Re-balancing the Other Trillion+ Portfolio

Big Markets

Many Americans have been revisiting their 401k plans to rebalance their assets and combat the market volatility brought on by the coronavirus pandemic.  While the value of assets in 401K plans remains in flux, it still represents several trillion dollars. Especially at times like this, rebalancing is an important strategy for managing the overall risk and return of one’s investment portfolio. 

While we are talking big numbers, it’s worth noting that US companies spend well over a trillion dollars managing their sales force and marketing initiatives each year.  When it comes to “rebalancing” their investment during the budget process, most companies fail to apply the necessary rigor to determine where to allocate their sales and marketing investment.  In fact, according to research by ZS Associates, 40-50% of companies determine their upcoming sales investment based on prior year, affordability or basic benchmarks and ratios.  If an investment manager has a fiduciary responsibility to maximize returns at a given level of risk, why do we relieve our sales and marketing teams from the same accountability for more than a trillion dollars of annual spend?

The Costs of Misalignment

In a B2B business with a lengthy and complex sales cycle, the failure to align sales and marketing investment proportionately to the right opportunities can be very costly.  For marketing, this means that its “overweight” on initiatives which yield little return and “underweight” on initiatives which yield greater returns.  For sales, this means that resources are deployed to deals which are not fully qualified or where the company is not well positioned to win.  For example, our analysis shows that if 20% of the deals your sales team pursues across a nine-month sales cycle are “bad deals,” it could cost the company nearly 28% of its total annual sales compensation.  Why so much?

There are two types of costs associated with pursuing bad business. 

1.     Direct resource costs – this is the costs associated with resources spending time on bad deals over the course of the sales cycle.  In the example above, we quantified this as the cost of five resources spending 20% of their time over a nine-month sales cycle and losing to a competitor or a no-decision. 

2.     Opportunity cost from not pursuing better opportunities – this is the cost of NOT otherwise pursuing deals where you are better positioned to win.  In the example above, we quantified this as two opportunities we could have pursued with a 25% close rate, an average deal size of $250K and a gross margin of 75%. 

Sales Resource Coverage

Both costs can be avoided with a clear strategy around the markets, accounts and opportunities which best represent the playing field for the sales organization. This requires more than a one-off analysis of where you can compete and win profitably in the market.  It also requires these decisions be documented in the CRM to inform the prioritization of sales targets based on the definition of an ideal customer.  A common approach is to tier prospective accounts based on various criteria such as size of potential spend, propensity to buy, right-to-win and other factors.  This gives the sales team the insights needed to surge selling capacity towards prospects which are the best fit for its value proposition. 

The benefits of tiering the addressable market go beyond prioritizing targets.  In a lengthy B2B sales cycle, the investment in the presales process can be quite significant.  For example, if “Tier A” accounts represent a higher likelihood of close and a potentially more profitable account than “Tier C” (i.e. higher customer lifetime value), it’s likely the company is willing to invest more in winning these opportunities.  Therefore, the tiering is used not just to prioritize the pursuit, but also to dictate which resources are involved and when across the enterprise sales process from the first outreach to discovery, solution design, contracting, delivery, service, growth and retention.  This is more than just leveraging inside sales to pursue the SMB market.  While this may work for transactional sales, it does not translate well to more complex, consultative sales cycles where the prospect’s buying preferences are not always aligned with the seller’s economic interests. 

Aligning and Optimizing Marketing Spend

Further, decisions related to sales strategy and target addressable market should never be made in a silo.  In the past when the responsibilities of sales and marketing were very clearly defined with little overlap, it was enough to be informed of each other’s activity.  However, when, according to Sirius Decisions, 67% of the buyer’s journey is done digitally, the line between when marketing ends, and sales begins is blurrier than ever.  Marketing has a critical role in increasing awareness and improving engagement to generate leads for the sales organization.  Given the history of finger-pointing between the sales and marketing organization, their alignment has become one of the largest drivers of business performance improvement. 

Just as sales tiers the addressable market to dictate investments in sales coverage, marketing leverages the same criteria to inform marketing strategy, tactics and spend allocation by tier.  As a financial manager constructs an investment portfolio to optimize risk and returns given their investment strategy, a marketing leader allocates budget across awareness, education and consideration based on the same tiering criteria leveraged by the sales organization. 

Achieving Outsized Returns

Rebalancing sales coverage and marketing spend will lead to substantial improvements in key metrics such as opportunity qualification rate, win rate, cost of sales and return on marketing investment.  If a $50M enterprise software company rebalances where sales and marketing spend their time and money resulting in one additional qualified opportunity for every 10 leads, this would equate a 19% improvement in its valuation over a four-year time period. 

We may set aside the time to tweak our financial portfolio to stretch another 75-100 basis points, but we often fail to adjust the investments we are making in our sales and marketing portfolio.  For any company looking to systematize revenue operations, prioritizing the addressable market and aligning sales and marketing is the first step in the journey to developing proven systems and predictable results.