Did you make money on this sale?

February 26, 2011 at 3:42 pm 1 comment

On your last sale, did your price exceed what it cost you to get the sale?  Did you make a profit?

Obviously, for a company to be profitable the answer has to be yes.  But in the early sales of many startups this is not true, particularly if you are selling products to large companies.  For example the accounting of the cost of selling to a particular customer could look like this:

Income (Product price)

10,000

Founder time $50/hr 100 hours

5,000

Legal support for negotiation Terms & Conditions

2,500

Travel costs (2 founders, 2 trips, meals with customer)

1,500

Referral fee (sales assistance)

1,500

Required insurance premium

1,200

Total Expenses

11,700

Profit/(Loss) on this sale

(1,700)

Notice that this does not include any costs for the product itself.   I’m focusing on paying for the cost of selling.  For many startups I find it very useful to establish this as an early milestone.  This is in keeping with the market-centric approach of Customer Development vs. the product-centric approach into which most inventor-founders tend to fall.

So what can you change to make each sale profitable?

  1. As you learn how to sell your product to large companies you need to find ways to make the sale-specific legal and insurance costs go down substantially.  Target less than 2%.  In the above example they were 37% – not unusual for a first sale.
  2. Founder time – it is not unusual for founders to spend so much time on one of their early sales that even at minimum wage, their time costs more than the what they make on the sale.  Founders should expect to spend a lot of their time in the first few years selling but that cost should net out to less than 5% of the price.  Compare that to the 50% in the example.
  3. Travel and sales commission costs – this varies by industry. For enterprise software, for example, in mature companies this is about 10 – 15% (directly attributable to a sale) as opposed to 30% in my example.

Achieving these target costs requires the development of many skills including:

  • Defining your ideal customers
  • Developing your sales process – how you go from identified lead to a closed sale and especially when you “disqualify” an opportunity and walk away from a deal
  • Refining your sales pitch and marketing materials
  • Understanding big company procurement and risk management processes

Measuring the right costs imposes a necessary discipline on start-up companies.  If you don’t quickly learn how to sell at a profit, you don’t have a viable business!

If you put the right metrics in place early and track your costs, not only will you learn your own business faster, you will really impress potential investors.


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Entry filed under: startup.

What should you pay a reseller? Yo market so ugly… (Evaluating markets from a b2b sales perspective)

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