Cost of Sales


I have written a few articles on revenue/risk sharing models in the past, but want to explore it further by outlining the cost of sales. As you can imagine I’ve had to go through this argument a few times in the last few days and I have a personal need to record my thoughts.

Many entrepreneurial companies that operate on government grants and/or operational income are eager to offer risk sharing models to partners and this is fully understandable. In Finland there is a saying that ‘it is not the one that asks, but the one that gives’. In some remote cases the value proposition is just so enticing that at the right end user price point the model would make sense, but those products are really one in a million… I personally have not seen such a product for some time.

What entrepreneurs enamored with their solutions do not understand is that they are NEVER unique, in most cases over priced and delivery is poorly supported. There is no magic directory of leads that you can skim through and connect buyers with product at virtually no cost of sales. There is ALWAYS an investment involved.

Typically there is an investment in building better verbal value argumentation for the solution. Email templates need to be crafted, out reach campaigns have to be created, audiences have to be targeted and lists have to be created (and in the least updated). People have to be reached out to in a personal and value adding way, which equates to a lot of manual labor and prospects need to be guided through the value proposition, possible demos, a pilot phase and through the purchasing argumentation phase; this is the sales cycle cost and potential ROI is often months away, which reflects on cash flow and as entrepreneurs know, cash flow is king. This is a process that cannot be done with 7-10 hours time difference and foreign phone numbers and accents. The entrepreneurial argument is that we will handle the work load, just hand over the contact to us. First of all you are handing over something of monetary value for which there must be a fee. Secondly the facilitator is reduced in the eyes of the end client to a telephone operator from a strategic advisor. Thirdly I personally do not believe that you can make a sale from a distance equal to a 14 hour flight. Would you buy a car from a dealer in Omaha over the phone if you lived in Europe? I would not. Then there is the issue of sales culture and there are significant differences between US and European cultures. During my career I have seen this a few times and the end client has called me back disappointed asking why I set up the meeting and they were expecting me to be the lead. People buy from people and that process starts from the first call. If you connect with the buyer on a personal level you may have a chance to sell. That is why not only content is important in an elevator pitch, but also the tone and style of delivery. 

Even if you are introducing a product to a warm contact there is time usage involved and that relationship has value in itself. You cannot inundate people with products so relationships are not a finite commodity. With each product intro you are wearing down that commodity and most intros do not lead into a ROI generating deal. In most cases you just burn a possibility to intro another product at a later date that might have better chances and a higher ROI.

I’ve said it and will say it again. In some cases consultants will take on a product on revenue share basis and I will the first one to say it; IT IS ALWAYS OPPORTUNISTIC. As an entrepreneur do not expect to get reports on progress. The agent will call you if he/she needs something. Since there is still an investment involved do not expect to get by with a 10% commission. If you are sharing risk then let’s equally share the profit. This type of a relationship doesn’t constitute a channel relationship or any commitment from either party. The CEO that claims that they have a committed international channel based on a revenue share alone is lying 99/100 times. Show me the sales numbers and the level of commitment to training and local market development.

I don’t know if you have had the discussion about is there life outside our planet approaching the argument mathematically? How many galaxies, star systems and planets statistically could hold life? Any way… my point is that there are thousands of products an agent can sell at no risk to the vendor. My question is: Is your product so unique and compelling that out of those thousands an agent should pick yours?

What it all boils down to is that there is a clear equation to success:

Success= Funding x Ability x Differentiation + Market Factors

If any of the first three are equal to zero you can see that your chances of success are also zero. With money you can often correct the other two factors, but without money you are stuck.

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