ROI in new business – don’t be fooled by randomness.

gold fish bowlI’m trying to show agency owners the problem with being proactive with new business via telemarketing and direct marketing that can end up with them being fooled by their own numbers..

This is not an article about how you should improve the creative output of your agency to increase your chance of winning more new business, although you should. In fact it should be top priority.  Doing a piece of work that makes an agency famous is the best new business tool ever. How often do you see that on a new business strategy document? Answer – not enough.

This piece makes quite a few assumptions about the talents of new business people, it assumes they are like for like which simply isn’t true, far, far from it. I’m sure you can find other assumptions too. Just try and not miss the point.

I hope it helps agencies see the new business problem from another angle and helps them change course or amend their new business programme.

It doesn’t mean you should never do these cold campaigns but you should be aware of your averages and expectations of outcomes over time. ANd when you get lucky understand that.

It appears to me many agency owners who want to win new clients get frustrated with the old practices and yet in a way seem trapped in them & then end up doing them just one more time. And the trap is chasing KPIs that are arbitrary and based on small sample sizes that makes them unpredictable and forecasting unmanageable in the real world.

Lucky Jim’s Story.

bars

When I was about 12 maybe 13, I used to go on summer holidays with my parents to a caravan park in the New Forest.  I loved it because it had a club house and in there where arcade games and fruit machines.  Evening time my parents would sit in the main bar where there would be some entertainment on and I’d play on the machines, the days when 50 pence went quite a way.

However, in the club house was the daddy of fruit machines, which was for over 18s only, that had a £50 pay out. I decided to sneak in and put my 50p in the daddy. I sidled over casually, hoping nobody spotted me and snuck my 50p coin in which gave me 5 spins.

First spin, nothing, second spin, nothing, third spin I hit four ‘double bars’ in a row, that won me £25, then they held, giving me another £25 – I’d won £50 (a lot 1983) as the money started to clunk out in 50 pence pieces (the £1 coins was very new) my Mum lucky looked over and came over to help me collect the winnings from the over 18 machine.

Question – Was I lucky?  What would you need to know to find out if I was or not or what does your social intuition tells you? How do we decide if I was lucky?

Of course I was, we know that about fruit machines don’t we. A determinist might say no I wasn’t.  I just didn’t know what had happened before hand, i.e. people had loaded the machine up for a win, lots of people need to lose before the machine pays out. It was fate? Anyway – would you advise me to play that machine again? Why not?  Look at my return on investment (ROI) it is 100 to 1.

New business wins are rare events.

It is easy to confuse your current results and ROI with luck which makes planning or forecasting results frustrating.  And I think most new programmes are very hard to forecast because the deviation between the potential outcome / variables is large i.e. what might happen or not happen is large and still be viewed as typical or normal. So zero business wins to 1 business win is a small variation but £0 to a win worth £200K is large. And any month could be zero or £200K.

Winning a piece of new business is a rare event in agencies in my opinion.  But how rare, how often does it happen?  And if you use a small sample size then you can get fooled by the stats easily.

Example –  an agency could easily have zero pounds worth of new business wins for 11 months in a row and then a new business win of £200K.  Each month has a likely new business variation of £zero to £200k  or put another way zero wins to 1 win and a zero month is perfectly normal, right?

Example: Let’s say I speak to agency A and agency B.  Both fairly similar in many ways.

Agency A has just won a piece of new business, great, hooray.  They look at what happened between this win and their last, to get some statistical feed back to use for forecasting.  It took them 1 year or 24 intro / credentials meetings, 8 second follow-up meetings, 3 pitches and 1 win worth £200k and a gross profit (gp) of 15% – which is normal (ish) for today.

Is it now fair to say that if they do the same again they get another win?  With that sample size what has been proved?  If you put x into the fruit machine x comes out –  always? ROIs aren’t fixed are they? Should I have played the fruit machine again? Will they get one business win per 24 intros? Why not?

Agency B, did the same as agency A, for no wins. Same amount of first and seconds and pitches but no dollars. Not that unusual in my experience.  In fact I would say this is most common – probably in my experience what I hear 70-80% of the time.

What if we added the two sample sizes together and averaged it.  Now we have 48 first meetings, 16 second meetings. 6 pitches for 1 win worth £200k at 15% GP (£30k) between them – is that even worth doing?

If you paid a lead generation agency or an in-house person £30K p/a (to make maths easier, could easily be £36k-£40k) you broke-even as long as you don’t include Employers NI at 13% = £3,900 for your in-house person and you put no cost against the time to prep for the 48 credential meetings and the 16 seconds and the 6 pitches. Are they all cost-free – do we even want to go there – I did a while back see here.

The piece of business will be with you for just under 3 years on average according to the IPA, so is really worth £600k at 15% = £90K which mean your new business person has a free-roll for 2 more years, right?

You can run with this thinking for 3 wins a year at say £80k each doesn’t matter really.Just get the thinking of ROI not being fixed.

Top Down Problem.

good quarter

Typically a new business programme is a top down initiative the CEO / MD decides that the agency should be pro-active about approaching prospects.  They’re right too.

The standard lead generation model whether it is in-house or outsourced is this – here is a ‘wish list’ of between 200 and 400 prospects – phone them, e-mail them, direct mail them (they love receiving it too by the way, really love it) telling them either a) we have or had experience in their sector b) we have an insight for them / their sector c) we have a way of working that will help you get better work – look here are our awards!

Fair – about right – give or take? What else is there to say?

So what do many agencies do after say a period of the similar results for a year or 18 months, like Agency Bs?  Well they fire the lead generator in-house or new business agency and do the exact same thing again but with a different lead generator/ new business agency.

Before they know it they have done the same process two or three times (often with higher meeting targets to make up for short-falls, we need 3 meeting per month, nope 4 ,nope 6 and so on)  and then all of a sudden they get the ‘double bars’ they get the business win. The outsourced agency or new business person is hailed a hero and carried aloft around the agency for all to see.

Was it the person or just the numbers that lead to the win? Is it just a numbers game?

Do the numbers even stack up?  Say a £200K win again at 15% but it took two years to get, that is the same as adding agency A and B together right? Except agency B now thinks it takes two years to win £200K and agency A thinks it takes one year?

Thought experiment.

What if we took a bigger sample of new business meetings that were attended by agencies in London let’s say 50 agencies doing like agency A and B combined over 1 year.

So 50 agencies, 25 like A and 25 like B would be 25 x 48  first meetings, plus 25 x 16 second meetings plus 25 x 6 pitches for 25 wins.

That makes a grand total of 1200 first meetings that end up generating 25 business wins of £200K at 15% gross profit.

If we represented each meeting as a marble and put 1200 in a gold-fish bowl, with 25 red  ones(winners) and the rest white (losers) and asked each new business manager to pick out 24 marbles (meetings per year) blindfolded (very important) what chance do they have of picking out a winning one?

Answer just over 2% (2.08%) a pick right, and with 24 picks –  50% chance of having a win this year.  But some will get zero and some will get three right? That’s the rub.  Someone will get better than that and so will get zero.

The MD is not happy with the first year of the new business manager’s work if he picked out 24 white balls – arghh – what an idiot, fire him. Some new business managers will look like heroes for picking out two or three reds and some will be in line for the elbow.

Changing the rules.

red bead IILet’s get back to normality, well a little bit.

What if we changed the scenario slightly and differentiated between leads.  Let’s say leads can be classified in just two main ways as a) cold leads  and b) referred leads.

Cold leads get to us via our cold channel marketing, DM, E-mail campaign and telemarketing to wish list of people we don’t know but brands we’d like to work for.

Referred leads that come to us by our client marketer referring us to another or moving job for example or from speaking at an event. And let’s say (because it’s true) that 70% of referred leads we close. We already know the rate for cold ones.  But a) and b)  leads come in different quantities, let’s say every agency gets three referrals a year and as before 24 colds.

Let’s increase our sample size again so we don’t get fooled by small sample size randomness.

Now in one gold-fish bowl you have as before 1200 marbles and a 2 % (ish) or 25 red winners to choose from.

In our new gold-fish bowl we have only 150 marbles and 70% or 105 red winners winners.

Rule – You get 24 blind folded picks from the cold bowl and three blind folded picks from the referral bowl.

Which bowl are you most hopefully from when your blind folded new business manager picks? Will they turn out to be lucky Jim?

If they could add 50 marbles at their current red / white ratio to any tank which one would you add marbles to?  Would you add cold leads to your pipe line or referred leads? Why?

What would happen if you mixed the tanks up in some fit of madness and then you didn’t know the difference between a referred lead and a cold one?  Like an agency would ever make that mistake and put as much effort and time into a cold lead as a referred one just because the payout was big.

Isn’t it worth learning how to get more referral leads, what I call column thinking?

94% of all problems in business are system driven and only  6% are people driven.
W Edward Deming

This entry was posted in Marketing, new business agency, Referral Marketing, Sales, sales training, System thinking and tagged , , , , . Bookmark the permalink.

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