Marketing Expert's Corner

This article written in 2007

 

This newsletter may be one of my toughest ones to read, but it covers a topic that may cost more executives their jobs -- or can get more people their bonuses -- than any I've written.  So read up...and happy new year to you, too.

What is it that makes the difference between a company that's firing on all cylinders, and one that can't get out of its own way when it comes to closing deals?  How is it that so many companies seem to have revenue-prevention programs in place?

It's not luck.  It's not even skill.  It's business architecture -- looking at revenue as a business process, and aligning the essential parts of the company around coherent objectives, behaviors, metrics, and incentives.

What's the Source of Your Business?

Problems with the revenue business process come from a clash of theory and reality.  Sales is using a theory about how to sell, and to whom... and the theory isn't working.  Sometimes, Sales has been compelled by the CEO or the VCs to use a theory, other times Sales leadership has come up with it all on their own.  Some companies even use a theory from Marketing. 

Theory #1: Our Profits Come From...

A recent CIO Magazine survey showed that B2B companies were focusing their revenue priorities along these lines:

  • Over 50% of companies were focused on getting new customers

  • About 25% of companies were focused on getting more business from existing customers

  • About 12% of companies were focused on generating business from their highest value customers

  • About 12% of firms had CIOs who didn't know what their company revenue priorities were.

OK, so most companies put a big bet on acquiring new customers -- and this means growth in installed base.  What could be wrong with that theory?

No one can deny the thrill of closing a new customer, and every new customer does sow seeds that can bolster future business.  But smart companies know that getting a new customer is not the same thing as getting a new profit stream.  In consumer marketing, everyone's worst nightmare is acquiring a new customer that won't spend much but will sap your sales and customer support resources.  It's ironic that in this survey of B2B firms -- where the cost of acquiring a new customer can be $50,000 or more -- the statistics show that the hunt for any new customer is four times more popular than working the most profitable customers.  This can be an expensive mistake.

Profits come from repeat business with the right customers, not from acquiring a (fairly random) crop of new ones.  To use a metaphor, businesses default to hunter-gatherer mode despite the 12,000 years of history showing that domestication and cultivation are more efficient, repeatable, and sustainable.  Smart marketers know that acquiring a new customer is 6-10x more expensive than building business with the customers you already have.  And that's not just a theory.

"A 5% improvement in customer retention can yield 25-100% increase in profits."
                  -- The Loyalty Effect

Theory #2:  Our Business Comes From...

There's lots of theorizing about what kind of marketing and sales activities really drive the business.  The good news is that after you've closed 30 deals or so, you can ignore theory for a while and instead measure where the business came from.

Look back over the last 6 months of closed business by examining the "lead source" or "campaign" for each deal in your SFA system.*  B2B companies often see patterns something like this:

  • The #1 source of deals:  contacts that the reps brought with them in their Rolodex (someone they knew or sold to before).

  • The #2 source (although it's often actually #1):  "blank" -- there's no information regarding where the deal came from.

  • The #3 source:  upsells, reference-driven sales from previous customers, and deals with individuals who have changed companies and bought again in their new role.

  • The #4 source:  partners.

  • The #5 source (often 5-15% of the deals):  all your marketing activities combined.

Some of this shouldn't be a surprise:  people buy from people they know, and sales reps tend to spend more time selling to prospects they already know.  There's another factor, though: reps like to take all the credit for any deal they touch, and they don't like sharing the credit with marketing or partners.  If you're running Salesforce.com, make sure to turn "history tracking" on so you can see how much of a problem this issue is for you.  Better yet, use "campaigns" to support a more subtle analysis that reflects all marketing and sales activities. 

One possible conclusion from this bullets above is "the only way to grow the business is to hire more sales reps and their Rolodexes."  This approach has cost a lot of Sales VPs their jobs because the revenue yield is not as reliable as the cost structure.  The other conclusion would be that Lead Gen doesn't have much business yield.  The issue here is that marketing rarely gets credit for its indirect influence and the visibility that makes a sales conversation possible in the first place.

But both of these conclusions are misguided because the analysis examined "deals" as a commodity, treating all customers as equal.  If you look at the most profitable deals, these will almost invariably be from big initial sales or repeat business.  The common ingredient to all profitable deals:  reference customers.

Happy customers are the only driver for healthy and sustainable profit flows.  They provide the references that let new customers feel comfortable enough with your company to make that big first-time purchase.  They provide the internal references for upsell and cross-sell repeat business.  They're the source of word of mouth that kick-starts customer interest.

Who produces happy customers?  The whole company does, but customer support needs to be tasked and measured on identifying them, marketing for cultivating them, and sales for harvesting them.  It is almost impossible to spend too much on:

  • marketing programs focused on customer referrals, and

  • special incentives for reps to close repeat business.

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*In most companies, the data won't be in the SFA system, or it will be so sketchy that the "analysis" will be mostly guesswork and phone interviews. To get good data on the source of deals, you'll need to add specific process steps and sales rep incentives to properly record lead responses.  You'll also need to use an outboard tool (like Access or Crystal Reports) to get the analysis you want.

Theory #3:  Our Best Prospects Are...

This is another area of intense and often erroneous theorization.  Of course you should be finding people who have the fundamental need and pain that can be focused enough to cause a purchase.  The question is, which of the people you come across are worth investing serious time in?  Sales typically prospects for people who fit a profile, such as:

  • companies in a size range

  • companies in a vertical industry

  • projects of a certain size

  • people with certain titles

  • people in a certain geography

Beyond this initial filtering, Sales guys will typically reject leads that have a commodity email address (e.g., yahoo), an missing job title, or an empty phone number.  Reps may immediately reject 90% of leads that come to them, or make only one feeble attempt at email contact.  This is even more true if they don't have solid telesales / telemarketing support.

It's true that nearly all of the deals your company closes will come from people that have passed the filters that sales folks use.  But that's the folly of self-selection:  a deal can't go forward unless the rep follows up.  The rejected leads have zero chance of ever proving the reps' criteria wrong.  No wonder Lead Gen scored so low in the earlier "deal source" analysis.

But what if those Sales Rep filters (company or personal characteristics) are just plain wrong? What if, as the Cluetrain Manifesto said, commerce is a conversation?  What if the way to filter is not by "who they are" but by "the vibrancy and the state of the conversation?"  In other words, what if the way to find a hot prospect is by their behavior?

You'll have to test this with your own prospects, but the idea is along the lines of "a valid prospect is any person who has registered on the web site, gone through the flash demo, and emailed/phoned with an additional info request within a 3-week period."  How do you figure out the particular behaviors that lead to business?  Get a couple of junior (but successful) reps and a couple of senior telesales guys together in a room for an hour to talk it out. 

Once you've got a behavioral theory, you'll need to adjust your lead filtering and cultivation infrastructure (web site, SFA, telesales) to spot those behaviors.  Your reps will need specific incentives to chase these leads first.  And you'll need to put in monitoring systems so everyone don't fall into old habits.

Theory #4:  Our Sales Cycle Is...

We often see Sales management with theories about the sales cycle -- how long the overall cycle is, how many stages there are, what's the smallest deal a rep should go after, whom the rep should call in to, etc.  If the sales guys are making their numbers, nobody will question these theories.  But if there's a revenue short-fall, the first thing to do is look at the facts in the SFA system (make sure you're collecting them now).

With decent SFA data, it's fairly easy to see how long the actual sales cycle is, which stages go quickly and which are troublesome, what industries are easier to sell into, and what job title the first sales call is with. 

But SFA data is parametric, and doesn't really explain why things are going on.  Have someone low in the management chain talk with a few reps about how things really work (this can be done in the guise of an informational interview by an internal candidate looking to move into sales).  You may find out that while the Sales VP is saying "call on the CIO," the sales reps are saying "I don't know what I can say to a CIO, because they just don't seem to care about our product category."  You may find that the guys at the bottom neither want to nor feel capable of having a productive conversation with CxOs.  It is surprising how often the reps do not (or can not) follow the theories from on high.

You may find that the leads that really go somewhere are from unexpected sources, and that the leads you're spending tons of marketing dollars on don't have as high a yield.

You may also discover that the Value Proposition or Elevator Pitch aren't used (or usable), and that many of the company's marketing materials aren't used the way you'd expect.  It's important to find any disconnects between Reps and their management, as well as Reps and any other part of the company.  

Theory and Executives

Executives (Sales VPs, Marketing VPs, and CEOs) feel pressured to come up with sales theories without testing them in their current market situation.  Within a couple of weeks of taking over, an exec will come up with the sure-fire strategy (that is often based on experience from a different business situation).  They also tend to over-enforce and defend their theory, rather than using real-world data to improve the theory's yield.

One problem to look out for is when Sales and Marketing are sniping at each other.  This is a lose-lose situation:  the Sales and Marketing VPs really have to work as a team (with the view that the only way either of them can win is if both do).

Many executives are overloaded and stressed out, some to the point of ADD.  They've got a lot riding on their decisions and pronouncements, and "optimization" can be a politically threatening word.

So the big step is to get the ego and executive fiat out of your business architecture.  This is most easily done by the CEO, but can be initiated from anywhere in the executive suite.  The goal is to make the business architecture a cooperative venture, moving the attitude away from "this better work" and towards "how can everyone here make more money?"

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