by scott.gillum | Jul 17, 2012 | 2008, Sales
Given our average deal size we used to think we needed to have a scaled down offer to get a foot in the door. Once in, we could then grow the account. We were wrong.
Considering the current economic situation, I know that many companies may be tempted to come up with a “door opener.” A subscale and/or entry level product/service intended to get a foot in the door with a new client and/or a new business division.
You’re also probably thinking about going down market into smaller accounts. Although this shift may help satisfy short term revenue needs it will do little to nothing in helping grow your business. Most likely those accounts will not expand and/or even be retained next year.
Here’s how I know. Looking back at the new accounts acquired over the last four years we found some interesting trends and confirmed some things that we knew intuitively (click on the image). When we measured the value of customers in their first year against the average time spent engaged with the client a few key insights emerged.
First, three “clusters” of accounts emerged;
- Customer that grew to beyond $800K in their first year
- Customer who had first year revenues between $350-$600K
- Customers who represented under $250K in total billings from the year.
Let’s start with the bottom and work our way up. Customers in cluster 3 had an average value of $150K. Accounts on the lowest end of the spectrum in the “One and Done” zone” (under $10K for example) were “workshop”…our “foot in the door” offer. Guess what, of the 8 that fit that description zero, zippy, nada, grew beyond the initial workshop. The other bad news…only 2 accounts led to follow on work and no company in that grouping was retained the following year.
I was speaking with Larry Emond, CMO of the Gallup Organization the other day and he mentioned that they saw a similar trend; “We found that only 4% of customers who were acquired under a certain price point grew to be substantial customers.”On the other end of the spectrum are the occasional customers who are big right out of the gate. The “Rare Birds” zone in cluster 1 includes those few customers who start big and for the most part remain large customers YOY. The key to success with this cluster is that they had/have a tendency to have a need for multiple service lines and/or desire a complex solution. This group was looking for a strategic partner versus a vendor for an immediate need. Year over year retention was also good at over 50% and if they used multiple services lines it was almost a sure thing they be retained….and grow.
As Larry also mentioned; “Our big customers today came in as big customers…”. We’ve had the same experience and have grown our top 5 largest accounts by an average of 90% over the last two years.
Customers in cluster 2, the “Sweet Spot” represented the best of both worlds. Although their value was not as high as the “Rare Birds” they were more plentiful. They also had higher price points, high percent of follow on work and YOY retention than the “One & Dones.” Retention rates although not as high as the “Rare Birds” was good (a little over 33%). Bottom line – they represent the model that we need to build our coverage and services bundle against. We have also realigned our resources to help account development/retention activities against this group.
Why do low price point and short engagement acquisitions perform so poorly?
We discovered five main reasons for this:
- Length of the engagement – too short to learn business/issues/meet folks/create a relationship, etc.
- They get the “B” team – the “A” team is on existing accounts, as a professional services firm that measure FTE productivity this will always be the case.
- Short term need vs long term problem – we were successful in building a relationship with target buyers within targeted accounts. So much so that they decided to “give us a try.” The problem with that is that it was usually a piece of work that wasn’t strategic.
- Size matters – our win rate and retention rate dropped dramatically on companies that had under $1B in revenues. The only exceptions were situations we were able to sell a solution as the first engagement.
- Culture/Attitude – some companies just don’t have a culture of working with outsiders. This very difficult to know until you’re in the door.
So as you are thinking about 2009 focus on aligning resources and efforts on;
- Retaining and expanding your biggest customers with new lines of business.
- Find your “sweetspot” based on this type of analysis…what is the right mix of services and price.
- Targeting big companies with big needs…there are many out there now just make sure you have the right offer.
Because at the end of the first engagement…a foot in the door just isn’t enough.
by scott.gillum | Jul 12, 2012 | 2006, Sales
Remember when you had a unique product, a top-notch sales force, customers who couldn’t get enough of your product and were willing to pay anything for it. Sales reps couldn’t close deals fast enough and the factory couldn’t keep pace with the orders. Little to no inventory cost, high margins, an incredibly productive sales force, big bonuses, soaring stock, etc…things couldn’t be better. But what happens when demand begins to slip?
One of the first things to occur is that your best customers, who in the past had no leverage, begin to feel the advantage shift their way and sales reps (unknowingly and for the most part unwillingly) help that transition.
As demand cools, good sales reps who are trained negotiators and born manipulators, begin turning their finely tuned sales skills on the organization. Feeling the pressure to close business and meet quota, reps begin “selling” the organization on what they need in order to get the deal done.
Instead of driving customers into existing solutions with a premium price, they take the course of least resistance, demanding that the organization bend to meet the customer’s (not the company’s) requirements. The company “customization” party goes on for as long as the sales quotas exceed market demand for the product.
The Hangover Effect
What does the company look like after the party? Unfortunately, like most good parties, the news of the festivities grows and involves most of the organization. At the end, it is not a pretty site and it take years to clean up. Here’s a list of the mess left behind:
- Large contract departments – When demand is high, customers typically agree to standard terms and conditions in order to get the product as quickly as possible. As demand slows customers begin to try to gain leverage by modifying the “T’s & C’s” of a contract to their advantage. Reps desperate to get the deal signed before the end of the quarter apply pressure to the legal and contract departments to accept customer terms. This results in contracts so complex to manage, that additional staff is needed to administer them. In one hi-tech firm, for example, it takes a staff of four to perform administrative tasks related to just one large customer contract. Multiply that by twenty large customers and you begin to see the problem.
- Complex product and price configurations – In the eyes of the customer, the value of the rep shifts from problem solver and solution provider to personal customer advocate. The same demand for customization of “T&C” is applied to product configuration and pricing arrangements. The result is highly customized solutions, hard-to-write service agreements, and complex payment terms that may end up costing the company money. The response from the product management team of an ATM manufacturer working on standardizing product configuration was: “We have been trying to do this for years, but the sales force wouldn’t let us.”
- Order Taking vs. Order Making — A nasty side effect of this hangover is that when demand slows it reveals flaws that would otherwise had been hidden. One of those is seen in the quality of the sales force. The difference between “order takers” and “order makers” becomes apparent in a slow marketplace. In this environment of longer sales cycles and fickle customers, sales reps must work harder than ever for the sale that doesn’t hold much appeal for reps who are used to making quota without much effort. A sales rep at a one-time highflying manufacturer of telecom and web equipment was overheard saying in the hall to a colleague; “…I’m afraid we are back to the bad old days when customers required a business case and ROI for every purchase decision…”
- A Service Nightmare – When product configuration becomes so highly customized, it limits the number of service reps who have the competency to work on the equipment. This results in long service times. Worse yet is when service reps turn over, new reps, which lack the knowledge of the original configuration, begin applying short term service “band-aids” that sacrifice product performance. In addition, complex product configurations bring complex service agreements. As is the case for orders, service contracts become incredibly difficult to administer and manage. For example, one customer of an equipment manufacturer demanded that each component of the product have its’ own unique service agreement…all 200 parts.
- Remarketing vs. Marketing – Marketing gets the opportunity to host the party. Because demand for most products already exists, marketers focus their efforts on having fun catering to big customers and satisfying the whims of the sales organization (big expensive customer events, sponsorships of sporting events, etc.). Their activities are nothing more than “remarketing” to existing customers to keep the party going.
As the downturn comes, marketing is stuck with pre-conditioned customers and reps who are looking for “fun” and “fluff”. Unfortunately in this environment, marketing never develops the types of programs and core competencies needed to effectively sell products and acquire new customers right when the company needs it the most.
Best Cure for the Hangover
It’s not the hair of the dog that bit you that’s for sure and unfortunately, this hangover does not respond to a quick fix like a couple of aspirin or a new technology. Here are a few tips for getting started:
- Map out a plan – you didn’t get into this overnight and you’re not getting out quickly. Start small and stay focused.
- Find/Create opportunities to standardize and/or simplify– force events such as technology implementation or new product introduction to standardize process, price and services.
- Understand that not everyone is going to make it – the hiring profile for reps and managers 10 to 20 years ago when the sales force was built may not make it – order takers vs. order makers. The service and marketing departments may also need retooling. New competencies, skill sets and training are also necessary for those who make it.
- Utilize new sales and marketing channels and retrain existing channels – introduce and pilot new sales and marketing channels that increase customer coverage, reduce overall sales cost, and improve customer acquisition. Help field sales reps find their “sweet spot” (closing large complex orders in new accounts) by providing training on multi-channel coverage models.
- Draw a line with customers – Analyze and determine the profitability of your customer base. Segment it into three groups: 1) Profitable, 2) Marginal but with Potential, 3) Unprofitable with no potential. Begin the process of re-conditioning the way customers in segment #2 buy. You’ve created the monster and now you have to tame it. In segment #3, begin the process of terminating the relationship.
In the end, it is like any hangover. You feel terrible, you have a few (or a lot) of regrets, you promise to yourself and others that you’ll never do it again — but…it was fun while it lasted.
by scott.gillum | Jul 12, 2012 | 2006, Marketing
Once upon a time there was a Prince named CMO and he lived in the magic kingdom of Marketing. The kingdom of Marketing was under attack from the kingdoms of Sales & Finance. The kingdoms were fighting over the “holy grail” of performance and ROI. So the Prince decided that he would build a Marketing Dashboard that would lead him to the Holy Grail.
The Prince commissioned a band of Knights called Consultants to lead the crusade and help him search the world for information. This journey was difficult and exhausted much of the Prince’s fortune but finally, the Knights built the Prince a magnificent and magical Dashboard…and the Prince was happy.
The Prince showed the Kingdoms of Sales & Finance his Dashboard and they were impressed. He told them that he was close to discovering where the Holy Gail of performance and ROI was hidden. Every month the Prince met with his people to talk about the Dashboard, and ogle at its magnificence but then, one day, something happened. The Dashboard started to lose its magic. The Prince and his people could not make it better and it steadily got worse; the Prince and the Kingdom of Marketing were very concerned and unhappy.
The Prince of Sales started to question the magnificence of the Dashboard and the power of Prince CMO. Prince Finance believed that the magic Dashboard was showing him how Prince CMO was squandering the wealth of his people. The Prince was under attack and eventually lost his kingdom.
The moral of the story is that a Dashboard is not the “holy grail” of performance and ROI. CMO’s are under a tremendous amount of pressure to show the organization how they are providing value and producing a positive return on what can be very sizeable investments (3-6% of revenues). CMO’s believe that they need to have the data to prove their case…and they are right. The difficult part is knowing what to do with the data once they have it, and how to move the numbers in the right direction. Although the story above is written as a fairy tale, it is based on a true story.
The most important thing that a CMO can do to improve the performance of marketing is teach/train country marketing managers the basics of pipeline management because it is their results that show up on the Dashboard. Effective pipeline management is built on four key principals:
- Volume – the flow of incoming response, leads, opportunity coming into the pipeline
- Conversion – the percent of opportunity that makes its way from one stage to another
- Cycle Time – the average time it takes for opportunity to move from one stage to the next
- Transaction Size – the average order size of the opportunity closed
If CMO’s can effectively coach their teams on how to manage by these prinicipals then they will have achieve the “Holy Grail”…and they will get to keep their kingdoms.
Here’s how I know. Looking back at the new accounts acquired over the last four years we found some interesting trends and confirmed some things that we knew intuitively (click on the image). When we measured the value of customers in their first year against the average time spent engaged with the client a few key insights emerged.
