Mathematical Model

The ROM Mathematical Model, where a series of meetings comprises the win rate

The Model

The Mathematical Model shows that growth in a recurring revenue business is based not on linear mathematical principles, but on exponential arithmetic.

Key Elements

Reexamining the win rate

The win rate is typically determined as the number of wins compared to the number of opportunities. This is a linear function, and it implies that you need twice the number of opportunities in order to achieve twice the number of wins. However, this way of looking at win rate glosses over what actually happens during a sales cycle, and how those moments in the sales cycle can be improved to achieve the highly desired exponential rather than linear growth.

When we break the sales cycle down in terms of activities, we see the the sales cycle is comprised of a series of meetings. At each meeting, the customer determines if they are still interested in the product; if yes, a subsequent meeting occurs, and if no, the sales cycle ends there. In order to get to a win, each meeting has its own conversion rate; if a meeting 'converts', then  the next meeting occurs. It then follows that the win rate becomes the aggregate of all of the individual meeting conversion rates. Continuing along these lines, the sales cycle becomes the aggregate of the time between all meetings.

The sales cycle can therefore be thought of as a simple mathematical formula, where the win rate equals the multiplication of each of the individual meeting conversion rates. Similarly, the win rate formula can also be thought of as the average conversion rate per meeting, raised to the power of the number of meetings --- which is an exponential relationship.

By thinking about the sales cycle in terms of the conversion from meeting to meeting, we then can start to see how small improvements can have a disproportionate impact on results. According to this mathematical formula, the two key ways to drive exponential results are (1) decrease the number of meetings in the average sales cycle, and (2) increase the average success rate for each meeting. [Footnote 1]

The true growth engine

It is a common misconception that the most important fuel for growth is new leads, opportunities, and closed deals; many organizations place a maniacal focus on these elements, while ignoring a much more powerful and efficient growth engine. Instead, the majority of the growth in a properly functioning recurring revenue business comes from the compound impact of existing customers, during their lifetime in their customer journeys as they go through the key moments of renewal, cross-sell, and up-sell.

Growth in a recurring revenue business is based not on linear mathematical principles, but on exponential arithmetic.

Findings

  1. Recurring revenue models are built to take advantage of exponential and compound growth; organizations need to build their revenue functions with these principles in mind in order to maximize their growth potential.
  2. Disproportionate impact comes from the compound growth of existing customers.
  3. In practice, the number of meetings in the sales cycle can be reduced using asynchronous tactics, such as sending a proposal with a recorded video that can be provided to all stakeholders, as opposed to needing multiple meetings to get all stakeholders aligned.
  4. Companies can deploy asynchronous selling techniques in order to accelerate sales cycles and increase win rates, in addition to realizing other benefits such as decreasing customer acquisition costs.

The Model In Action

Exponential arithmetic

Thinking about the sales cycle as a series of meetings, we can see that the win rate can be thought of as the average conversion rate per meeting, raised to the power of the number of meetings; therefore, fewer meetings in the average sales cycle yields a higher win rate.

A visualization of the Mathematical Model, showing the difference between exponential vs. compound impact in sales

Templates

Apply the model

Download the template of the model so that you can customize and apply it to your own organization.

NOTE: The template is in Google Slides format; click "USE TEMPLATE" to make a copy for yourself.

Download Google SlidesDownload PowerPointDownload PDF

Terminology Used

Exponential impact. Achieving rapid, multiplicative results over time; represented by the curve of an exponential mathematical function.
Compound impact. Achieving rapid results when recurring growth repeats over time.

References

Source 1. Aligning Strategy and Sales: The Choices, Systems and Behaviors that Drive Effective Selling by Frank V. Cespedes.
Source 2. Blueprints for a SaaS Sales Organization by Jacco J. van der Kooij and Fernando Pizarro.
Source 3. Building Trust Growing Sales: How to Master Complex, High-End Sales by Daniel J. Adams.

Footnotes

1. This model should be used in close conjunction with the Data Model.
2. This is a simplified view of the sales process, making such assumptions for the purposes of illustrating this model: (a) each meeting that occurs is a linear step in the sales process, and (b) the outcome of each meeting is binary (either yes or no).