By Frank V. Cespedes and Steve Thompson
When formulating a strategy, markets and segments are important categories to consider. But a market never buys anything. Only customers buy. To borrow a telecom industry metaphor, a deal with a customer is the “last mile” in connecting any strategy with business development efforts and marketplace results.
So, for most firms, de facto strategy is the aggregate result of the deals their salespeople bring in. The problem is few firms clarify their deal selection criteria. Either directly in meetings or implicitly in their compensation plans, they basically tell their sales forces to “Go forth and multiply!” And that is exactly what happens.
As a consequence, salespeople tend to sell to anyone they can, often at discounted prices to make a volume quota target. There are also opportunity costs: since money, time, and people are allocated to customer A, they are not available to customers B, C, and so on.
This is ineffective deal management, and it eventually leads to loss of positioning with customers, and, over time, the nurturing of “commodity competencies.” In other words, the sales force gets better and better at striking deals that more customers value less and less.
To avoid this, some companies establish a Strategic Deal Profile — guidelines and parameters that its sales force can use in conversations with actual customers — and make it part of selling behaviors through performance management practices.
Consider the case of Alphatech (a disguised name), which sells software that allows businesses to deploy applications consistently across their desktops, laptops, and other devices. Since every business has a somewhat unique combination of hardware and software, Alphatech grew by taking responsibility for integration and after-sale support. But by 2012 growth slowed, revenues flattened, and margins declined. At that point, Alphatech’s management reassessed its strategy and sales approach.
Identifying good customers. Management first evaluated who were, and who were not, good customers. Previously, Alphatech considered any organization in which workers used laptops as a prospect. Because of this, selling cycles were lengthy, and, even when reps did close deals, they did so at highly discounted prices and were forced to include unwieldy service requirements. As a result, false positives and negative-value prospects littered the sales funnel, and about 75% of margins came from just 25% of the deals—almost all of which were managed-services contracts versus one-off “project” installations.
With analysis, Alphatech identified regional hospitals—which faced mandated digital-records requirements, and usually lacked the scale and IT staff to do that on their own—as their best customers.
Hospitals presented two advantages. They were accessible because Alphatech could oversee integrations remotely via the internet. And, since they were spread out across a geographically diverse area, they represented a large enough market to support renewed profitable growth.
Creating the right sales processes and incentives. Next, Alphatech set out to redesign its sales processes in order to support its new strategy. It did this in a few ways. It reorganized its sales force to focus on specific segments within the hospital market, and trained both its sales and service teams (which now visited sites early in the sales cycle) on outcome-based selling. It changed its sales compensation incentives from revenue bookings to commission payments tied to margins, service mix, and duration of subscription agreement. It also standardized its proposals to include managed services offerings as an option, and changed its marketing collateral to emphasize its new value proposition. In turn, it tracked the number of calls its salespeople made to hospital administrators at assigned accounts, and included this as a metric in performance reviews.
Following a strategic “Deal Profile.“ At this point, Alphatech knew it wanted to sell its services to the regional hospital market and felt it had the capabilities to do so. But it needed a Deal Profile first — a set of guidelines that would link the company’s strategy with the approaches used by its salespeople.
The first component of a Deal Profile is figuring out how to define success. Sales calls now focused on defining success with the customer, including specific outcomes such as time to deploy applications and system up-time guarantees. These metrics were critical because many of the applications affected patient care, hospital reimbursements, and health-care confidentiality requirements, and various stakeholders had different perspectives.
Establishing a common language of value helped customers to communicate internally, which, in turn, accelerated sales cycles when Alphatech won a deal and minimized selling expenses when a customer and Alphatech could not agree on outcomes.
This method of selling also tended to involve more senior decision makers. In the past, sales reps sold to IT system administrators, but now they were conversing more with CFOs and other executives, which better positioned Alphatech to expand at accounts where it did land deals.
Second, Alphatech had to decide how to communicate value. Alphatech was selling a change process as well as hardware and software services. That meant that to be effective, they really needed monthly conference calls with the customer and periodic Customer Business Reviews (CBR) with IT and administrators after implementation.
For customers, the calls were reviews and reminders of agreed-upon success outcomes. They were also opportunities to talk about best practices and to troubleshoot any issues they were encountering.
For Alphatech, the CBRs provided opportunities to extend or expand a contract, or both. Since a longer term contract needed approval outside IT, it was in Alphatech’s best interest to keep key senior execs involved in the process.
Pricing guidelines were the third key factor. In the past, Alphatech’s pricing had been driven by competing proposals, often from competitors with lower service levels. The sales force was often closing initial deals at a loss in the hope that the value they ultimately delivered would lead to higher prices.
But hope is not a method. With Alphatech’s Deal Profile, sales people were only able to offer 5-10% discounts off book prices if the customer bought at least three months of services. The three-month period was beneficial to both parties. It lowered customers’ risks of trial, while the network and service terms gave Alphatech access to better information about value drivers and change requirements at that account.
Further, experience indicated that, despite value delivered, it was difficult to get higher prices after an initial discount. So pricing with the new Deal Profile provided a basis for profitable future business if and when expanding service became a reality.
The Deal Profile also specified payment terms with pricing. This is an important and often overlooked aspect in many strategy discussions. Any deal affects a company’s economics and valuation. Financing needs are driven by the cash on hand and the working capital required to conduct and grow the business. For most firms, the biggest driver of cash out and cash in is the selling process. Accounts payable accumulate during selling, and accounts receivables are determined by what’s sold, how fast, and at what price, and payment terms. That’s also why a Deal Profile is a strategic issue as well as sales issue.
Finally, there’s measuring results. Business results were outstanding: EBITDA more than doubled in the first year and ROIC increased almost 300%, with fewer sales people. And, while the Deal Profile meant that Alphatech was saying “no” more often than in the past, customer churn for done deals decreased and customer lifetime value and profitability increased as a result.
Not everything went without a hitch. With the Deal Profile in place, many sales people left because they found the new selling behaviors alien to their skill sets and preferences. But the most important lesson here may be this: it is not the customer’s responsibility to inform you when you are barking up the wrong tree. It’s your responsibility to make that judgment and make it real through execution. And a Deal Profile is a basic building block in linking strategy and sales.