TEC – Profits through Sales Distribution Design – Jim Bleech
The “E” Predicament: Profits through Sales Distribution Design
Most product and services start out as a solution, but over time they all move to a commodity. Personal computers are a perfect example. In the early ‘90s, they cost several thousand dollars. Now, some companies are giving them away for free if you sign up for their Internet service. This commoditization doesn’t just exist at the level of products and services it also exists at the level of your customer and your salespeople.
Product Level Commoditization
The easiest way to determine whether your products and product lines are being commoditized is to look at historic comparisons of your gross profit, pricing and added costs. Typically, gross profit and pricing go down while added costs go up. When that happens, your customers are moving you to the commodity side of the spectrum.
Other ways to tell you are becoming a commodity:
- Are your prospects/customers asking for the product or are you suggesting it? If they are asking for it, you are a commodity. If they’re asking, it means they already have the answer to their problem. If they have the answer, you are a commodity. You can’t be a solution unless you are suggesting an answer.
- Is the number of providers increasing in your industry? The greater the number of providers, the closer you come to being a commodity.
- Market share stats and trends. If you’re growing but losing market share, you’re becoming a commodity.
- Availability of substitute products. If you have a great product, you will soon see knock-off products As soon as other products enter the market, the process of commoditization begins.
- Level of decision-making. If a purchasing agent is making the decision, you’re a commodity. If the decision is made at the senior management level, you’re a commodity.
The point is that everything becomes a commodity over time. And it today’s markets, that usually happens sooner rather than later. In fact, it doesn’t really matter where your company is on the product commodity scale because even if you do come up with an innovative, solution-oriented product, competitors will knock it off very quickly. Plus, you can have a very successful company on the commodity end if you manage costs and customer relationships properly. The key is to know where you are and make sure your costs are appropriate to that point on the spectrum.
- Customer Level Commoditization
Commoditization also takes place within your customer relationships. You may start out selling to the top levels of an organization, but certain things will eventually happen regardless of what you do:
- You will lose contact with the top levels. This is inevitable.
- You will volunteer price concessions along the way. This isn’t inevitable, but it happens more often than not.
- You will give knowledge away. The smarter your prospect becomes, the quicker you become a commodity. Yet, you train your salespeople to educate your prospects and customers. It’s inevitable that they will gain knowledge as your relationship continues.
- The competition will step in because they see an opportunity to beat your price. This is inevitable.
It’s critical to know where you stand with each customer on the commodity spectrum so you can properly manage the relationship. For your top 10 or 20 customers, ask:
- What is the level of contact I have with this customer? Who am I doing business with in that company?
- What is their level of product knowledge? The more knowledge they have, the more likely you are to become a commodity.
- Do they have a buying process (i.e., purchasing agent, RFP, bids)? The more sophisticated the buying process, the closer you are to being a commodity.
- Why are they doing business with you? Are you in there because of low price or for other reasons?
Next, conduct a current and historic competitive analysis for each customer. What is happening to the competitive pressure within the customer’s industry? Is it growing? What is happening to your penetration with the account? Are you getting commodity business or solution business? What is your relationship with the customer? What is their willingness and ability to talk strategically with you?
In order to be a solution seller, you must understand each customer’s strategy. Common strategic issues include:
- Reducing costs
- People (utilization, retention, outsourcing, etc.)
- Systems and processes
- Cash flow
- Financial management
- Market share
- New product development
- Growth issues
- Distribution channels
Do you understand these issues with your top accounts? If not, you are not a solution provider.
Reasons for failing to understand your customers’ key strategic issues include:
- You are dealing with a purchasing agent who has no knowledge or interest in strategic issues.
- You are dealing with the right level but not talking about strategic issues.
- You are dealing with the right level but your customer doesn’t feel comfortable discussing strategic issues with you.
Sales people start out as hunters, the people who go out and make the kill. Over time, the become skinners, the people who stay behind and clean up the kill and get it ready to eat. Making the kill is a lot harder than skinning it, yet salespeople become skinners not through their own doing but because of things CEOs and sales managers do.
The biggest mistake companies make is promoting the best salespeople to accounts manager or sales manager, which means the salesperson stops doing what they are good at. Sales department design also causes problems. As salespeople start getting more successful, they spend more and more time servicing their customers. Before you know it, they have stopped hunting because they don’t have the time or the need. This is a structural problem more than anything else. It happens because sales departments are set up to reward skinning more than hunting. Ask your best salespeople hunting or skinning?
Typically, new salespeople come in at the low end of the scale on pricing because they don’t anything other than to sell price. As they gain knowledge, they begin to sell solutions. Over time, they hang in with the same customers who are falling down the commodity scale, with the same products that are falling down the scale. As a result, they lose their ability to hunt and your margins suddenly go down. Look at your top people and their level of contacts. Are their appointments with purchasing agents of senior managers? The answer will tell you a lot about where they are on the commodity scale.
Are your salespeople bringing in new business with new customers or penetrating deeper into existing accounts? If it’s with existing accounts, you want them brining in more business at the high end because it shows they are being trusted and brought into the decision-making process.
Salespeople should report key indicators to you on a weekly basis. Each person should have different indicators based on their situation. Allocation of time is an important indicator. Are your salespeople spending their time hunting or skinning? Many sales departments are designed so salespeople don’t have the time to hunt. If they have to give up skinning time to hunt, they take an income hit. Is there a limit on what your salespeople can earn? If a salesperson says, “I can’t make any more money,” that person is spending their time skinning.
Compare your salespeople versus the competition. Who are your competition calling on? The last thing you want is for your salespeople to be dealing with the purchasing agent while your competition is calling on the top level.
Like it or not, you are the top salesperson in your company. Where do you spend most of your time? Are you spending your time solution selling or handling the big accounts as a commodity sales person? Look at your top salespeople to see where they fit on this scale. Typically, your highest priced salespeople are at the bottom. Those are the senior people who handle the big accounts at commodity margins. That’s a terrible mismatch of resources. Your best salespeople should be out hunting, not skinning.
There are four phases in a product life cycle:
- You are the only product. This requires a very different set of sales skills.
- Several products and people start differentiating.
- No perceived difference in the product. Companies start adding value.
- No additional value that can be added. This represents strict commoditization. All products look alike and have the same value. The only thing that gets the business is low price.
It takes different skills to sell at each level
- Phase one. You have to educate the market because people doesn’t even know it exists. You have to be a creative and strategic thinker. This is a very short sales cycle that involves almost no price negotiation.
- Phase two. Your salespeople have to be able to differentiate your product from somebody else’s. They need very good presentation skills. They have to know how to do proposals. They have to deal with a lengthening sales cycles and more complex decision making.
- Phase three. This phase requires the sharp negotiator, someone who can wheel and deal on the spot.
- Phase four. This phase requires someone who can bring massive amounts of activity to the table, organize it well and throw a lot of stuff against the wall to see what fits.
The problem in most companies is that phase one salespeople are working with a phase four product. Ideally, you want salespeople who understand and can handle all phases and adjust their resources accordingly. That may require some training.
- Product/Service Strategies
- Repackage existing products and services. Sometimes it works, more often it doesn’t.
- New product enhancements. Use this strategy only if it meets new requirements in the marketplace.
- Put yourself out of business. Identify your customers’ problems and determine whether you can solve them, even when the solutions fall outside the boundaries of what you do. Assume that your business doesn’t exist today. What would you do to help solve your customers’ problems?
- Bundle or unbundle products or services. As you keep a product or service online, you tend to add services to it. Any time you add something, make sure you add a cost increment.
- Create a new standard or brand your product.
- Create substantial cost savings. Too often, there is a mismatch between resources and customers. Too many companies spend the most money on the low margin accounts, giving their worst customers the best deals. Match your resource allocation with the quality of the customer.
- Product development. Manage the life cycles of your products and services so you don’t have a gap between old products and new. Don’t wait too long to start developing new products. Stay ahead of the curve.
- Customer Strategies
- Establish and maintain contact at the highest and at other levels. When you go in as a -solution sale, you make it at a high level. After a while, the CEO drives you down to the purchasing agent. If you try to go back up, you irritate the purchasing agent and the CEO. Instead, establish a contract for account management. Tell the CEO, “I know you are going to want me to deal with your vice president or purchasing agent, and I’m okay with that. But I want to make sure that you and I don’t lose sight of the strategic issues that got us to this position. So pull out your calendar and let’s set up a lunch for three months from now.”
When the lunch comes up, don’t talk about the deal you just sold. Instead, talk about the customer’s strategic issues. Then when you get shoved down, tell the purchasing agent, “I want you to know that three months from now I am meeting with your CEO. It has nothing to do with you or this deal. It’s just something we have on our calendar.”
The best time to manage the relationship is when you first get the account. Assume you have already lost the top level relationship and your salesperson is meeting with a purchasing agent. Have the salesperson say, “My boss would like to meet your boss.” If the client agrees, use that meeting to re-contract for the future. One of your most valuable roles is to help your salespeople get back to the top level.
- Own the customer relationship and understand their strategy. Salespeople typically don’t understand their customer’s strategy because they don’t understand a lot of the issues at the CEO level. Make sure your salespeople can discuss cash flow, balance sheets and other issues paramount to CEOs.
- Manage the information in the value chain. Find a problem that has to be solved and figure out a way to solve it, even if it breaks the boundaries of your business (within reason). Your best opportunities for growth probably rest outside the box, not with what you are currently doing.
- Conduct creativity days. Most companies have creative salespeople, but salespeople tend to horde their best ideas to themselves. From time to time, bring your salespeople together for brainstorming sessions about what is working and what you might do better. Have them bring at least one written down idea. Most will be lousy, but every meeting will yield one or two good ideas. Force people to bring out their ideas because it won’t happen naturally.
- Lost account analysis. Salespeople typically blame lost accounts on price. In fact, price is rarely the issue. Hire an outside person to call customers and find out why you lost the business. Most of the time they will tell an independent person a very different answer than what they tell you.
- Account penetration at different levels. Make sure the new business you are picking up from current customers comes from all levels. If you are only getting the very low-margin business, you’re in a terminal relationship. It’s better to recognize that and taking control of the relationship. When customers end the relationship on their terms, you end up with disputes, returns, credit problems and collection problems. You will be much better off taking care of it yourself.
- Review your customers’ trade publications and leading indicators. Read the editorials and look at the ads. Those are excellent indicators of the problems within that industry. Plus, your salespeople will get more familiar with the terminology of that industry, which allows them to come in as a consultant expert instead of a peddler. Understand the leading indicators of your customers and be able to talk intelligently about them.
- Long-term contracts in exchange for proprietary or outsourced expertise. Sometimes you have to give up the information. Always try to get something in return.
- Fire your worst customers. As a rule of thumb, 15 percent of your customers should be fired today. For every two giant customers, you also have four large and 15 small. Many companies spend so much time chasing the huge deals that they starve to death. Others spend so much time dealing with the small guys that they never get the big accounts. Define these categories of accounts for your business and stick to the two-four-fifteen rule. This tells you which customers to get rid of. Also, make sure your prospecting is balanced according to this rule. You can measure the two-four fifteen according to dollars, gross margins or both.
Don’t necessarily drop small customers. Instead, consider changing your level of service. Or tell them you can’t afford to deal with them because they aren’t spending enough. Many will ask what they have to do to stay with you. The key point is to match your organizational resources to the level of customer.
- Sales People Strategies
- Slow down the transfer of knowledge. The single biggest reason salespeople transfer knowledge is to build trust in the relationship. Yet, studies show that building trust has a lot more to do with the quality of questions asked than the quality of knowledge that you bring. The better questions you ask, the more trust you build. Many salespeople don’t ask quality questions or enough questions because you they aren’t train to do so.
- Develop higher standards of accountabilities and measurement for salespeople and sales management. Sales call reports inspire creative writing. Instead, every sales person should report on three to five key indicators every week. For each salesperson, identify what you want them to focus on and what behaviors you want them to improve. Based on those priorities, have them develop a set of key indicators and report them on a weekly basis. Examples of key indicators include:
- Number of appointments with top people
- Average ticket size
New products sold
Average gross margin on sales
Number of demonstrations given
- Number of new accounts
- MPV. Before going into a sales call, salespeople should have minimum, primary and visionary objectives. Too many go into sales calls with unclear objectives (or none at all).
CUTTING SALES COSTS
In every industry, gross margins are doing down while selling costs are going up. Measure the productivity and efficiency of your sales effort. Good management can generally cut 15 percent to 20 percent of your selling costs. That money goes straight to the bottom line.
Potential areas for sales cost savings:
- Unprofitable sales calls. Do you know how much it costs you to put a sales person in front of a customer? Or bring a customer in front of the door? It doesn’t matter how you calculate it, just do it.
- Poor proposal control and pricey presentations. The biggest thing you need to do is disqualifying prospects. Qualifying an endless process. Disqualifying involves figuring out who isn’t a prospect so you can move on to someone who is.
- Unnecessarily long sales cycle. Measure how long it takes from the time you first contact the prospect unto you actually close the deal. The more salespeople get invested in a prospect, they less they want to get out of it. Make sure salespeople don’t go too far beyond the average sales cycle. Cut them off at a certain point.
- Poor account transitions. Keep your customer data in a safe place, not in your salespeople’s hands.
- Eliminate needless paperwork. You aren’t paying salespeople to fill out paperwork.
- Needless entertainment. Reimburse entertainment expenses only if the salesperson comes back with information about the customer’s strategic issues.
- Unqualified prospects. This is clearly one of the biggest wastes of time and money. Most salespeople spend an inordinate amount of time with people who will never buy anything from you because it is safe and comfortable. They will continue to do it until you manage them away from the behavior.