By Victor Antonio, BSEE, MBA

Is Cold Calling Effective: Calculating the Present, Future and Net Value of a Prospect

Let’s take a closer look at the sales practice of cold calling, or prospecting.  Over the last couple of years, several books have claimed that cold calling is a waste of a salesperson’s time and effort.  Before any conclusions are drawn, it’s important to assign an empirical value to determine whether or not cold calling is an effective method for generating sales. 

Once the numbers are calculated, we can look at the Net Present Value of a sale and the Future Value of any potential sales to better understand the real numerical value of cold calling.  Lastly, I’ll identify one mitigating factor that acts as a moderator when it comes to the success or failure of cold calling.

Does cold calling really work?  Many books have been written about the value of cold calling and how it can help you grow your business.  But recently, books like “Never Cold Call Again,” “Cold Calling Sucks,” and a few others have argued that cold calling is a complete waste of time.  They claim that the effectiveness of cold calling if a myth. Are the authors correct? 

It will be helpful to take a closer look at cold calling by first gathering some key information about the process, and then setting up some metrics to measure its effectiveness.  Before making a determination on the value or non-value of cold calling, I’ll examine the activity of cold calling in the context of a client’s value today and over time.

Cold Calling by the Numbers

Say that your target goal as a salesperson is to make at least 10 calls a day.  Out of those 10 calls a day, you manage to set one appointment for the following week. 

• Your Call-to-Appointment ratio would then be 10:1 (ten calls results in one appointment). 

So, if you made 10 calls per day for a whole week and managed to get one appointment per day, the following week you would have 5 appointments setup.  Out of those five appointments you’ve setup for the following week let’s say you managed to close one deal. 

• Your Appointment-to-Close ratio would then be 5:1 (five appointments resulted in one sale).

If you look at it from an overall phone calling perspective,

• Your Call-to-Close ratio would then be 10:1 (ten calls resulted in one sale).

Phone Time Invested

In reviewing the calls you made, you realize that there were times when you got the prospect’s voicemail and left a message that lasted approximately 1 minute.  On other calls, the prospect actually answered, and it took approximately 15 minutes to set up an appointment.

If your Average Call Time was 10 minutes per phone call, Then you would have  spent a total of 100 minutes per day (10 calls per day x 10 minutes per call) or 500 minutes per week (100 minutes per day x 5 days) on the phone. 

• The Total Phone Time invested to setup those 5 meetings was 8.3 hours (500 minutes / 60 minutes in an hour). 

Client Time Invested

Now let’s look at how much time you invested in those 5 meetings.  Let’s assume it took you 1 hour to drive to and from the meeting.  You also needed about 1 hour of preparation time for each client before the meeting and each meeting lasted an average of 1 hour.  That means that every meeting costs you 3 hours of your time.  

• Total Client Time invested is 15 hours (5 meetings x 3 hours) to close 1 deal.

When you put all of this data together, you can figure out how much time was invested in setting up the meeting and making the sale.  First, you need to add the Total Phone Time and the Total Client Time together to get an idea of how much it took to close one deal.

• Total Time Invested = Phone Time + Client Time = 23.3 hours (Phone time 8.3 hours + Client time 15 hours) to close 1 deal. 

Based on these numbers, it seems that the experts who advised against cold calling have a case.  It hardly seems worth it to pick up the phone and call.   No one in their right mind wants to spend the equivalent of 3 days on phone (23.3 hours) just to close one sale. 

But we need to consider some other very important variables before we conclude that cold calling is a waste of time. We still don’t have a full picture of what’s really happening in this sales process.

Present, Future and Net Client Value

Client Value is an area of sales that is seldom commented upon but is extremely important to understand. It’s simply the value a certain client holds to your business.  There are three kinds of value to take into consideration: Present Value (PV), Future Value (FV) and Net Value (NV) of client. 

The PV is how much a client is buying from you today.  The FV is how much more a client will buy over a given period of time.  And the NV is the sum of both numbers which will represent the net total of how much a client has purchased from you over a given period of time.  These numbers are critical in understanding whether or not prospecting is useful or not. 

Present Value (PV) of the Client

Every salesperson should know the average sale of any product or service in order to determine whether or not the investment of their time was worth it. 

Let’s assume that an Average Sale for a given product is $200.  Let’s also assume that the client will never buy another product from you again.  If this is the case, then the PV of the client is equivalent to the Average Sale price of $200.  Present Value here refers to what the client is worth to you today and only today. 

Future Value (FV) and Net Value (NV) of the Client

But what if the client does buy from you again?  If, over a given period of time, the client intends to buy an additional $500 worth of products, this would be considered the FV of a client.  And, if we add the PV (what a client will buy today) and FV (what the client intends to buy tomorrow) we arrive at the NV of the client which is $700 ($200 + $500).

Now that we know how to calculate the value of a client, let’s go back and compare that with the amount of time utilized to acquire the client. 

The amount of calls made and the number of hours invested in a client, combined with the value of the client, will draw a much clearer picture of the actual investment involved in  cold calling. 

There are two ways to analyze these numbers: Present Value and Net Value:

Present Values

PV of $200 divided by 50 calls = $4.00 per call

PV of $200 divided by 23.3 hour of Invested Time = $8.57 per hour

These hourly rates for the ‘present’ are not encouraging.   For a client who buys just one time, each call is equivalent to earning four dollars per call - hardly a motivation to jump on the phone and keep dialing for dollars.  The hourly rate isn’t that enticing either.

Even as you look into the future, and assume the client will buy more down the road, the numbers don’t look that much better:

Net Values

NV of $700 divided by 50 calls = $14.00 per call

NV of $700 divided by 23.3 hour of Invested Time = $30.04 per hour

Although the NV isn’t that bad, especially at $30 per hour, for many salespeople this return on investment (ROI) simply wouldn’t cut it.  If you value your time at more than $30 per hour, then clearly cold calling seems to be a waste of time. 

But before we hang up the phone on cold calling, there’s one more important factor that needs to be considered.

The X Factor

Based on the numbers above, it would be easy to conclude that cold calling is a waste of time.  There is one mitigating factor that can turn this analysis around -  the average size of the deal.  Imagine for a moment that you’re selling a high ticket item with an average sale price of $1,000.  Let’s run the numbers once more:

Present Values

PV of $1,000 divided by 50 calls = $20.00 per call

PV of $1,000 divided by 23.3 hour of Invested Time = $42.86 per hour

As you can see, all of a sudden the numbers look more appealing.  I’m sure a salesperson would be motivated to pick up the phone knowing it was worth $20.00 a call or better still $42.91 an hour for making the call.  

What if every client you sold to purchased an additional $2,000 (FV) worth of product over the next year?  The new NV would be $3,000 ($1,000 plus $2,000). 

Net Values

NV of $3,000 divided by 50 calls = $60.00 per call

NV of $3,000 divided by 23.3 hour of Invested Time = $128.57 per hour

The numbers here speak for themselves.  A salesperson is more likely to get excited about picking up a phone and cold calling if they knew each call was worth $60 today (PV) and almost $130 tomorrow (NV).

Conclusion

So, is cold calling worth it or not?  The answer is … it depends!  To determine whether or not cold calling is effective, you must consider the X Factor (i.e., the size of the sale).  If the item being sold has a low margin or commission, then one could easily argue that cold calling is NOT an effective strategy for growing the business. 

But on the other hand, if the average margin or commission is high, the numbers clearly prove that cold calling becomes a valuable part of the overall marketing effort to win new business. 

When it comes to cold calling, the size (of the sale) does matter and is the primary factor in determining for the salesperson whether or not they should even pick up the phone.