by Bill Aulet
GENERAL EXERCISES TO UNDERSTAND CONCEPT
See the back of the book for answers to some of these questions.
Personal experience with a consumer product: Identify a product in your personal life that you enjoy buying. Quickly map the experience you had in going from having initial interest in the product to purchasing it. Why do you like the sales process so much? Which sales channels does the product’s maker use? Which tactics are effective? ______________________________________________________________________________
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Personal experience with a business product: Do the same exercise in #1 but now with a product from your professional life. What are the differences? ______________________________________________________________________________
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Learning from negative experiences: Now think of a product where you were particularly unhappy with the sales experience. What did you not like? What was fundamentally flawed in the sales process? How could it have been redesigned to benefit both the customer and the company selling the product? ______________________________________________________________________________
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LinkedIn example: How does LinkedIn get new customers? How do they get customers to fill in their profiles? How do they encourage customers to increase the number of connections they have on the social network? Do customers ever speak to anyone who works at LinkedIn? ______________________________________________________________________________
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Private jet sales process: Now imagine you were going to buy a private jet. (Nice!) What kind of sales process would you expect? Why? ______________________________________________________________________________
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WORKSHEETS
Sales Channels for the Short, Medium, and Long Term
Short Term—Initial Market Entry Medium Term—Gaining Market Traction Long Term—Steady State
How long—when does this time period start and end? (Include units—e.g., months, years.)
What % of the sales (measured by revenue) for:
- Field sales _____% _____% _____%
- Inside sales _____% _____% _____%
- Internet sales _____% _____% _____%
- Third-party reseller _____% _____% _____%
Key milestones for this time period, which, when achieved, indicate it is time to move to the next time period: 1.
2.
3. 1.
2.
3. 1.
2.
3.
Key assumptions: 1.
2.
3. 1.
2.
3. 1.
2.
3.
Highest risk factors: 1.
2.
3. 1.
2.
3.
1.
2.
3.
Summary for time period:
2nd Draft Sales Funnel Inputs
Short Term Medium Term Long Term
#1: Identification (Output: Leads) How will you generate leads?
What are your customer’s watering holes?
Who from the customer’s DMU is involved in this part of the funnel?
#2: Consideration (Output: Suspects) How do you start the initial dialogue with your leads?
What windows of opportunity or triggers exist?
Who from the DMU is involved?
#3: Engagement (Output: Prospects) How do you determine whether your value proposition is appealing to the customer?
How do you determine whether your pricing is in line with the customer’s budget?
Who from the DMU is involved?
#4: Purchase Intent (Output: Qualified Prospects) How do you qualify that the customer is ready to purchase, and how do you develop a proposal for the purchase?
How do you close the sale and handle customer questions/objections?
Who from the DMU is involved?
#5: Purchase (Output: Customers) How do you secure full commitment from the customer to purchase your product?
How does your customer pay for your product? Who pays?
Who from the DMU is involved?
#6: Loyalty (Output: Satisfied Customers) How do you ship and install the product?
How do you provide support to the customer so they use and get the expected value out of your product?
Who from the DMU is involved?
#7: Advocacy (Output: Evangelists) How do you encourage the customer to buy more product?
How do you encourage the customer to tell others about the product, and how do you measure whether customers are telling others about your product?
Who from the DMU is involved?
2nd Draft Sales Funnel with Actions for Short Term
Describe the major differences between the short-term and medium-term sales funnels:
2nd Draft Sales Funnel with Actions for Medium Term
Describe the major differences between the medium-term and long-term sales funnels:
2nd Draft Sales Funnel with Actions for Long Term
Describe the major differences between the medium-term and long-term sales funnels:
Techniques and Actions to Maximize Yield Rate at Each Stage
Short Term: Summary of Techniques and Actions to Maximize Yield
Stage in Funnel (starting at top) Technique(s) How to Maximize Conversion Done by Whom? When?
#1—Identification (leads)
#2—Consideration (suspects)
#3—Engagement (prospects)
#4—Purchase Intent (qualified prospects)
#5—Purchase (customers)
#6—Loyalty (satisfied customers)
#7—Advocacy (evangelists)
Medium Term: Summary of Techniques and Actions to Maximize Yield
Stage in Funnel (starting at top) Technique(s) How to Maximize Conversion Done by Whom? When?
#1—Identification (leads)
#2—Consideration (suspects)
#3—Engagement (prospects)
#4—Purchase Intent (qualified prospects)
#5—Purchase (customers)
#6—Loyalty (satisfied customers)
#7—Advocacy (evangelists)
Long Term: Summary of Techniques and Actions to Maximize Yield
Stage in Funnel (starting at top) Technique(s) How to Maximize Conversion Done by Whom? When?
#1—Identification (leads)
#2—Consideration (suspects)
#3—Engagement (prospects)
#4—Purchase Intent (qualified prospects)
#5—Purchase (customers)
#6—Loyalty (satisfied customers)
#7—Advocacy (evangelists)
Risk Factors
What are your three biggest risk factors in your go-to-market plan? How do you intend to mitigate those risks? What metrics will you use to monitor them and intervene as needed? (Remember, things never go exactly the way you want them to or as you plan them!)
Risk factor #1 and mitigation plan: ______________________________________________________________________________ ______________________________________________________________________________
Metrics to watch:
______________________________________________________________________________ ______________________________________________________________________________
Potential intervention strategy:
______________________________________________________________________________ ______________________________________________________________________________
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Risk factor #2 and mitigation p
lan: ______________________________________________________________________________ ______________________________________________________________________________
Metrics to watch:
______________________________________________________________________________ ______________________________________________________________________________
Potential intervention strategy:
______________________________________________________________________________ ______________________________________________________________________________
______________________________________________________________________________
Risk factor #3 and mitigation plan: ______________________________________________________________________________ ______________________________________________________________________________
Metrics to watch:
______________________________________________________________________________ ______________________________________________________________________________
Potential intervention strategy:
______________________________________________________________________________ ______________________________________________________________________________
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EXAMPLE
GearUp was a class project by Anusha Paliwal, Jillian Ardrey, and Monique Guimond—all MIT Sloan MBAs from the class of 2017. They are all avid outdoors types, and they developed a plan for a new venture that would offer an annual subscription service to provide active young traveling professionals with high-quality ski, snowboard, camping, and backpack gear delivered to them when they went on vacations. Here is how they explained how they would maximize conversion between stages of the funnel, and how they defined their milestones for moving from the short-term to medium-term to long-term sales strategies.
This has been another intense chapter, but you are building up great knowledge of your business; so not only do you know if it is worth doing, but you also have a plan to make it great. Just as important, you are understanding the underlying drivers so you can intelligently and quickly identify and make adjustments once the business starts. It is hard work, but it will pay off. The only thing harder is trying to launch a new product and not having a good plan. That is not only more work in the end, it is much more frustrating. Hang in there, you are about to pull it all together and launch this rocket ship.
STEP 19
Estimate the Cost of Customer Acquisition (COCA)
WHAT IS STEP 19, ESTIMATE THE COST OF CUSTOMER ACQUISITION (COCA)?
Estimate the total marketing and sales expense in a given period to get new customers and divide that total expense by the number of new customers. This will be the marketing and sales expense required to acquire one additional average customer for the given time period.
WHY DO WE DO THIS STEP, AND WHY DO WE DO IT NOW?
The unit economics are a simple but effective indicator for how sustainable and attractive your business will be at any point in time and, maybe most important, as it scales. You just completed a meaningful go-to-market plan in Step 18, and that is the critical input to estimate your COCA.
By the Book: See pages 203–211 of Disciplined Entrepreneurship for basic knowledge on this step.
See page 211–217 of Disciplined Entrepreneurship for examples of how different companies and teams have addressed this step.
COCA is a tough number to estimate, so entrepreneurs often just bypass this step--but that is a big mistake, as your business will be flying blind if you skip the COCA estimation. Entrepreneurs also, almost without fail, underestimate COCA.
PROCESS GUIDE
You have done an enormous amount of work in this workbook so far, and now you can tie it all together to see if the unit economics work. Very often they don’t initially, but don’t lose hope because now you will understand the underlying drivers of COCA and Lifetime Value (LTV), which will enable you to make adjustments to make the unit economics work. If, after the adjustments, they can’t work, then don’t waste your time trying to defy math and move on to another opportunity, wiser for the experience. You need to know there is some path to greatness, or at least success. Otherwise, don’t go forward with the journey.
To estimate the COCA, you will take the plan from Step 18, Map the Sales Process to Acquire a Customer, and build a forecast of how many customers you expect to gain during the short-term, medium-term, and long-term time periods, as well as the total marketing and sales expenses for each time period that would result in gaining the number of customers you forecast.
To forecast the number of customers you expect during each time period, you need to do a sales forecast that you and your team really believe is not only possible but also likely. Have your forecast reviewed and tested by a sales professional. Often entrepreneurs’ forecasts are incredibly naïve and wildly overoptimistic.
Your sales forecast for your first 90 days, and possibly even for your first year, should have specific names of the customers whose sales you are going to record. If the potential customers don’t already know you and you know them, it is highly unlikely that they will be buying during this initial time period. Take the number of people you think will be buying and only record a percentage of that on your forecast so that it is more realistic (maybe 80 percent, but that will vary by situation).
In the longer term, your sales forecast can make more abstract estimates based on growth rate, sales productivity, and market share, but understand that the more abstract the assumptions are in the calculation of the forecast, the less credible and the more risky they are. For every story of an entrepreneur exceeding their projections, there are dozens of entrepreneurs who underachieved. Follow the maxim “underpromise and overdeliver” when it comes to your forecasts. Don’t delude yourself into believing you have a great business when the facts indicate otherwise. Enthusiasm is good, but naïveté is bad. Again, get a professional salesperson to review your forecast with you so they can point out the flaws. Listen to them carefully!
To forecast your sales and marketing expenses, you will need to first estimate, based on your sales process from Step 18, what all of your sales and marketing activities will be, and how much they will cost. Marketing expenses will generally be the set of expenses that build brand awareness and generate leads, and sales expenses relate to converting those leads into paying customers.
Sales expenses may include:
Salaries of salespeople
The time you and other nonsalespeople spend on sales activities
Commissions
Bonuses
Travel and entertainment expenses
Benefits (health insurance, etc.) and employer taxes (social security, Medicare, etc.)
Marketing expenses may include:
Salaries of marketing employees (and bonuses, benefits, employer taxes, etc.)
The time you and other nonmarketing employees spend on marketing activities
Websites
Social media
Advertising
Trade shows
Public relations
Consultants
If some people aren’t collecting a salary or their salary is below market rate, you should take the market rate for that person when calculating the expense. It is not sustainable to not pay salaries, so using anything less than market rate in your calculations will significantly understate your expenses.
If you have not done an exercise like this before, understand it will take some time to go through at the level of detail and thought required to produce a relatively accurate list of expenses. I strongly recommend you work with someone who has experience building a marketing and sales budget to help you, because otherwise you will miss a lot of expenses. Also look at the expenses that your competitors and others in similar markets incur. While you actively and aggressively seek ways to save money and be more effective by being innovative in how you approach marketing and sales—see
the Dollar Shave Club example from Disciplined Entrepreneurship—understanding what your competitors do will ensure you are not overlooking any expenses that you will need to incur later.
