Josh Melick is something of a genius when it comes to the business world, and as a man who has come free an engineering and math background, he loves to get into the nitty gritty of the numbers. Josh gos to great lengths to describe the economics of sales and all of the factors which businesses should be taking into consideration when it comes to creating a sales comp structure. After all we have to strike the sweet balance between incentivizing our employees, and ensuring that the business is making money.
In order to do this it is critical that all points are considered, and here are some of the big economic points which some may be missing.
What is a Customer Worth?
Using average data we can estimate more or less how much a customer is worth to the business, which can therefore help us to gain an insight into what exactly we should be paying a member of the team for customer acquisition. If your average customer pays $300 per month and generally stays around for 2 years, you can instantly assume that the customer is worth $3600 per year, $7200 in terms of their lifetime value. This can help you get started in terms of what you are paying your reps based on sales.
Now for each customer we have to start deducted some of the company spends which are factored into bringing them on board. For example we have to look at marketing budgets, which can often run up into big figures. The cost of the marketing can be spread out between the cost of customers, of course. And so if you are spending $25,000 per month on marketing and you have 1000 customers, you can take $25 off that $7200 to start with.
In the same way that you would calculate the marketing costs of the customer, you then have to look into additional areas such as basic salaries, rent, energy costs and other overheads, as well as tax implications too. All of these figures can be broken down amongst the customer which will give you their total profit value to the business. Once you have this, you can use that to understand more about where your sales comp plan fits in.
In terms of how you break down the math this will be based on your own figures and your own generosity or ambition for the business. There is no direct formula which you can use here, although the one which Josh goes with actually looks to be closest to the industry standard. The key is not about making this an art or a default calculation, but following the science within the business’ numbers and going from there. This is what Josh is getting at in his piece, that the business should make decisions based on the figures and the metrics which it has put in place, in order to understand how much sales comp to pay.