The Mathematical Model shows that growth in a recurring revenue business is based not on linear mathematical principles, but on exponential arithmetic.
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]
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.
More growth can be achieved when teams take advantage of the compound mathematical principles of recurring revenue.
More growth can be achieved when teams take advantage of the compound mathematical principles of recurring revenue.
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.
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