The Mathematical Models behind Sales and Customer Success

[Music] hi there my name is jocko van der fukoy i'm the founder and co-ceo of winning by design [Music] and today i'm going to share with you the mathematical model we're going to see that sales and customer success and marketing are really based on an exponential and compound model and how this impacts every part of the business so let's get going let's take a closer look and let's learn that we can look at sales marketing and customer success from a scientific perspective now historically what you have seen me talk about is a series of models and currently as we talking about early january we are seeing that these four models are currently available already described with videos on our youtube channel which you can find at youtube. com winning by design what we are going to talk about today is the mathematical model and that model is based on the data model so you really if you haven't seen that you're better best off to watch that video first otherwise you may have a few questions here and there you may not exactly know what has happened now what i hope is that so far you have enjoyed what we have already shared with you i do not know what you think about it [Music] okay i see you'll like it so so let's go a little bit further into that okay yeah so what are we going to talk about and what this is based on is that data model now in this data model you're going to see that there's essentially three specific metrics volume metrics down here measured by m1 and to m8 time metric delta t and conversion rates we name these with mnemonics in other words with short letters because in many companies and in different many different businesses they use different things sometimes they call it mql sometimes you call lead prospect sql sel they have all kinds of terms for it so you're going to see that in the data model we have created a uniform data model as long as we know what they're based on now what i'm going to do next i'm going to share with you how the mathematics apply to that in this case we're going to look first and foremost at volume metrics what we see that volume metrics are generally based on adding things up for example how many mqls did the marketing department uh generate how many leads did the marketing department generate how many logos were won by sales how many customer customers were onboarded by the cs team how much revenue did we make and so on and so forth these are referred to as volume metrics and they often involve the arithmetic of adding up we also have conversion metric think of metrics such as win rate or churn these involve the arithmetic of multiplying often by a percentage for example a 30 win rate means from the the the qualified opportunities 30 converted into a commit or churn can indicate we lost x percent of our clients this month this year and so on they use an arithmetic of multiplication what you'll see that the multiplication arithmetic often really well applies to securing a deal but we must note that most of these multiplication are based on what we refer to in the industry as an open loop system meaning if i want to have more coming out of that system i gotta improve either the performance or increase more on the input this is open loop open loop as you may have seen me explain before is when you program a car and you say i need to drive 65 miles an hour and the car keeps driving until it hits something that's open loop closed loop means that the radar indicates something an object is coming up and it originally starts advising you to slow down but essentially can overrule it and slow down it uses the radar as the low radar as an indicator of distance that is a closed loop system today most organizations operate on an open loop system where the closed loop is only created through a form of human closing the loop for example voice of the customer programs you know learning you know an nps score how much do do the client really want and so on and so forth however for us to make the right decisions in our business we really need to learn and understand what is the true arithmetic that we are based on what are the mathematical models that are based on that arithmetic and what is the impact what i'm going to do is i'm going to use some visual charts in order to explain this as early on early on in my my life i was taught math through visual models i still love that desmos. com is a place where you can find a calculator where you can draw a chart for those if you're interested in looking up on this graph chart i'm first going to indicate to you what is adding up in this case y equals x plus n indicates if x equals 0 and i you know add 5 stuff this line will will go up it's a linear line that is going up for example this applies to when you have a setup fee a setup fee with ten thousand dollars has only a one-time impact it's a form of adding up here's a mathematical line of x of y equaling x in this case whatever what it approximates y equals about half x you create a linear persistent line so the further i go to the right i can calculate what my y is because n is constant if you're going to see what x to the power of n is y equals now x to the power of n you're going to see that that graph is going to create that line is going to create an exponential curve and that is what i'm interested in what we notice is that if we started multiplying multiple times our conversion rate we essentially establish that co that that exponential rate let me explain here we have an exponential graph what we notice and what the nature is of an exponential graph is the further i go to the right the more disproportionate the impact becomes in this case i create a delta your a and let's say that the delta a of rom block let's say that that is a six month period so we are right now let's see the first three blocks we were covered so at this point in time we may can assume that you know like somewhere down here we're at 18 months and this is a six month window what you're now going to see is as i increase that that that delta i'm going to add six more months not only does it create again b but it creates a bigger impact six months in this case from 18 to 24 months and from 24 to what it seems to be about 30 months that has a bigger impact than earlier i go even further and what i see is if once again i increase by six months my impact is even more disproportionate it goes even further that creates an idea that there's a disproportionate impact that an exponential curve has comparing this to a to a linear model a linear model doesn't have that a linear model has the same impact if i keep moving forward now let's apply that and figure out how does that impact sales if i look at sales and i look at the bow tie model only the part that applies to sales then i see that for many what happens into that specific box into that specific sales box is pure art or mystery what i'm going to depict is that in many cases we are calculating what the win rate is simply by dividing the number of wins by the amount of leads or opportunities whatever you may call it that creates a linear function a linear function that has two variables how many wins did i get or how much revenue and how many leads did i generate uh did i did i need another or a number of opportunities divide these two and i get a percentage off of like 30 20 25 these two variables how many leads and how many wins are often also the most discussed in the boardroom how many logos they were with how much new revenue did we secure how many mqls were generated by the marketing department in a linear model what we have to realize if i want to generate twice as much output i have to generate twice as much input heck look at that that that mystery box in order to get twice as much because of that function that i just depicted i need twice as much on the input you often hear this in lingo when for example in the world of sales a person may say a sales leader may say i need to give my team more at bats or and so on as a four or another way is like i need i need more shots on goal now what you'll see down here by considering it being a linear function that may absolutely make sense right not only am i adding up more mqls now i need more shots on goal i you know multiplying hey give me twice as many shots on goal i'm going to get twice as many results this is the reason shots on goal whether it's you're populated or soccer related you know at bat this is the terminology now what we are going to look if i zoom back a little bit roop i will go back i want to go back to this spot and at this spot i'm saying is like hey what actually happens inside that box i'm no longer looking at the excellent part i'm looking at what's going in what's happening internal what you'll see internally it is often a function and a product of number of emails phone calls social engagements calendared meetings and so on and so forth if you look at that and i just simply take a look at the meetings the calendar meetings then the win rate is essentially the product of every one every time i keep multiplying right so first meeting has been successful let's say ninety percent of the time then i move to the next meeting oh seventy percent of the time next meeting and so on and the win rate simply is multiplying the success the success rate of each of these calendar meetings that you have and often we kind of like know how many calendar meetings a particular deal needs to take for example we know enterprise 100 000 plus deals need in excess of 10 to 12 meetings whereas smb higher velocity deals need a little bit shorter if i take that formula and i say like so the win rate equates to every conversion rate of every meeting and multiply it with the next one and the next one and the next one if i now assume that the conversion rate per meeting is kind of like the same then it the true nature of the mathematical formula starts to become clear to me because if each conversion rate is approximately the same per meeting then the win rate equates to the conversion rate per meeting to the power of the amount of meetings i'm having and that unveils that the mathematical relationship of sales is not linear but is exponential and as a result we are going to be able to reap the rewards of that exponential curve disproportionate impact the impact of gaining a commitment is an exponential relationship with your effectiveness and your efficiency i'm gonna yeah like demonstrate that if i take that win rate and i use the inverse which is i'm taking the root off then in order to calculate how many conversion rates per meter what the conversion rate per meeting on average is i need to have across a sales cycle i can learn something really really amazing in this case i'm going to depict that it's going to take on average and enterprise close 12 meetings an enterprise commit is going to take me approximately 12 meetings and on that in this case i assume a win rate of 28 and a half percent that means that an enterprise deal therefore takes 90 percent conversion success rate per meeting to be successful now let me compare this to smb in smbs we see that the win rate is reasonably amount of lower why is that as the price average sales price of a deal goes down more unqualified buyers are getting into the process high dollar deals often require you know company approval before you go start entering the sale cycle process the buying cycle process and so if you're buying 250 000 your company often first require you to have budget there are four you're automatically a more qualified buyer as the dollar value drops let's say to ten thousand dollars you see there's more dis unqualified buyer and as a result we're going to see that rent rate dropped to about 20 percent that still means that the average meetings are still going to be about five meetings to close you just disqualify faster you need to disqualify faster however what you'll see now where i calculated that 12 meetings we have an approximate one-third win rate required 90 success rate per meeting for an smb that means i have to have on average a 72 win rate across five meetings and that is a very different kind of sale that's the reason why smb sales are often higher velocity and have a different profile and why it is so hard for an smb rep to step up to become an enterprise but give you an explanation of that if i go back to that win rate which is a function of a conversion rate per meeting to the power of number of meetings what i'm going to see that if i take that 90 and do that in reverse you're going to get the 28.

5 right now look what happens when i reduce from 12 meetings to 11 meetings look what happens what we are noticing is the impact of fewer meetings that our win rate goes up i know you may say jaco is not that easy to reduce the amount of meetings let that be for another day and some of the other videos we explain you how you can do that all i'm proving down here is the mathematical impact of reducing the amount of meetings and what it has next what i'm going to see is what the mathematical impact is if i increase the win rate look at that i'm upping the win rate from 90 percent for sorry from 28 and a half percent to close to 37 simply by improving the performance the success rate per meeting if i do both at the same time look at that i am now improving the win rate and i'm in reducing the meeting combined this gives me a 40 win rate again is this realistic would this happen overnight not per se we would reduce the meetings from 12 meetings to let's say 11. 5 or 11. 6 all i'm saying is marginal gain has huge impact and this is because it is based on an exponential function that explains why the execution of a process that has proven action out proven actions is so important because there's a mathematical relationship let's summarize this okay when we look historically at cells we've always thought it was a linear function however what we see what hap from the outside of the box what we see when we look inside the box we see it actually has an exponential function a linear function means that in order for me to get twice as many wins i need twice as many leads however as we see since it's based on an exponential function we know that in order to create twice as many wins we can also improve fifteen percent improvement by five five action as if we improve five meetings each by a small percentage of 15 it will give us 2x to sales and when i say 15 improvement i mean if you go on average let's say from uh normally we convert a meeting or we convert something at 20 percent a fifteen percent improvement means we now converting it twenty three percent that is a fifty percent improve another fifty percent points this even is more so when we look at customer success when we look at customer success we have to think will this system constantly be exponential and the truth is it is not because we do have outside of sales and inside customer success we see a closed-loop system this is the very nature of sas if you achieve the impact that the client wants they are coming and they're going to keep buying from you recurring impact results in recurring revenue and if you make small improvements month after month after month this has a huge impact we call that compound and this is because the impact of previous months has an impact on the next month whereas with sales once the deal is committed there's no like further thing happening the deal is committed customer success however it keeps making an impact now what i'm going to do is i'm going to share to visualize the impact in the compound domain exponential if i only compound it once in this case i'm only going to do it once like with gaining the original commitment you know like it is the exact same thing as exponential however if i keep renewing and renewing month after month year after year you're going to see that essentially that curve starts to create an even steeper curve it becomes steeper and steeper and that points out that the extending of a customer lifetime value by two to three months has a disproportionate impact as i earlier explained into the future this is super important because it shows that the impact of delivering the promised the impact actually gives you a renewal again and again and again gives us an immense amount of impact now what i want to demonstrate this is how does it go what you'll see a common practical scenario we see down here mag is a manager of a cs team and mac is being asked to cut costs so i'm going to show what would happen if man a meg in this case reduces the head count by one person you know let's say that the head count is 80 000 what would do you think would be the impact on meg's budget what would happen what i'm going to show you is the impact it has on a business for starters when max started she managed let's say 20 accounts and let's say that those 20 accounts were really big accounts on average whatever that ends up being and the revenue that mac really got from that was 6.

1 million dollars the revenue keeps growing and meg eventually at some point in time hired a new person we'll call that person jacob and jacob you know together with jacob over a year once jacob was able to ramp up mac and jacob together were doing 35 accounts and as a result they brought in 10. 7 million dollars now mec was unfortunate and so she had to let go of jacob jacob you know like like was fired in this case and meg was tasked to make sure that that same head count now delivered the same revenue because you know like how much could it impact right and so the question now is how much would firing jacob you know a year two years later impact the revenue what you're going to see is horizontally i'm going to depict right now what it takes in order for mac to increase that revenue so down here you're going to see the accounts go up over now you're going to see the churn was impacted the upsell nature the amount of periods everything is going to be impact we're not just going to compound one factor there's multiple things are going to happen so we're going to increase meg is now going to increase and originally she was managing uh 25 20 accounts meg is now going to increase and she's now personally has to manage 35 accounts what is going to happen well what is going to happen is logically because meg has less time per client the churn the losing of the account is going to increase and i simply improved it you know made this go up by one percentage point right oh my gosh more accounts meg has less fewer less lesser time to spend on it we're going to see that the upsell opportunity because mac really doesn't have time to spend with clients so that is going to reduce and on top of that you know mac is going to turn faster so the lifetime value of a client is going to reduce again i just you know what you see down here is i reduced it by months and months and months what you're going to see because of the compound nature the lifetime value of that client is significant and if i then multiply that by the amount of accounts you're going to see an even bigger impact now understanding how compound impact work you'd often have to type in this particular formula you can say in in excels uh or in google sheets oh x times y you have to use a function and this function is referred to as future value what you'll see if you type in this function it says it shows that the future value aka the lifetime value of a client is based on these multiple factors that calculates out to have a significant impact on the revenue what you're going to see down here is that as meg nearly doubled the accounts that she has to cover for she went from managing 20 accounts to personally managing 35 accounts that due to the compound impact it hardly had an impact on the revenue she foregone with all that the upsell and the length accentuation of the contracts that is significant that shows you that meg didn't save 80 thousand dollars per year but by her cutting that headcount she actually reduced in this mathematical example the revenue by 3.