The balance of risk versus reward is a fundamental of sales and, actually, business itself. Each opportunity is weighed, taking into account the risk of the company against its eventual outcome. The goal is to take risks that endanger the company as little as possible, and that in the majority of cases are rewarding.
Successful salespeople calculate this balance fairly instinctively. They have to; it’s a competitive world and the faster you are at gauging opportunity, the more opportunities you’ll land ahead of the competition. But instinct only carries so far, especially in the business world where it’s a numbers game. Given the sheer volume of opportunities and the speed at which they must flow through a sales pipeline for a company to maintain advantage, there comes a point at which the assistance of automation is required.
The Simple Evaluation: Lead Scoring
A simple risk evaluation method in Pipeliner is “likelihood of closing.” This is one that can be used when other more in-depth data is not easily available — an evaluation by the salesperson to communicate the likelihood of the deal coming in. This is a common method used by most Pipeliner CRM users. The user normally rates the potential of closing on a scale of 1 – 5, with 5 being the highest.
If you don’t have lead scoring set up in Pipeliner CRM,
Digging Deeper
If you really want to analyze your risk versus reward, and zero in on making the most profitable and risk-free sales possible, it is well worthwhile to conduct an analysis of past sales.
To do this, you would need to research out the answers to some key questions.
1. What were the attributes of the most risk-free sales that have occurred in the past?
Attributes would include:
- Cost of lead—obviously the lower the cost of lead, the lower the risk
- Buyer profile—job title, types of issues they generally encountered, where they usually stood in the company approval process
- Approval process—the faster the approval, the lower the risk
- Buyer pain points—the stronger these were, the stronger the need for your product or service and the more likely they were to buy
- Profit margin—the better the margin, the lower the risk
Along with the above, you can also tally these for sales that leaned toward being more risk free:
- Type of industry
- Product or service sold
2. As part of this analysis, it is a good idea to also look over sales that had higher risk versus the reward. It often happens that a company, in an all-out drive to make high sales numbers, doesn’t always fully evaluate the costs and risks.
Attributes of a higher-risk sale might include:
- Higher cost of lead
- Buyer profile—buyer may not have had enough standing in the approval process to affect the sale, and the salesperson may have had to spend extra time pitching to other decision-makers
- Approval process—a long approval process means money lost during that process, as well as an increased risk of the sale falling off the line
- Buyer pain points—the buyer or the buyer’s company may not have had the pain points really needed for the sale, and it took considerable work to get them there
- Profit margin—it can happen that in an effort to make a quarterly target or a sales quota, discounts are offered which lower profit margin—sometimes to the point of negligible profitability for the company
Once again, you can also tally these for sales that leaned toward being more risky:
- Type of industry
- Product or service sold
If you’re using Pipeliner, you can revisit your past sales and look them over. Simply click on “Archive” from the main Pipeliner interface and examine your closed sales:
- Click on a closed sale
- Click on each contact, and examine their data
- Examine any other of the data listed above that you can get out of Pipeliner at this time
If you don’t have Pipeliner set up for profitability and risk (as in the next section), you will have to research elsewhere in your company to examine each of the points you need to. But follow through—it will be well worthwhile to your future success and profitability.
If you’re not using Pipeliner CRM, or if many of your sales occurred before you used Pipeliner CRM, it may be more difficult but this analysis still should be done, in as much detail as possible.
Current Pipeline
You can also use Pipeliner CRM to more accurately show risk versus reward, for each potential sale in the pipeline. At a glance you’ll be able to see your most profitable potential sales, and those with the least amount of risk and the most reward. You can then make those a priority for your sales force. There are a couple of ways to do this:
Lead Scoring
A simple way to show risk versus reward is to work the potential risk into your lead scoring. Within Pipeliner, lead scoring is a simple method of rating sales as to “likelihood of closing”, as described above. But instead of simply likelihood of closing, you can instead focus on risk and reward to this system. You can weigh the lead with factors such as:
- Cost of lead below a certain level
- Profit margin above a certain level
- Buyer pain points high
You then make these your scoring system. For example:
Score of 1:
2 out of 3 of the following points:
- Cost of lead: more than $50.00
- Profit margin: 20% or below
- Buyer pain points: 1 – 2 [on a scale of 1 – 10]
Score of 2:
2 out of 3 of the following points:
- Cost of lead: less than $50.00
- Profit margin: 30% or below
- Buyer pain points: 3 – 4 [on a scale of 1 – 10]
Score of 3:
2 out of 3 of the following points:
- Cost of lead: Less than $40.00
- Profit margin: 40% or below
- Buyer pain point points: 5 – 6
Score of 4:
2 out of 3 of the following points:
- Cost of lead: Less than $30.00
- Profit margin: 50% or below
- Buyer pain points: 7 – 8
Score of 5:
2 out of 3 of the following points:
- Cost of lead: Less than $20.00
- Profit margin: 50% or better
- Buyer pain points: 9-10
Note that for any of these, the likelihood of closing might be high. But if the likelihood of closing is high, but with a high risk and low profitability, this may not be the type of sale on which you want to be focusing on a regular basis. On the other hand, if the majority of the above factors are present, the likelihood of closing is probably also high.
For this system to work, you will have to have the data involved readily available, so that the person doing the lead scoring (a sales admin or the salespeople themselves) can readily utilize it in scoring the lead.
Auto-Calculated Field
If you have relatively few products and services that your company or sales unit sells, you can also set up an auto-calculated field in Pipeliner to show profitability of a potential sale, based on lead cost. You would have to set up one field per product or per service, so this might not be advantageous for you if you’ve got a long list of products or services.
Here is how you set up an auto-calculated field:
The calculation you’re going to use is:
Net profit to company-cost of lead/net profit to company = profitability for that sale
The variable will be the cost of lead. Once you have set up the field, the cost of the lead just needs to be typed in and the profitability for that sale will be calculated. In setting up the field for each product, you’ll need to know the difference between the cost of the product to the company and the price being charged to your customer. That will be your net profit to company. Here’s an example of how it would work:
Net profit to company: $375
MINUS Cost of lead: $10.00
DIVIDED by net profit to company equals: 97%
or
$375 – $10 / $375.00 = .97 or 97%.
Whether you utilize just the simple method of “likelihood of closing” or dig deeper with other pertinent factors, utilize Pipeliner CRM to help you weigh the risk versus reward of your sales.
