Friday, August 29, 2003

Sales Management Irrationality

Before 9 am this morning I had two sales events that caused me to reflect on sales management irrationality.

The first was the CEO of a small company wanting to sell to a large brand name company. The CEO in question has unproven technology, no track record, no reference sites, no demonstrable business model, and in my judgment was about to try and sell the totally wrong product to the wrong buyer, even if he did have all the missing pieces. But it would have been big if he were right.

The second was a company where the sales reps are paid on what they close for the quarter. The sales rep however, was working with a client following a two step purchase process. First, test and validate the technology. Second, upon demonstration of success, the client would roll out to a hundred sites. The CEO of the supplier was resisting special terms for the initial sales. She was driven by short term goals, is probably going to mess up the test phase and jeopardize any hope of closing the second and larger phase.

So what are some basic sales rules for selling new technology?

1. You better have a compelling reason for people to want to do business with you.
2. You need to have sales people who understand how to pioneer new markets. Typically, that means being able to understand what motivates the buyer, who the buyer is and what their buying process is.
3. You need to have different evaluation measures for those pioneernig relationships than those who are responsible for account development.

Many managers in new companies fail to understand the importance of relationship profitability. In contrast, retailers and financial services organizations know that they live or die by getting repeat sales. Relationships per household is often a key metric in retail financial institutions. And corporate clients are almost always looked upon as relationships.

Now, relationship profitablity in high tech firms has been given a bad name by the many DotCom failures who confused usage with a business model. But it's important to remember that your assumptions about the buying process will have dramatic effect upon:

1. Your pricing model.
2. Your sales management approach.
3. Your close rate with customers.
4. Your overall profitability.

Basically, the way it works in many industries is as follows:

1. It is more expensive to acquire new customers that sell to existing customers.
2. A small number of customers demonstrate a Pareto phenomenon. Often 20% of your customer account for 130% or so of your profits
3. Customers go through a life cycle in their relationship with suppliers. Managing the perception of risk is key to acquiring and growing customers. Price and terms can be varied to reflect the risk customers perceive.
4. Most accounting and incentive systems are focused on short term outcomes not relationship profitability outcomes.

So, if there is a high level of frustration in your organization in the sale force, maybe it's time to think differently about how you pay them.

Consider the two following sale people.

1. The first works very hard and has a very low close rate. He brings in a few very large clients.
2. The second works very hard and has a high close rate, but account penetration dollars are very small initiatially, in spite of the fact he is selling to very large clients.

Which is the better sales person?

I would suggest that it is almost impossible to tell unless you look over the relationship life-cycle. If Salesperson 2, is recent and in subsequent periods of his relationship, his revenues to existing clients continues to increase, while Salesperson 1, keeps on bringing in new accounts who never buy more, then the Salesperson 2 is probably being more effective.

From a revenue risk perspective, Salesperson 2 is probably much lower risk, because his installed base of customers who have tried and validated the product, represent a more likely source of new business than the "Big Hit" strategy with unfamiliar accounts of Salesperson 1.

From a profitability perspective, expanding usage at a client is frequently much less expensive and much profitable as well.

One useful way of thinking about buying models is that there are six stages:

1. Time to qualify
2. Time to purchase
3. Time to competence
4. Time to productivity
5. Time to repeat purchase
6. Time to reputation

It takes time and effort to qualify whether a prospect has the interest, motivation, power and budget to buy.

Time to purchase is a traditional measure of sales activities.

In some industries, it takes a while before the customer can use the product successfully. Making the product easier to use accelerates later stages.

Time to productivity is the least obvious and typically the least well managed by companies. It is the time before the economic decision maker realizes the value from the initial purchase or usage.

Time to repeat purchase is affected by time to productivity.

And the goal for most firms is to build such a reputation that they have become the supplier of preference. In such situations you can say "Noboby ever got fired for buying from IBM/Microsoft/Adobe or whatever vendor has established themselves as the value/reliability leader in their category."

Alistair Davidson

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