Added on July 17, 2012 Ray Collis

Sales Maths: How Well Are You Using Numbers To Increase Your Sales?

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Sales people have long excelled at relationship building and communication, but to be truly persuasive in the face of modern buying sellers need a new skill. That skill is maths. But just how good is your sales maths? Could using numbers help you sell more?

Selling To Numbers-Obsessed Buyers

Today’s buyers are more hard-nosed, results driven and price obsessed than ever before. To sell to them requires a new dexterity with numbers. And there is a wide range of acronyms that go along with the new seller maths, including; TCO, ROI, EBIT and so on.

Now, some sellers will say I am never asked for those things, or that they never come up in conversation with their buyers. Some sellers will say that their customers are not that sophisticated joking that their customers can barely add and subtract.

If your customers are not doing the numbers on your proposition then that is a great opportunity…

Either of these situations make the seller’s maths more, rather than less important. If your customers are not doing the numbers on your proposition then that is a great opportunity. If they are doing the numbers and not involving you then that is a greater opportunity still. Either way you need to put the power of basic maths to work in your selling.

Improving Your Buyer’s Maths

In another article we vividly described the challenge seller’s face in selling to buyers who are obsessed with price cutting, almost to the exclusion of anything else. It is as if their calculator was broken and the only key working was the minus, or subtract key.

You need a calculator to sell to price obsessed buyers. You need to get the buyer to do more multiplication and long division, and consequently less subtraction. That means you need to ‘bone up’ on your sales maths.

Testing Your Sales Maths

Below you will find a simple test of your sales math. Now, it may seem like an innocent test, but don’t be fooled. If you cannot answer any of these questions then you are missing out on what could be a very persuasive element of your sales proposition.

…you are missing out on what could be a very persuasive element of your sales proposition.

Your maths can be a competitive differentiator. In particular it is key to price negotiations, protecting margins and moving the conversation off price and onto value.

Here is a checklist for you to test your sales maths. How may of the following questions can you answer with confidence?

What is EBIT and how is it calculated?
What is APR and how is it calculated?
What is ROI and how is it calculated?
What is TCO and how is it calculated?
What is TCA and how is it calculated?
What is OPEX and how is it calculated?
What is the payback period for your solution and how is it calculated?
What is Discounted Cash Flow and how is it calculated?
What is Internal Rate Of Return and how is it calculated?
What is the difference between direct and indirect costs?
What is the difference between fixed and variable costs?
What is the difference between mark-up and margin?
What is Activity Based Costing?

With the test done, focus on the questions that you struggled to answer. You will find short answers to each question below with a link back to the Wikipedia definition for more information.

The above is of course only a list of some of the most universal terms of importance in using numbers to sell. It is important to consider any specific financial terms and metrics used by your customers and their particular industry.

Putting Your Sales Maths To Work

Now that you have identified any information gaps in your sales maths knowledge, don’t stop there. Here is a more challenging test – how many of the above are you using in your selling. Are terms, such as ROI and TCO to be found in your sales presentations, sales proposals and so on?

Follow these steps to put numbers back at the core of your selling:

Get a calculator!
Read a financial statement for one of your customers!
Sit with your accountant! The CFO in your company can help you develop the numbers aspect of your proposition, as well as your confidence in business or sales maths generally.
Start to build a spreadsheet to calculate the impact of your solution, including TCO, ROI, etc.
Measure the impact of your products and solutions on your customer’s business (and find out how they measure impact)
Start talking to your prospects about their numbers from day one.

Answers To The Questions

Answers to the questions and links to more information (courtesy of Wikipedia):

1. What is EBIT and how is it calculated?

In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm’s profit that excludes interest and income tax expenses.^[1] Operating income is the difference between operating revenues and operating expenses. When a firm has zero non-operating income, then operating income is sometimes used as a synonym for EBIT and operating profit.^[2]

2. What is APR and how is it calculated?

The term annual percentage rate (APR), also called nominal APR, and the term effective APR, also calledEAR,^[1] describes the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on aloan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate.

3. What is ROI and how is it calculated?

Finance: “Return on investment(ROI) rate of return (ROR), also known as ‘rate of profit’ or sometimes just ‘return’, is the ratio of money gained or lost (whether realized or unrealized) on an investment relative to the amount of money invested.

4. What is TCO and how is it calculated?

Total cost of ownership (TCO) is a financial estimate whose purpose is to help consumers and enterprise managers determine direct and indirect costs of a product or system. For example, the TCO defines the cost of owning an automobile from the time of purchase by the owner, through its operation and maintenance to the time it leaves the possession of the owner. Comparative TCO studies between various models help consumers choose a car to fit their needs and budget.

5. What is TCA and how is it calculated?

The Total Cost of Acquisition (TCA) is a managerial accounting concept that includes all the costs associated with buying goods, services, or assets. ^[1]

Generally, it is the net price plus other costs needed to purchase the item and get it to the point of use. These other costs can include: the item’s purchasing costs (closing, research, accounting, commissions, legal fees), transportation, preparation and installation costs.

Typically they do not include training, system integration costs that might be considered operational costs.

6. What is OPEX and how is it calculated?

Operational expense, operational expenditure or OPEX is an ongoing cost for running a product, business, or system.

In business, an operating expense is a day-to-day expense such as sales and administration, or research & development, as opposed to production, costs, and pricing. In short, this is the money the business spends in order to turn inventory into throughput.

7. What is payback period and how is it calculated?

Payback period in capital budgeting refers to the period of time required for the return on an investment to “repay” the sum of the original investment. For example, a $1000 investment which returned $500 per year would have a two year payback period. The time value of money is not taken into account. Payback period intuitively measures how long something takes to “pay for itself.” All else being equal, shorter payback periods are preferable to longer payback periods. Payback period is widely used because of its ease of use despite the recognized limitations described below.

8. What is Discounted Cash Flow / Internal Rate Of Return and how is it calculated?

Discounted Cash Flow is used to estimate the attractiveness of an investment opportunity. It uses future cash flow projections and discounts them to arrive at a present value. If the DCF of the IT project is higher than its anticipated current cost of the investment, the opportunity may be a good one based on the return generated – internal rate of return (IRR).

9. What is the difference between direct and indirect costs?

Indirect costs are costs that are not directly accountable to a cost object (such as a particular function or product). Indirect costs may be either fixed or variable. Indirect costs include administration, personnel and security costs, and are also known as overhead. These are those cost which are not related to Production.

Direct costs are those for activities or services that benefit specific projects, e.g., salaries for project staff and materials required for a particular project. Because these activities are easily traced to projects, their costs are usually charged to projects on an item-by-item basis.

10. What is the difference between fixed and variable costs?

Variable costs are expenses that change in proportion to the activity of a business. Variable cost is the sum of marginal costs over all units produced. It can also be considered normal costs. Fixed costs and variable costs make up the two components of total cost.

11. What is the difference between mark-up and margin?

“Margin (on sales) is the difference between selling price and cost. This difference is typically expressed either as a percentage of selling price or on a per-unit basis. Managers need to know margins for almost all marketing decisions. Margins represent a key factor in pricing, return on marketing spending, earnings forecasts, and analyses of customer profitability.

12. What is Activity Based Costing?

Activity-based costing (ABC) is a special costing model that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing models.