance indicators such as forecasts, target achievement, etc.
While the commission of sales employees is usually exclusively dependent on sales and possibly also on margins, there are many other key figures for controlling the sales units and assessing their performance.
In order to make reliable comparisons, manage a good sales channel mix and make sensible investments in the most attractive channels, sales key figures should be broken down in part according to the respective sales channels. This must be done especially if sales deals generate corresponding internal follow-up costs (e.g. in order processing or support) or if the costs of sales, the margin or other key figures differ greatly.
Sales key figures example
As Product Manager mobile applications for a newspaper publisher, you want to reduce the loss of subscribers to the printed edition of newspapers. Since many customers frequently use the Internet including news portals, there has been a drop in print subscribers.
In addition to opening new lines of business, it is vital for the survival of the publishing house to offer customers digital products, e.g. in which the magazine can also be read in a smartphone app. If necessary, as a bundle with the printed edition or as a purely "online offer".
You have determined after appropriate analyses and market interviews according to the Open Product Management Workflow™ that the most effective sales channels for concluding an online subscription for the group of existing customers are, on the one hand, advertising in the print edition and, on the other hand, using the telephone sales channel.
As a "goodie" and for a faster conclusion, existing customers are offered to test the online offer free of charge for 30 days, after which it automatically converts into an annual subscription.
You place a two-page ad in your own magazine for 4 issues in a row to promote the online offer. Unfortunately, the subscriptions for the online offer do not increase at the desired rate. The management gets nervous and immediately decides to win over all print customers for the online offer within the next 3 months through telephone sales.
A corresponding completion rate, i.e conversion rate is expected.
Since there are not enough internal resources available, an external service provider has to be commissioned, who is to be paid per completion.
What do you think will happen?
You will gain a significantly higher number of new online subscribers in the short term, depending on the capacity with which the service provider can process the customers.
After 45-60 days you will receive more complaints from support and order processing because existing customer contracts were automatically extended for one year. At the same time, it turns out that many customers who had ordered the offer through the service provider cancel the online offer again within 30 days. Unfortunately, this was sometimes accompanied by cancellations of the print subscription.
As soon as you have analyzed the situation accordingly, you will realize that the basic idea of "selling via telephone" is correct, but due to the "order-related payment" of the service provider (who in turn also remunerate their employees accordingly), the cancellation rate of the orders through TeleSales is five to six times as high as the cancellation rate of the orders through their own advertising.
It could be because the customer was "talked into" the online subscription. A few black sheep of the service provider even deliberately exploited only the 30-day period, although the customer was not interested in the online offer ("You can cancel again immediately").
The closing ratio, the cancellation rate, the gross to net ratio (N/G) and the Cost per Order (even after gross and net order) are therefore very different for the two sales channels.
If the two sales channels are not considered separately but together, a deceptive misinterpretation is likely to occur:
The (total) cancellation rate is very high, i.e., customers do not appreciate the online offer. In the worst case, this means the end of the online offer.
In the less dire case, it is wrongly inferred that the online offering needs to be improved or expanded.
The focus changes to "features" and product instead of sales.
If the cancellation rate is considered separately according to sales channels, the result is that optimization of the "telephone sales" channel must take place, but not changes in the product or the online offering in general.
In addition, the high cancellation rates generate a high number of returns and probably also support costs. These additional efforts and costs should be included in the calculation of the sales costs of the channels in order to keep the costs per order (CPO) comparable.
In very few cases, I have seen that follow-up costs incurred in administration are added to the sales costs. This is not necessary if the follow-up costs are identical. Therefore, the example clearly shows that KPIs, recorded separately by sales channels, must be put into relation and dependencies must be shown. (see article Defining KPIs).
Only the product manager who measures, evaluates and analyzes the important KPIs can act correctly and act like a professional leader of his product.
Other KPIs can be derived from the example, which, as the example shows, may well fluctuate greatly over time.
In the example, the gross new orders increase sharply from the start of telephone sales, and the gross to net ratio becomes very poor overall, as telephone sales have contacted all the remaining customers and the proportion of these customers is therefore weighted many times higher than the rest. At the same time, the cancellation rate multiplies.
The cancellation rate or cancellation ratio is the ratio of cancellers and contract rescinders compared to the corresponding number of new customers, always measured within individual "cohorts".
Depending on the company, 30-day periods are used as a basis, or 60 days because cancellations can still be made after 30 days as a gesture of goodwill. This results in the key figure N/G 60, the gross to net ratio when taking a 60-day cancellation period into account.
N/G 60 = Net orders remaining after 60 days / Gross orders of a period
or
BN/G 60 = 1 - Cancellation rate (after 60 days)
The cancellation rate must not be confused with the "normal" customer cancellations, i.e. customers who cancel during the course of a contract towards the end of the contract. The rate of cancellations is usually set in relation to the average contract portfolio of all customer contracts in the respective period under consideration.
In the case of subscription models and the telecommunications industry, this ratio is referred to as churn, and sometimes also as the attrition rate. Over a longer period of time, this churn should be relatively stable.
The higher the customer base, the lower the percentage value of churn (given the same number of terminators).
In order to ensure transparency, measures that have an impact on early terminations, such as contract adjustments, price increases with special termination rights, must be taken into account in advance in the planning process and be accompanied by corresponding assumptions on the respective key performance indicators to ensure transparency. Since some measures only have an impact on a KPI with a time delay, such measures must be well documented and their impact must also be forecast.
The example described also shows that by actively addressing all customers in the print area, so-called "sleeping customers" who have so far repeatedly forgotten to cancel their print subscriptions can be reminded of this. A certain loss of such customers is therefore to be expected.
Often enough, I have seen milkmaid calculations and templates that, in order to increase sales, suggested a price increase for the products in the customer base. From this was sometimes directly deduced:
Number of customers x price difference (new - old price) = additional sales.
Such templates were reinforced by the argument of not generating additional sales or additional costs through advertising. In the rarest cases, however, it was taken into account that a certain number of customers will cancel as a result of the price increase and how the long-term loss of customers will thus affect total sales.
The revenue that a customer realizes for the company during the entire lifetime of the customer relationship is referred to as Customer Lifetime Value, CLV, or CLTV. In most cases, this key figure refers to profit, i.e., revenue less costs. For the sake of simplicity, only sales are often taken as the basis for the CLV, which is then forecast into the future. This value therefore depends on the duration of the customer relationship, i.e. the customer lifetime (CLT).
If empirical values are used as a basis, they must be included in every calculation.
Among other things, this value, together with many other factors, determines the maximum level of distribution costs. In no case, however, may the distribution costs be higher than the CLV, unless the company buys a market for strategic reasons. On the contrary, the distribution costs must be amortized as quickly as possible, since development costs and basic costs must also be covered and the product should yield a margin.
In the "price increase" example, this consequently means taking into account future sales losses due to the terminating parties.
Similar to the cancellation rates, companies should measure the renewal rate, i.e. the percentage of existing customers who renew a maintenance or support contract or a subscription model. This varies greatly depending on the product, service, contract and customer loyalty. I have personally seen renewal rates of over 90% for good products and brands in the software space. The belief that you can get to 100% through automatic contract renewals is a misconception. If you bind and force a customer another month/year into a contract he doesn't need, this customer will rarely buy more products from the company, not to mention possible flashpoints ignited by dissatisfied customers.
Ergo: coercion leads to less revenue and less customer satisfaction in the long run.
While the "number of pieces" plays an essential role in sales in the manufacturing industry, other "pieces" are counted in the service segment or in the software environment. For example, the number of customers (one customer BMW, one customer proProduktmanagement GmbH = two customers), the number of users of the solution or the number of "contracts".
If one and the same customer concludes several contracts with a manufacturer, these are often also counted several times. This number has a nicer effect in balance sheets, of course, than the pure number of customers, because it is provided with a factor 2-x.
Readers unfamiliar with the market or superficial readers do not recognize this immediately and conclude directly from the contract number that different customers are involved.
Continue reading KPI sales key figures combined with marketing key figures
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