Why Do You Need Commercial Ratio?
Your Company Exists to Produce Value for your investors
Your Company Is a Value Engine
Your investors see your whole company as an asset. Its value is measured by its stock price.
Your CEO is responsible for building your value engine and driving it in such a way that it increases shareholder value.
Investors want to see how well your company converts capital into value for customers, who give you more sales.
There are three subsystems of your engine:
Strategy system - focused on value creation.
Portfolio system - focused on value delivery.
Commercial system - focused on value communications. Sales & Marketing drive the value communication process.
Value Communication is a simple process
Communicating value to customers has four (4) basic parts:
The specific people with whom you are trying to communicate the value your company provides in exchange for their money.
The combination of: value propositions, branding, experience, references, products, services, insights, and knowledge your company has that can add value to your audience.
The person (or entity) who is connecting the dots between the needs and perceptions of the audience with the various messages in your company is a messenger.
Messengers will interact with the audience over some time, hopefully building an economically valuable business relationship that results in a signed contract.
The Commercial System is Inefficient
Too Many Cooks in the Kitchen
The buying process within customers is increasingly complex and involves many different stakeholders.
Companies have so many different products and services and a cacophony of documents describing them that the economic value gets diluted.
Demand generation, BDRs, website agents, sales executives, overlays, sales engineers... you get the point.
Your commercial process is an ecosystem with many moving parts. Without an effective procedure to coordinate all of these moving parts and perspectives, you create too much noise for your investors and customers to understand and appreciate the economic value you can provide.
What is the Commercial Ratio?
A Measure of Productivity
The Commercial Ratio is a simple metric that measures the productivity of a company's investment in Sales and Marketing. The underlying assumption is that the purpose of both Sales and Marketing is to drive Revenue Growth.
Investors view your company as a value engine. They see sales and marketing is a single function of driving revenue. Over the years, they have become increasingly more frustrated as companies increased sales and marketing budgets with the promise of big results but failed to realize them. When the Commercial Ratio is mandated, it holds the CEO accountable and forces sales and marketing alignment to achieve revenue growth goals.
The purpose of the Commercial Ratio is to gauge the efficiency of the commercial system and how well a company is managing its sales and marketing costs. The Commercial Ratio helps companies understand the commercial waste created by poorly managed organizational silos and an incessant focus on activity. It opens up a dialog to discover new strategies to fix the process -- not the salespeople.
The Commercial Ratio Measures Value Communication
Connecting Value Communications Process Elements with the Income Statement
The focus of the whole process. They are a group of people whom your salespeople must persuade to get a contract.
Customers hold the salespeople the most accountable for their overall experience with the company. Their salaries, commissions, T&E, and incentives are all expenses.
All of the packaging, tools, constant, collateral and training salespeople receive are all messages that cost money (expenses) that salespeople must match to specific customer situations.
Interactions should add up to a contract. Contracts add up to revenue.
Measure the system, not the individuals
The Commercial Ratio measures the efficiency of the whole system.
Compounding negative implications
The Snowball Effect
One of the more interesting side effects of a low Commercial Ratio over time is "The Snowball Effect." When a Commercial Ratio is less than one, the expense required to generate that new revenue growth must be recovered in future years of operation to meet investor expectations.
This creates a debt. It might not be a financial debt, but it creates a gap. That gap works like a tax. When you spend too much each year on revenue acquisition, it puts more pressure on other parts of the business.
With each consecutive year that this happens, more and more debt is pushed to other operational elements of the business, creating more stress across the whole business. The only reliable lever to pull is for other functions is to cut costs, which creates a vicious cycle. If you run your organization in the red (a Commercial Ratio below .75) you create an increasingly rigid and siloed organization unable to respond to changing market conditions.
How Do You Move the Needle?
Sales enablement has emerged as the antidote to the invisible problem we call Productits. This discipline will coordinate sales and marketing activities and shift the mindset from fixing salespeople to orchestrating the commercial system.
Watch the webinar on-demand: Move the Needle: Using Commercial Ratio to Drive Sales and Marketing Performance