The Lean Equation

Some of may have heard about something called the sales equation, which is an formula that uses several parameters and indicates how you can improve your sales or your profit. The theory behind the equation is that you only have 4 factors that impact how much you sell:

  • The number of sales opportunities you work on (#)
  • The average deal value ($)
  • Your win rate or uplift percentage (%)
  • The length of the sales cycle (L)

Sales Equation

If you want to know more about that equation, I suggest you take a look here

Using this equation, what you would want to do is increase your opportunities, increase deal values and increase your profit, while at the same time decreasing the length of you sales cycle. Of course, that is easier said than done, but look at what you are currently focussing on. I bet the main focus lies on increasing opportunities. Decreasing the length of the sales cycle probably hasn’t crossed the minds of some readers.

How exactly does lean fit into this equation? Well, Lean is aimed at increasing your process cycle efficiency it has a similar equation, called Little’s Law, which I discussed in an earlier blog post. Little’s Law talks about 3 components in the equation:

  • The process lead time
  • The work in progress
  • The process cycle efficiency

Little's Law

You see the similarities here? If you can increase the sales process cycle efficiency, you decrease the sales lead time or the length of the sales cycle. As a consequence, when you decrease the sales lead time, you will have room for handling more sales opportunities as well. Furthermore, when you increase your product throughput using Little’s Law, you deliver a faster service to your customers. Throw in some Six Sigma for added quality and apply a continuous improvement strategy towards quality and you don’t only have a faster service, but also a much better service quality. And that, in my humble opinion, is a valid reason to increase your sales value, because people are willing to pay for a fast service of good quality. (Remember the quality triangle I discussed in an earlier post?)

Taking things back to the sales equation, we can now increase sales opportunities because the sales process has gotten more efficient. And because of our reduced production cycle time and added service quality, we can increase the sales value, increasing the profit margin as well. That means that we have achieved our goal of adjusting all 4 components in the equation.

Let’s talk some number now. If you increase the sales opportunities, the sales value and the profit margin by 10%, while at the same time decreasing your sales lead time with 10%, you end up with an increased sales velocity of 47%! That means you’ll be able to sell 47% more than before. Wait, what? How does 10% optimisation end up in a 47% increase in sales velocity?

Well, let’s do the math with some easy numbers. Assume for calculation purposes that we start out from a value of 100 for all factors (just because that makes percentages easy to calculate). The equation would be like this in the initial state: (100 x 100 x 100) / 100 = 10000. Next step is to increase sales opportunity, sales value and profit margin by 10%, while at the same time decreasing the lead time with 10%: (110 x 110 x 110) / 90 = 14788.89. If you compare both numbers, you will see that this results in a 47% increase (rounded down).

Even if you don’t increase the number of sales opportunities, the velocity will still increase by 34%! (just do the math with the same numbers as I used above) You’re not going to fool me by telling me this is not an interesting approach to improve your business…

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