The profit multiplier: sales productivity

March 31, 2010 By David Crankshaw

In her work teaching her buying facilitation method, Sharon Drew Morgen (author of “Dirty Little Secrets”, reviewed here) states that she has worked with groups who have doubled their sales close rate. This doubling is possible because sales people are facilitating the change management that must occur in the buyer’s organization. And because the average close rate for companies with a direct sales force is low, around 7%.

What would it mean if a company doubled it’s close rate simply by increasing the productivity of its Sales people?

Let’s first look at a fictitious company with Revenues of $20M and an Operating Profit of $2M.

Here is the simplified income statement before the increase in productivity:

Description Annual Amount Percent of Revenue
Revenue $20,000,000 100%
Cost of Revenue $10,000,000 50%
Gross Profit $10,000,000 50%
-
Cost of Research & Development $3,000,000 15%
Cost of Marketing $600,000 3%
Cost of Sales $2,000,000 10%
Cost of Administration $2,400,000 12%
Total Operating Costs $8,000,000 40%
-
Operating Profit (Profit before Interest, Taxes, etc.) $2,000,000 10%

What happens when Sales productivity doubles? At first you might think, well, if the company has an operating profit of $2M and a margin of 10%, then if the revenue doubled, the operating margin would double to $4M. Typically this is true. A company grows, but it’s financial model and productivity stay the same. A doubling in revenue requires twice as many sales people and most operating expenses (except R&D) would also double.

This is not what Morgen is talking about. She’s describing a situation where the same marketing group delivers the same number of leads. The only thing that changes is that Sales people are twice as productive. This increase produces twice the sales and twice the revenue.

What would the impact be on the Operating Profits? Let’s take a look at the new income statement for our fictitious company. Revenue doubles and so does the corresponding Cost of Revenue and Gross Profit.

But the overhead cost has not changed, it is still $8M. Overhead is now only 20% of revenue. This increase in Sales productivity causes the Operating Profit to jump from $2M to $12M, an astonishing 600% increase in operating profits!

Here is the simplified income statement after the increase in productivity:

Description Annual Amount Percent of Revenue
Revenue $40,000,000 100%
Cost of Revenue $20,000,000 50%
Gross Profit $20,000,000 50%
-
Cost of Research & Development $3,000,000 7.5%
Cost of Marketing $600,000 1.5%
Cost of Sales $2,000,000 5%
Cost of Administration $2,400,000 6%
Total Operating Costs $8,000,000 20%
-
Operating Profit (Profit before Interest, Taxes, etc.) $12,000,000 30%

This exercise shows the power of increasing Sales productivity. You get a multiplier effect because you are increasing revenue but keeping operating costs stable.

Filed Under: Analytics Tagged With:

Does Marketing and Sales have to be a numbers game?

March 25, 2010 By David Crankshaw

Numbers GameSalespeople have been told for a long time that selling is a numbers game. The more people you talk to, the more people you present to, the more people you give proposals to, the more business you’ll get.

Sales and Marketing play the numbers game when they are given little control over which buyers they will target, little understanding of the buyer’s journey in their market, little ability to know when a buyer is ready to move to the next stage in the buying process, and little knowledge of what constitutes a qualified buyer.

The numbers game leads to massive inefficiencies. Marketing generates too many poor leads and Sales chases too many unqualified opportunities.

It’s as if a bicycle manufacturer bought materials from the first name in the yellow pages, told their production staff to assemble bicycles from the parts, and when only a few of them came out right, shrugged and said it’s a numbers game.

Yet we are working in a time when forces outside our control – competition, globalization, and technology – are forcing companies to get a better return on their investment in Marketing and Sales.

What is the alternative to the numbers game, a game where you have little control over your work or your results?

The alternative is to focus on the buyer and the buying process.

  • Segment your market carefully and define your ideal prospect.
  • Understand the buyer’s journey in your particular market. Buyers move from being unaware of a problem to awareness to doing something to solve the problem. Map the buyer’s needs and how you create value for the buyer at each stage of the buying process.
  • Create value for the buyer at each stage by answering questions and solving problems. Enable the buyer to move forward.
  • Know how to recognize when a buyer is ready to move to the next stage, particularly when the buyer is far enough along that the situation warrants bringing in a salesperson.

In this environment, salespeople are specialists who only get brought in when the buyer is qualified and ready to talk to a salesperson.

Marketing defines the market, finds potential buyers, and nurtures them on their journey. Sales works with qualified opportunities, facilitates the buyer through the range of organizational decisions it must make, and helps the buyer’s team determine the best solution and the best solutions partner.

Filed Under: Marketing Strategy Tagged With:

Redefine the issue in your favor

March 24, 2010 By David Crankshaw

Immigration Rally in Washington, D.C.What happens when the facts aren’t in your favor? Maybe your competitors have facts that support their position as well as your facts support your position. Or perhaps your position is weak. Can you redefine the issue in your favor?

Yesterday I was listening to a segment on the news about an immigration rally in Washington. The reporter interviewed people on questions about policy, enforcement, and economics. Some of those interviewed used facts to argue for stricter limits on immigration. Others used different facts to argue for immigration rights and reforms.

At one point I heard an immigration advocate say “This isn’t about immigration policy, this is about America’s future. It’s about adding $1.2 trillion to our economy.”

What did she do? Both sides in the debate used facts against each other. In order to get a better grip on the argument, she redefined the issue. She defined her side in terms that contrasted with her opponents and attached immigration reform to something most people view as positive, America’s economic growth.

What’s more she didn’t trash-talk or discredit her opponents. She found a commonplace phrase that summed up something most people believe in, America’s future.

Redefining an argument works in business too. Let’s say you are a small company competing for business against a much larger competitor. Your larger competitor will probably frame the argument to emphasize the importance of which company has been in business the longest, has the most resources, and is the most stable. These arguments favor a large company.

It will be difficult for the small company to respond to these arguments. An alternative is to make their positive words seem like negatives. The small company can present its small size as a strength, as the company that is flexible, more responsive to customer needs, more personal in its service.

You haven’t actually called the large company a lumbering dinosaur whose large bureaucracy will be inflexible and unresponsive. You simply redefined your small size as a strength and can leave your potential client to draw the obvious conclusion.

What is the best way to re-frame the argument? Use the commonplace words of your audience that carry a lot of emotional weight. Listen to the expressions that your potential customer uses. Identify the primary persuasive words. Use these words to define the issue in your favor.

It they talk about teamwork or innovation or being more aggressive, describe how your small size will allow you to:

  • work closely with them as a team or
  • enable rapid innovation or
  • move more aggressively.

You don’t have to be a small company going up against a big one to define the terms in your favor. Anytime the facts are against you, redefine the argument in terms that work for you and that discredit your opponent.

Filed Under: Content Marketing Tagged With:

Review: Dirty little secrets by Sharon Drew Morgen

March 23, 2010 By David Crankshaw

Dirty Little Secrets - Sharon Drew MorgenThis book made me think hard about the buyer’s journey and how organizations make a buying decision.

In Dirty Little Secrets, Sharon Drew Morgen observes that Sales knows how to identify a need and how to place a solution. But that these skills are insufficient to help buyers make a change.

“Sales never taught me that a buyer lives in a system – a unique company culture (or family culture) filled with politics and rules and relationships and hopes and dreams and history – that needs to buy in to change before anything gets fixed or added.”

“Neither buyer nor seller has been taught that before buyers are in a position to buy, before a viable solution can be chosen, before budget or vendors can be discussed, buyers must go through some sort of change management.”

Although sellers can facilitate this change management, it is ultimately the buyer that must maneuver through the range of necessary decisions to make a purchase.

“Before buyers even get to the point of choosing a solution, they must get buy-in from everyone in their system that will be affected. Until or unless this happens, they will do nothing, causing the long delays in the sales cycle.”

“We can help them do it faster if we can help them understand the full range of people and policy issues that are attached to their Identified Problem – and then lead them through their change issues.”

After outlining the problem, Morgen then explains in detail how to use her buying facilitation method to help organizations work through their decision. Her method revolves around a type of questioning that asks the buyer their criteria for making decisions and taking action.

Warning: this is not a breezy book on selling that you can read in an hour and then add to your shelf of similar books. It is meaty material and takes some time to absorb. It is also powerful because it shows sellers how to stay active and involved with the buyer throughout the buying process.

This book easily ranks among the top five I’ve read in the last few years on marketing and sales.

You can find another review here and here. Sharon Drew Morgen has more on her site, including workshops and a companion book called Buying Facilitation.

Filed Under: Selling Tagged With: ,

Questions a buyer must answer before becoming a customer

March 5, 2010 By David Crankshaw

Once you’ve identified the buyers you want to connect with and attracted their attention, these buyers have to answer three crucial questions before they can become a customer. These decisions have to be made in order. The length of time it takes to make these decisions is the length of your sales cycle.

1. The first question buyers have to answer is: “Do I have a problem that I must do something about?” The buyer and the “problem” exist in a system that is in balance and is working. You may have identified a problem in the buyer’s organization. But that organization is working in spite of the problem and has figured out ways to work around the problem. Until buyers are convinced that the problem is one that they MUST solve, it’s unlikely that the buyer will continue to the next step in the journey.

One of the best results that Marketing can produce for its Sales group is to convince buyers that the pain of inaction is greater than the pain of taking action. Doing nothing seems like the easy choice until you spell out what may happen if they procrastinate.

2. The second question the buyer’s organization must answer is: “Do we need to go outside the organization to solve this problem?” Maybe the organization has internal resources that could solve the problem. If they’re not sure, what will they have to know to decide whether they have the resources or not?

3. And the final question is: “If we decide to go outside the company to solve this problem, how will we know which solution to purchase?”

Product Marketing and Sales generally focus on the third question. But as you can see, buyers aren’t ready to ask that question, let alone answer it, until they have addressed the first two questions.

Filed Under: Buyer's Journey Tagged With:
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