Key takeaways

Without realizing it, most recurring revenue teams tend to focus on a linear mathematical model --- for example, to get twice as many closed deals, they search for how to get twice as many leads.

But the fundamentals of recurring revenue are built on an exponential and compound model, not linear.

This workshop reviews how to align the actions of your team to take advantage of the exponential model, in order to achieve results that don't just grow on a linear basis, but grow by compounding.

Hi there, my name is Jacco van der Kooij. I'm the founder and co-CEO of Winning by Design. And today I'm going to share review, 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 are talking about early January we are seeing that these four models are currently available already describe the videos on our YouTube channel which you can find at youtube.com/winningbydesign. What we're going to talk about today is the mathematical model and that model is based on the data model. So you've 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. Okay, I see you like it. 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 the 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 to M8. Time metrics, Delta T and conversion rates. We named these with mnemonics, in other words for short letters, because in many companies and in many different businesses, they use different things. Sometimes they call it MQL, sometimes it's called 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 generate? How many leads did the marketing department generate? How many logos were won by sales? How many 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 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. Day and month, 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 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 a 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 the essentially can overrule it and slow down. It uses the radar as an indicator of distance, that is a closed loop system. Today, most organizations operate on an open loop system while 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, NPS score, how much 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're 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 that I'm going to use some visual charts in order to explain this. As early on in my life, I was taught math through visual model, I still love that. Desmos.com is a place where you can find a calculator and where you can draw a chart for those of you who are interested in. Looking upon this graph chart, I'm first gonna indicate to you what is adding up. In this case, y equals x plus N, indicates if x equals zero and I'm, add five stuff, this line will go up. It's a linear line that is going up. For example, this applies to when you have a setup fee. The set up fee with $10,000 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, what are the 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 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 gonna create, that line is gonna create an exponential curve and that is what I'm interested in. What we notice is that if you're starting multiplying, multiple times our conversion rate, we essentially established that exponential rate, let me explain. Here we have an exponential graph, what we notice, and then 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, yo 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 are recovered. So at this point in time, we may kind of assume that you know, like somewhere down here, we're at 18 months and this is a six month window, which you're now going to see is as I increased that Delta, I'm gonna 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 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 ID that there's a disproportionate impact that the exponential curve has. Comparing this 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 that 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 generate? Did I need another or a number of opportunities. Divide these two and I get a percentage often 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 will win? How much new revenue they were secure? How many MQLs were generated by the marketing department? In a linear model, What we have to realize if I wanna generate twice as much output, I have to generate twice as much input. Hack, look at 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 advice or and so on and so forth, or another way is like, I need more shots on goal. Now what you'll see down here by considering it being a linear function that may absolute make sense, right? Not only am I adding up more MQL, now I need more shots on goal. I need a multiplying. Hey give me twice as many shots on goal. I'm gonna get twice as my new results. This is the reason shots on goal whether it's your puck related, the soccer related at bat. This is the terminology. Now, what we are going to look if I zoom back a little bit, roop, roop, roop, I'll go back, I wanna go back to this spot and at this spot, I am saying is like, "Hey what actually happens inside that box?" Am 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, a calendar of meetings and so on and so forth. If you look at that and I just simply take a look at the meetings to call on the meetings then the win rate is essentially the product of everyone. Every time I keep multiplying, right? So, first meeting has been successful. Let's say 90% of the time then I moved to the next meeting. Oh, 70% of that next meeting and so on and the win rate simply is multiplying 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 a hundred thousand dollars plus deals need an excess of 10 to 12 meetings, whereas SMB higher velocity deals need a little bit of shorter. If I take that formula and I say like so the win rate equates to every conversion rate of every meeting and multiplied to the next one and the next one and the next one. If I now assume that the conversion rate per meeting it's kind of like the same that 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 it's 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 commitment is an exponential relationship If you're effectiveness in your efficiency. I'm gonna demonstrate that if I take that win rate and I use the inverse which is I'm taking the root of then in order to calculate how many conversion rates, what the conversion rate per meeting on average is I need to have across a sale cycle, I can learn something really, really amazing. In this case, I'm gonna depict that is going to take on average and enterprise close 12 meetings, an enterprise commit is gonna 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% 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 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 your 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, therefore you're automatically a more qualified buyer. As the dollar value drops let's say to $10,000, you see there's more dis unqualified buyer and as a result, we're going to see that win rate drop to about 20%. That still means that the average meetings are still gonna 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 for 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 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 rep, it gives 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 due to the reverse, you're gonna get the 28 and a half percent right? Now look what happens whenever deuce from 12 meetings through 11 meetings. Look what happens, what we're noticing is the impact of fewer meetings that our win rate goes up. I know you may say Jacco is not that easy to reduce the amount of meetings, let that be for another day, in some of the other videos we explain 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 inbox is if I increase the win rate, look at that. I'm upping the win rate from 90%, for sorry, from 28 and a half percent close to 37%, simply by improving the performance to 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 reducing the meeting. Combined this gives me a 40% win rate. Again, is this realistic with this happen overnight? Not per se, we would reduce the meeting 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 actions is so important because there's a mathematical relationship. Let's summarize this, okay? When we look historically at sales, we've always thought it was a linear function. However, what we see what happened 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 15% improvement five actionized, if we improve five meetings each by a small percentage of 15%, it will give us two extra sales and when I say 15% improvement, I mean if you go on average, let's say from, normally we convert a meeting or we convert something at 20%, a 50% improvement means we now converting at 23%. That is a 50% improvement, not a 50% percent point. 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 gonna keep buying from you. Recurring impact results and 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 is 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 compounded once, in this case I'm only going to do it once like 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 start 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 impact actually gave your renewal again and again and again gives us an immense amount of impact. Now, what I wanna demonstrate is, is how does what you see a common practical scenario, we see down here, magazine manager of a CSD, Meg is being asked to cut costs. So I'm going to show what would happen if Meg in this case reduces to headcount by one person, you know, let's say that the headcount 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 Meg 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 mag really got from that was $6.1 million. 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, one, Jacob wasn't able to ramp up. Meg and Jacob together were doing 35 accounts and as a result, they brought in $10.7 million. Now Meg was unfortunate and so she had to let go of Jacob, Jacob, you know like handwork was fired in this case and Meg was tasked to make sure that same headcount now delivered the same revenue because you know, like how much good it impact, right? And so the question now is how much would firing Jacob you know, a year or two years later impact the revenue. What you going to see is horizontally, I'm going to depict right now what it takes in order for Meg 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 impacted, We're not just gonna 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 20 accounts, Meg is now going to increase and she's now personally asked to manage 35 accounts. What is going to happen? 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 lesser time to spend on it. We're going to see that the upsell opportunity because Meg really doesn't have time to spend with clients. So that is going to reduce and on top of that, yo Meg is gonna churn faster so the lifetime value of a client is going to reduce. Again, I just hear what you're 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 gonna 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 Excel's or in Google sheets or 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 a.k.a 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 are going to see down here is that as Meg nearly doubled the accounts that you asked 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 forgone with all that the upsell and the length accentuation of the contracts that is significant. That shows you that Meg didn't save $80,000 per year but by her cutting that headcount, she actually reduced in this mathematical example the revenue by $3.95 million and that points to us that what is the impact on the budget a.k.a 4 million something close to $4 million. Meg did not know that, the company did not know that, they didn't think about the compound impact. Again, they weren't thinking about it in a linear perspective. Hey, two people bring in $20 million, how much will Meg really lose? But when you start seeing all these little things that they're impacting, I'm gonna go even further and give you an explanation why that is. If you look at customer success, we see that customer success is based on a compound formula. What we see is that the small improvement here in churn and upsell to the power of high repetition, for example, monthly contracts, we're talking about 24, 36, 48 kind of repetitions, right? That has a huge impact on the lifetime value which is where most of the profit comes from. What we see is that sales genuinely operates predominantly in the exponential domain whereas the compound impact really takes place in the customer success department, think of that. If I now look at that formula, what created at lifetime value, I'm going to see that sale's exponential Impact is felt in one super important variable, make that variable zero and everything else doesn't matter but also that customer success has a huge impact on the three super valuable factors in this. Some people may refer upsells and put that back into sales, we got that but the idea down here is that it works on a compound impact which is often not something that sales is very familiar with and therefore they may take, you know, different kinds of actions. I certainly hope that with this, I have given you great insights on what we can do and how you can apply this and I'm looking forward at some point in time that you find a way to apply this in your world because thinking about sales from a scientific perspective has a such a bigger impact on your business and with that, I wanna say and thank you very much for attending, I really appreciate it. I wanna let you know that there are several more of these models coming out, that you can find them on YouTube and hope that you enjoy these process. Thank you again, please subscribe to the channel by clicking on subscribe and with that said, I'm gonna let you go. Thank you for having spending the time with me. ♪♪♪

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Without realizing it, most recurring revenue teams tend to focus on a linear mathematical model --- for example, to get twice as many closed deals, they search for how to get twice as many leads.

But the fundamentals of recurring revenue are built on an exponential and compound model, not linear.

This workshop reviews how to align the actions of your team to take advantage of the exponential model, in order to achieve results that don't just grow on a linear basis, but grow by compounding.

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