As a sales manager, you might only have one thought in mind: sell, sell, sell. Of course, selling is a good thing. But is each sale worth it? How much money are you spending per lead? If you spend more money attracting and nurturing the lead than the amount of revenue from the sale, you’re actually selling at a net loss for your company.
To avoid this pyrrhic victory, sales managers should consider the ROI —return on investment— for each step they take. If you’re new to being a sales manager, this guide will explain everything you need to know about ROIs in sales and how to strategically leverage ROIs in your own sales strategy.
Table of Contents
What is ROI in Sales?
To start off, ROI stands for “return on investment,” and is a percentage representing how much money a business made versus how much it spent on a particular course of action. By looking at an investment’s ROI, a sales manager can determine if they should take the same action in the future or change their strategy.
Some examples of investments your sales department might’ve made are targeting a specific lead, hiring a new sales rep, purchasing a new CRM, or arranging a training seminar for your team. It can be hard to qualify the impact these changes have on your business’s bottom line, so calculating the ROI of these investments helps you objectively determine if the action was beneficial to your company or not.
Why Does ROI Matter?
ROI matters for businesses of all sizes because it helps sales managers make data-driven decisions about their current and future sales strategies and operations to keep total costs down and maximize profits.
Say, for example, that a sales department runs two sales campaigns: one online and one in-person. Though both campaigns might generate $10,000 in sales, the online campaign might cost $1,000 to the in-person campaign’s $5,000 – in other words, the online campaign has an ROI of 900% while the in-person campaign’s is only 200%.
With this information at hand, a sales manager would know to prioritize and invest more in the company’s online sales campaign over the in-person campaign. Though their revenues might be the same, the ROI illuminates the difference in each campaign’s profit margins.
As another example, a sales rep might use ROI to evaluate a single lead – if the cost of nurturing a lead begins to outpace the value of the potential sale, then the sales rep would know to walk away from the unprofitable deal. The sales manager would set this guiding ROI to ensure that each rep is making efficient use of their time and resources.
(Not sure what a sales lead or sales campaign might look like? If you’re a new sales manager, check out Making That Sale for easy-to-understand guides to the world of sales.)
Additionally, because ROI is measured as a percentage rather than a raw number, tracking ROI over time allows a company to see if its performance and revenue are scaling proportionally as it grows and if its margins are comparable to other companies in the industry.
How to Calculate ROI
There are two ways to calculate ROI: simple ROI and campaign-attributed ROI.
Simple ROI
Simple ROI provides a general overview of how much money is generated per dollar spent. It’s useful when determining the value of a single discrete investment, such as an individual sales lead or campaign, or when comparing ROIs between projects or other companies.
To calculate simple ROI, use this formula:
Simple ROI = (sales growth- sales cost)/sales cost
As an example, here’s the ROI calculation from our online sales campaign earlier:
Simple ROI = (sales growth – sales cost)/sales cost
Simple ROI = ($10,000 – $1,000)/$1,000
Simple ROI = ($9,000)/$1,000
Simple ROI = 9
Expressed as a percentage, this becomes 900%.
However, the big issue with simple ROI is that it assumes that every extra dollar made from the sales campaign is directly caused by the related expense. In truth, there might be other factors at play that affects the profitability of a sales campaign that can’t be seen from a single snapshot.
Campaign-Attributable ROI
For a more detailed look into an investment’s profitability, a sales manager could instead calculate its campaign-attributable ROI, also called an adjusted ROI. An adjusted ROI uses a company’s pre-investment growth to calibrate the investment’s growth rate, filtering out the growth from other aspects not related to the target campaign. This lets a sales manager identify exactly how much of a company’s sales growth is attributable to a single sales campaign.
But to do this, you’ll first need to determine how much your sales grow on average without the new campaign or investment. To this end, look at your historic sales data and calculate your average baseline sales growth rate per time period. For example, you could use a 12-month sales record to determine how much sales growth the company naturally experiences per month, and compare that to the new growth rate after the sales investment.
To calculate campaign-attributable ROI, use this formula:
Campaign-attributable ROI = (sales growth in a time period – average baseline sales growth in the time period – sales cost)/sales cost
Let’s say for example that in the month after implementing our online sales campaign, our company made $10,000 total in sales revenue. However, if our historic data tells us that our average baseline sales growth is 5%, that would mean that 5% of that $10,000 (in other words, $500) of that revenue was organic growth we would’ve made with or without the campaign. As always, our campaign costs $1,000. Our campaign-attributable ROI would then be:
Campaign-attributable ROI = (sales growth in a time period – average baseline sales growth in the time period – sales cost)/sales cost
Campaign-attributable ROI = ($10,000 – $500 – $1,000)/$1,000
Campaign-attributable ROI = 8.5
Expressed as a percentage, this would be 850%. Still very high, but a marked difference from our simple ROI.
Conclusion
Keeping track of ROIs helps sales managers determine profitability by quickly communicating the relative gains to losses for each strategic investment. By calculating the simple ROI for each lead or campaign-atrributed ROI for each sales campaign, a sales manager can identify and hone in on strategies that will maximize their sales teams’ effectiveness, leading their company to great sales success.
