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The Return on Sales Investment (ROSI) is a performance metric to assess a sales team's efficiency and effectiveness. It measures how well the sales team generates revenue about the costs incurred. It's a way to understand the profitability and productivity of sales investments together (not precisely but roughly correct statement).
To calculate ROSI, you compare the revenue generated by the sales team to the cost of sales investments. The formula for ROSI is:
ROSI = (Revenue Generated by the Sales Team − Cost of Sales Investment)/ Cost of Sales
This equation gives you a percentage that indicates the return on every dollar spent on sales. For example, a ROSI of 50% means that for every dollar invested in the sales team, the company gets $1.50 back in revenue. This metric helps businesses assess the effectiveness of their sales strategies and make informed decisions on where to allocate resources for maximum return.
It is a straightforward calculation that everyone has at least once tried. However, the metric can't be a single, standalone measurement of sales success. None of them is in that position. I'd recommend using that in at least the CAC/ LTV ratio context while planning. It is an embedded metric in CAC, helping you understand how to structure your costs based on your GTM and unit economics. The second use case is associated with the unit economics itself. This exercise is more complex than the calculation itself, as it requires a particular selection of units to make it an actual unit of economics. You need to determine the unit, calculate revenue per unit, identify/ match revenue to cost unit, and apply the formula.
ROSI (per unit) = (Revenue Per Unit- Cost Per Unit)/ Cost Per Unit.
It's very similar, but once you start working on it, you realize how difficult it is to do the cost-to-revenue matching. That's the bad news, among a few others, that I want to highlight here:
Complexity in attribution: In businesses where sales cycles are long or complex or where multiple factors contribute to sales (like marketing efforts, product quality, etc.), it can be difficult to attribute revenue to specific sales investments/costs accurately. Clean cuts are rare, so you must assume the allocation of some costs. That's when the fun starts (joke).
Variability across products and regions: ROSI may vary significantly across different products, services, or regions. This variability can make using ROSI as a universal metric for assessing sales efficiency challenging. Your scaling and expanding process take time to settle on, but the calculation is becoming more complex as you add more dimensions.
Risk of cost-cutting: An overemphasis on ROSI can lead to excessive cost-cutting measures in sales investments, which might harm the sales team's ability to perform effectively in the long run. This is a balanced dance between enough but not too much. Cut carefully so you don't make your team less productive than before cuts. Many follow this trap, assuming too much, and they get a much lower return despite deep cuts.
Let's switch gears to a positive tone here. The benefit of the metrics starts with the efficiency of your sales operations team. Yes, you might see this as surprising news, but it's a metric that indicates whether your sales operations team works on what it's for. The ROSI helps to understand how efficiently the company converts its sales investments into revenue. A higher ROSI indicates that the company effectively uses its resources to generate sales, a positive sign of operational efficiency. Here you go. If that's different from what your sales ops team does, what else are they for? The metric snapshot provides the company's potential for profitability. It helps investors assess whether the company is on a sustainable path to profitability, especially if it is currently in a growth phase and not profitable. It is less about the result but the path and awareness that drives the improving output over time.
Translating this to the actual case would follow a scenario like this. As the financial year approaches, the executive team at TechySaaS (fictional company) begins their annual human capital planning, significantly focusing on optimizing their sales force in line with the insights provided by the Return on Sales Investment (ROSI) metric.
The previous year's ROSI data revealed that while the overall revenue delivered by the sales team was impressive, the relative cost of sales was higher than industry benchmarks. The CAC/LTV ratio is 2.8x, the OTE/Quota Ratio is 4x, and your quota attainment is around 65% for your sales population. This insight has prompted the team to rethink its sales staffing strategy. They are considering a shift towards a more technology-driven sales approach, integrating advanced CRM tools and data analytics capabilities to enhance sales productivity. This strategy is expected to maintain or potentially increase sales revenue but at a lower cost per sale, thereby improving the ROSI in the upcoming fiscal year.
In collaboration with the sales division, the HR department executes this strategy. This involves a targeted recruitment plan to hire sales professionals with solid proficiency in GTM tools and experience in data-driven sales environments. The existing sales team is also slated to receive extensive training in using new sales tools and analytics software through sales enablement and sales ops resources. The HR, finance, and sales ops team also explores restructuring sales incentives to align more closely with ROSI outcomes, encouraging the sales force to adopt more cost-effective selling strategies. These initiatives, underpinned by the ROSI metric, are aimed not just at reducing costs but, more importantly, at fostering a more efficient, technologically adept sales team that can drive sustainable revenue growth in the long term.
Conclusion: Some investors use ROSI to gauge the management team's effectiveness, especially in generating revenue and managing costs. A strong ROSI can signify good strategic decision-making and operational management. Don't be swayed by the fact that this metric is looking good. Per my example above, you must put a couple of these together to see that your actions make sense. If your metric is impressive, but your CAC/ LTV ratio isn't, and your attainment distribution looks confusing (or pretty unimpressive), you must fix some other things before doubling your investment. Otherwise, you are just wasting money and resources and leaving more room for your competitors to weigh in over time. Like in math, you must follow an order of operations to get you to the correct answer on your equation. There are more fundamental things that we have to have in place to get more sophisticated and benefit from that at full length. Here are a couple of other things to pay attention to while working with this metric:
Conduct ROSI analysis at different intervals (quarterly, annually, monthly) based on the industry dynamics and business lifecycle. It helps in the timely identification of trends and necessary adjustments. You can leverage the metric's versatile nature and apply it to sales/ marketing campaigns and projects or incorporate it in the LTP process. It might help you validate the planning drivers for your Budget/ LTP plan.
Use ROSI as a tool for risk assessment. A declining ROSI can be an early indicator of issues in sales strategies or market positioning, necessitating a deeper financial analysis. Ensure you skip the seasonality, as your business might be susceptible to peaks and valleys.
Leverage the metric as critical to inform decisions on future investments in sales and marketing initiatives, ensuring funds are allocated to the most effective strategies. If your CRO comes to you saying that you need more reps, you should ask first whether your currently employed reps are productive or provide the right level of return.
Productivity is king in this space. Your sales ops team should help develop and implement scalable sales strategies. Analyze past ROSI data to identify which strategies led to sustainable growth and replicate these in different markets or product lines. Unfortunately, experimenting is inevitable before you land with a few choice points.
Conduct comparative analyses with competitors in the same industry to benchmark your sales performance. Use ROSI as a critical metric to identify areas of strength and opportunities for improvement.
Structure sales incentives and targets around ROSI outcomes. This shouldn't be a metric itself, but some of the inputs for that metric can translate for a higher output. Include your first-line managers in the process of accountability for the results. It encourages the sales team to focus on generating revenue and doing so cost-effectively. A good example is the sales cycle. For longer sales cycles, focus on nurturing leads and building relationships to improve ROSI over time. For shorter cycles, emphasize efficiency and quick conversions. You can include both in your incentive plan.
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