New Business Equity and Value – learn some poker #2

The chances of what happened above is 7%,  similar to the chance of closing a cold lead if you are a new business fish. Also a good lesson in humility.

In poker there are two terms that a new player should seek to understand ‘value’ and ‘equity’. And they are related.  I am going to explain what poker players mean when they use these terms and then what new business fish can learn from these terms and how agencies can use them to improve their new business processes.

Value in poker is most simply defined the strength of your hand.  The stronger the hand the more value it is. Having two aces in your hand is very strong (the strongest) for example.  Then poker payers will talk about betting for ‘value’.  This mean you are not bluffing, pretending to have a hand, but really have one.  You are trying to get someone to pay to see your winning hand. So you’ll hear poker players so I got good value or I failed to get value.

Equity in poker mean the chances of your hand winning in a pot – it is related to value often described as expected value (ev). This is the beginning of understanding that poker gets very complicated.

A player needs to calculate how much to bet based on what he believes is the equity of his hand v the equity of his opponent(s) hand(s). The complication is that you don’t know the exact cards the other player(s) have so you have to work out their likely hands. Guessing. And people like buyers lie sometimes.

The thought process goes – if he is betting £x and £x is a lot that must mean he has a decent hand.  I wonder if his hand is a better hand than mind.

If I raise and he re-raises the answer is probably yes – or is he bluffing because he thinks I have a weak hand and I am just trying it on i.e. bluffing.

If I just call his bet and let’s say a heart comes he may then hit his flush and I am definitely behind, whoops. What are the chances of a heart coming though? Without explaining poker – the odds are approx 36% just over 1 in 3.

Or I could pretend to have the flush.  If I pretend to have the flush and bet big and he really does have a flush then I lose. What should I do? That is poker in a nut shell making decisions based on the information you have and wondering about the relevance of the info you don’t. Life aye!

So  as long as a poker player can put his opponent on a range of starting hands he can start working out his chances to win and how much he should invest in a pot. E.g. – If the chances of him improving his hand to a flush as above is 36% and the pot is currently £100 and to stay in the pot he has to bet £50 – is that a good bet or not?  If the best is £20? What if it is £75 to stay in the pot? Humm what do you think?

There are so many variable missing it makes me cringe like how much money does each player have – will you opponent believe you and fold if the flush comes.  Or if the flush comes will he not believe you and you can bet even more knowing you have the winning hand – what poker players cal the nuts.

The situation where if you improve your hand and can keep betting and getting called by the fish is called implied odds.  I think agencies think about implied odds all the time – the what if factor – you have to be in it to win it cliché.

Not to mention what is an agency’s cost of sale – do meetings and pitches cost time and money?

So how does some of this relate to agency life and new business?

In poker there are good and bad starting hands – very good hands include obviously two aces, two kinds, two queens, than Ace King – poker players call these premium hands – they are very valuable. And then any pair is good as is connecting cards i.e. jack and a ten, king and queen and so on.

What is a starting hand in new business, well it is a bit like a lead isn’t it?  Where do leads comes from? Well they come from various forms of marketing and relationships.  I think premium leads are referrals from client that you have worked with for a long time and have achieved great things for. These are the nuts.  Reduce those variables and the lead weakens – i.e. we havent worked for them  for very long and or we didn’t really do good work. The leads loses some of it’s starting value.

Then add to this who is the person that is referred to you – do they have  decision-making ability – does he have the sorts of problem(s) you can solve, have they tried to solve that problem before – why does it keep coming back, what is their budget? If they don’t know their budget how will they find it out for you?

Next there are leads that are incoming via PR or networking.  I know they are not normally clumped together.  But if a Mkt Dir reads something you wrote in a publication or in a book that you wrote and thinks he’d like to meet that is a good lead. Similarly if you speak at an event and a Mkt Dir in the audience likes what you said and approaches you regarding business then that could be a good lead too.

Now how do we know these are good leads – well you’d have to look at their equity or expected value – What is they likely hood of a referral closing in your business? My experience is that many agencies tell me that they close between 50 – 85% of referrals.  And they know on average a piece of business is worth in revenue say £150K and GP is 50% so £75K. and most client stay with then for 3 years – so it has a total value of £225K over three years, that is their life time value (LTV).  How much effort would you put into this lead?

Lower down are cold generated leads that come from e-mail, cold calling and DM. What are the odds of you meeting one of this leads and closing business with them? This is a bone of contention between me and some of my peers. Not least because there are so many variables to be added in.  The quality of the proposition in the email/ cold call or DM piece.  Perhaps the prospect does know something of the agency already?  They still have value – implied value – but you need to qualify these harder against more variables unlike the referral.

However in general in my experience I reckon a cold lead on average closes today about one in 16 times and that is being kind – I’ve seen 1 in 50.. But use your own figures – how many people who you would class as cold leads did it take you to close last year?  So what is the expected value of one of these leads – the prize can stay the same at £225K..  Well simply it is 1 in 16 or just over 6%.

This is where new business and poker alike get tricky.  What if that Marketing Director is seeing other agencies and one of those is the referred agency – the nuts. What then?  You have 6% (on average) and they have between 50% and 85% chance of winning?  What now?

How would you find out? Could you find out? Could you fold anyway even if you knew?  Your boss pays you or at least praises you per lead – you look good getting on a pitch list – that is your job right. Win or lose pitches they look good, right. So could you fold even if you even knew you were in a 6% position?  In poker it is rare to be as bigger dog as 6% see video above.  And just so you know the 6 per-centers do happen – ever the optimist – ever the fish. Remember prospects need fish for their procurement departments pitch list.

So having some ideas of your equity  / chances may help your agency spend time and resources that are valuable in other areas.  Or do as good poker players do and simply wait for the right hand in the right position and then play it and fold the weak hands.

The reason today some agencies focus on content is that they have realised that incoming leads are more valuable than ones they get via outgoing prospecting.  But the problem is they have stripped out too many variable.  The referrals equity is based on more than just out-going verses in-coming or  pull v push marketing leads.

The value of a lead is in  strength of the relationship between the prospect and the person who refered them – i.e. your client. E.g. Your super client refers another Mkt Dir to you who have been buddies for 5 years and they trust each other – Bingo – the nuts.  A marketer reads trade press and asks your agency in based on a PR piece to pitch against the above referred agency – fish alert!. You are pitch bait!

There are hundred of hands / new business leads you could look at this way.  In new business the way you play your starting hand i.e. meeting one is so important you need to find out where you are in the hand? Why have they come to you – why don’t they have a favourite agency already what happened to the incumbent – what are they expecting from you – why couldn’t the last agency do that?  And do you believe their answers?  Remember you are trying to either improve the equity of your chances to win the business or find a fold.  And you have to do this nicely and in a polite manner too, so it doesn’t sound like an inquisition.

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