Frank Cespedes: The Role of the Sales Force in Pricing Strategy Implementation

Interview, “Frank Cespedes: The Role of the Sales Force in Pricing Strategy Implementation” [Chapter 4 of Pricing Strategy Implementation: Translating Pricing Strategy into Results, ed. Andreas Hinterhuber and Stephan M. Liozu; Routledge, 2020]

  1. What are key capabilities for the sales manager/SAM in the future vs today?

Selling, sales management, and account management requirements are changing—quickly and with implications for other functions and activities in companies—but not in ways typically discussed in the business press and many popular sales books.

For example, it is not true that salespeople are being “disintermediated” or replaced by online interactions. In the United States, the internet has been a fact for nearly 30 years. Yet, according to U.S. Bureau of Labor Statistics (BLS), the number of salespeople in the U.S. has increased in the 21st century to more than 10% of the labor force.[1] Further, the BLS data almost certainly undercounts the reality because, in increasingly service economies like those in the U.S., Europe, and other places, business developersare often called Associates, Managing Directors, or Vice Presidents, not placed in a “sales” category for labor-department reporting purposes. But selling is what they do.

Similarly, ecommerce has been there since the introduction of the internet. Yet, after decades, only 11.4% of total retail sales in the U.S. in 2019 were online sales. That figure includes Amazon, and almost half of the non-Amazon portion of ecommerce is via the online sites of brick-and-mortar retailers. Even if this online percentage doubles, or triples, in the next decade the majority of retail sales is still done in stores.

U.S. companies spend, annually, on their sales efforts more than three times what they spend on all of their media advertising, and more than 10 times what they spend on social media and all other digital marketing initiatives. Selling expenses and the sales force are, by far, the most expensive part of strategy execution for most firms.

What is changing is the nature of sales tasks. Consider the process of buying a car. Consumers do a lot of online research: the average U.S. car shopper now spends over 11 hours online and only about 3.5 hours offline in trips to dealerships during their buying journeys. But the vast majority of consumers still purchase their cars in-person at a dealer. Further, research indicates that their online sources of information have made consumers place more emphasis on their interactions at the dealer with salespeople. However, becausebuyers can access prices, reviews and other information via online searches, their attitudes toward negotiations, list prices, and sales behavior at dealers are changing. Smart phones, market forums, and other factors are causing similar changes across many other industries, both B2B as well as B2C.[2]

The most important thing about selling is the buyer. Changes in buying behavior are affecting the capabilities needed by sales managers and SAMs. Rather than moving sequentially through a funnel, buyers (like auto shoppers) now typically engage in parallel activity streams throughout their buying journey. Understanding where prospects and customers are, how they move between streams, and how to interact with them in a given stream, is now central to effective selling, sales management, and the implementation of a pricing strategy.

  • Pricing and sales: what is your experience in delegating pricing authority to sales/SAMs? Under which circumstances would you expand/restrict pricing authority? e.g. type of product (complex solutions vs commodity type; type of customer; etc.)?

Where pricing authority resides depends a lot upon context and the buying process. But let’s first consider a pre-requisite for even considering delegation of pricing authority to sales: having in place a relevant and coherent sales compensation plan.

Compensation is perhaps the most discussed aspect of sales management—even though research indicates that coaching, reviews and other performance-management practices typically have more impact on actual selling behaviors. Surveys consistently indicate that, across industries, about 65-75% of firms set sales incentives on the basis of volume—i.e., how much is sold irrespective of the price, margin, or cost-to-serve customers.

In an incentive plan like that, the message to salespeople is, sell to anyone because there is no such thing as a “bad” customer; and reps will, rationally, discount price to make the sale and make quota. This mis-alignment is not hard to understand intellectually. But many companies still do this.

As a result, industries are filled with companies that get what they pay for (e.g., sales people who, responding to their volume-driven incentives, fail to execute a premium-priced strategy), and don’t get what they don’t pay for (e.g., individually focused incentives for SAMs who must work with others in a team-selling approach to key, multi-location accounts). So the first step in potentially delegating pricing authority is to make sure your sales incentive plan encourages the behavior you need.

Second, it’s important to distinguish between a price and pricing. Competition, supply and demand, other market factors, and—by voting with their feet—customers determine what they will pay in terms of price. In a given context, sales people may or may not possess the best local knowledge to help negotiate that price with specific customers. But it’s the selling company’s responsibility to set pricing—i.e., the structure of prices for a given product-service configuration. A price is not the same as pricing. Customers ultimately determine price. But you and your company do pricing, including the framing and delivery of the value proposition.

Then, whether or not sales people should have significant pricing authority depends, in my view, more about buying processes than product type. There are successful and unsuccessful examples of centralized and decentralized pricing in both commodity and specialty product categories. The more relevant variables are who buys and how, not what they buy.

Historically, many firms delegated price authority to individual salespeople because the time required for sales to get pricing approval from headquarters, their managers, or a centralized pricing office was long and cumbersome. Technology is fast overcoming that constraint. But any process—including pricing—is only as good as the people who manage that process.

  • Any examples of best-in-class companies in pricing strategy implementation?

Best practices in pricing vary by type of business, stage of business, and competitive context. Market forces can soon make today’s example of “best in class” tomorrow’s case study about marketing myopia. That said, I would cite as long-term good examples of pricing implementation Apple for tangible tech products, Disney in B2C, Paccar in B2B, Louis Vuitton in luxury goods, and some SaaS firms about whom I teach case studies in my courses at Harvard Business School.

In my experience, however, a key issue in effective pricing implementation is understanding the role and goal of price in your particular business model. The role of price, and therefore what constitutes best practice in price implementation, varies significantly depending upon (for example) whether the company is involved in project pricing, product pricing, the pricing of a product/service package, or seeking an early-mover advantage where (in theory at least) we initially sell low with profitable monetization coming later by up-selling the installed base.

These are very different pricing roles and, as always, the specific buying-behavior context is crucial. Consider, for example, consumer internet companies and the currently fashionable “freemium” pricing approach. The common business model here is a two-sided platform with a chicken-and-egg dynamic: you must attract users in order to attract consumers or firms willing to use your site and pay to advertise on your site. Hence, to sign up users and build that part of the platform, initial “free” pricing to consumers is common.

This sounds plausible because there’s typically almost no or very low marginal costs to digital goods. So the plan is to acquire users with free services until inertia or switching costs kick in and then you charge for additional capacity, extras, or premium features. It seems to have worked beautifully for companies like Dropbox, LinkedIn, and Skype. But so many other freemium pricing companies have basically enacted the old joke about selling each pencil below cost while hoping to make it up in volume. Why?  

Usually, only 1-2% of users will upgrade to a paid product. Therefore, the size of the target market counts in adopting this pricing approach. Choice of features for free, and managing a built-in tension, are important implementation issues in this approach: offer too many features and there’s no incentive to upgrade (the plague of most current SaaS businesses); but offer too few and you cannot generate enough initial users to make your site attractive to advertisers or others on the other side of the platform. The product/customer context matters. Note the dynamics of services like Atlassian or Basecamp (collaborative software), Dropbox (cloud sharing files), LinkedIn, and Skype: in part you sign-up for and use these services because other important people in your life (colleagues, prospective employers, friends, family) use them. The presence or absence of peer pressure and social switching costs are often the foundation for the success of this pricing approach.

Therefore, my counsel to executives is to be wary of trying to use someone else’s ‘secret sauce’ in the recipe of their business model. Best practice is what works here, not there.

  • How should companies start this journey?

“Journey” is the right word because, in a competitive market, effective pricing is a process, not a one-and-done analytical study of willingness-to-pay. The journey starts with identifying customer value and it requires ongoing price testing to make sure we are still travelling in the right direction as market conditions inevitably change.

In my MBA and executive courses, I often assign a note about pricing which (among other things) discusses a company called Zolam (disguised name). Zolam is a chemical firm serving diverse global markets characterized at the time by declining demand, industry over-capacity, and capital market pressures to increase earnings. Not a happy situation. Zolam initially responded by stressing new technology complemented by product-line cuts, reduced inventory and service levels and other cost-cutting moves. But these moves did not appreciably improve earnings. Zolam’s leadership eventually focused on pricing as a way to win profitable business.

Zolam leaders started with a consistent message: “We must understand what is valuable in order to be valuable.” In meetings across functions, they repeatedly asked how specific product, service, or other benefits impacted customers including, but not limited to, their customers’ financial success. Buying decisions always have at least two dimensions: the benefits customers value, and how they buy. Zolam’s customers included firms that package pharmaceuticals and to whom it sold rubber stoppers used to cap injectable drugs–a product long viewed as a low-price “commodity.” But Zolam found a hierarchy of benefits in this simple product.

The base level was to minimize customer acquisition costs of the stopper. The next level was to reduce possession and usage costs through design and delivery initiatives that increased customers’ packaging line speeds, lowered their inventory requirements, and aided their manufacturing capacity planning. A third level was to help customers increase their product’s performance. Zolam found, for instance, that stoppers molded in unique colors helped hospitals and doctors reduce errors and lower insurance costs, yielding a higher price for Zolam’s packaging customers and less churn in their customer base.

Adopting this value-based approach across its product line, Zolam developed metrics, customer profiles, and new account-review processes for its salespeople. Different customers, or the same customer at different times, had different purchasing criteria and price elasticities, depending upon the usage application. This approach and the consequent data and testing allowed Zolam to clarify target price, reservation price, and the price negotiation strategy relevant in a given buying context. In turn, salespeople were trained and incentivized in line with this approach, which generally meant calling on different people at different organizational levels within their assigned accounts.

Then, you must credibly communicate the value being delivered. Zolam did this through frequent reviews, after the sale, with key people at targeted accounts. In other businesses, however, it’s important to find ways of doing this before the sale. A good example is Paccar, maker of trucks which Paccar sells for about a 20% price premium versus its competitors. Paccar salespeople qualify customers with an online interactive detailing of expenses incurred during the life of a truck, with data supplied by the prospect. You can input gasoline costs, tire rolling coefficients, and vehicle weights to quantify the benefits of a Paccar truck versus lower-priced alternatives. You can do the same for resale value, maintenance, driver retention (useful data if you run a fleet), and financing costs. The firm’s website also provides a fuel-economy primer aptly titled “Push Less Air, Pull More Profit.”

  • Let us get down to the individual sales manager/SAM. What are in your view characteristics – i.e. personality traits – of sales managers/SAMs that excel in pricing strategy implementation? What are, by contrast, personality traits or behavioral characteristics that make the individual SAM less effective?

Popular sales methodology books, and many sales training firms, focus on personality traits. However, most of these assessments read like a horoscope (“can listen but challenge”), or like a bland summary of traits like “modesty, conscientiousness, curiosity, an achievement orientation, lack of discouragement,” and so on. At best, these lists of personality traits remind us that people tend to do business with people they like, or that certain basics of human interactions (listen, don’t interrupt, make sure you understand the other person’s perspective, etc.) are relevant in most sales contexts.

But the search for personality traits in effective selling, including pricing implementation, is fundamentally flawed. Research about the links between personality traits and selling effectiveness has been conducted for nearly a century. The results are inconsistent and, in most cases, contradictory and not replicable—that is, study X asserts a positive correlation between certain personality traits and sales performance, and study Y finds in a different context a negative correlation.

These inconsistent results tell us something: so much depends on the buying situation that what academic researchers call a “contingency approach” is necessary. More simply stated, the research suggests that common stereotypes of a “good” sales person (e.g., pleasing personality, deep inventory of stories, hard-wired for sociability, and so on) are indeed just stereotypes. Sales talent—and sales failure—come in all shapes and sizes. No size fits all.

Here is how I think of the traits and characteristics relevant to sales and pricing effectiveness:

First, recognize that multiple factors cause sales, including—but not limited to—price, the skills of the salesperson, and the quality and relevance of the product being sold at a given price. Another important factor is customer selection or what the strategy literature calls the “scope” of the business—i.e., decisions that companies are always making, implicitly or explicitly, about where they do and do not focus in a market. See Figure 1.

Second, then understand the key sales tasks in that business. See Figure 2. To do this, always start with the externals in your business, not internal price lists. Value in any business is created or destroyed in the marketplace with customers, not in conference rooms or research studies. Key externals include the industry you compete in, the market and product segments where you choose to play, and the nature of the buying criteria at the customers you target. These factors determine the required sales tasks—that is, what your go-to-market initiatives must accomplish to deliver and extract value via your pricing approach, and therefore what your salespeople must be good at to implement your approach effectively.  

Then, the issue is aligning actual selling behaviors (including pricing) with the required sales tasks and using the appropriate levers for doing that. The key levers in most businesses are displayed along the bottom of Figure 2:

Salespeople: who they are, what they know, how you hire and then develop their skills and attitudes over time, so that they are good at executing your firm’s required sales tasks, not those of a generic selling methodology or what they learned at another company that made a different set of strategic and pricing choices.

Sales Control Systems: the systems that shape ongoing performance management practices, including how the sales force is organized, key performance indicators (e.g., volume? margin? profit-per-sale? other?) used to measure sales effectiveness, and sales compensation and incentive systems.

Sales Force Environment: the wider organizational environment in which pricing and other go-to-market initiatives are developed and executed; how communication does or doesn’t work across organizational boundaries (e.g., between Product and Sales groups in the firm); how sales managers are selected and developed; the conduct of performance reviews.

Selling effectiveness is not a generalized trait. It’s a function of the specific sales tasks. Therefore, the relevant personality is the personality, and skills, that are relevant for those tasks in that market for that selling company.

I believe the same is true when it comes to personality and pricing. In a transactions-intensive, inside sales model where the pricing is part of a land-and-expand sales approach with accounts, you almost certainly want a different type of customer-contact person than you do in a longer selling cycle, product/service solutions model where up-front pricing requires effective framing and articulation of a more complex value proposition. My view is that managers should start with understanding the relevant sales tasks, not an elusive search for a set of all-purpose personality traits.

  • What other pieces of advice do you have for companies that struggle in getting pricing/value creation strategies implemented?

Based on my experience with companies, I’ll offer three final pieces of advice:

“Everyone else does it this way.” Avoid this mindset. Pricing is a visible moment-of-truth in business, and many managers take refuge in the herd—i.e., “established” industry practice. But the essence of strategy is being smart about being different. Pricing is where you test the coherence of a business strategy and value proposition. Herd pricing also runs the risk that prices are the legacy of obsolete market circumstances and sales tasks in that industry.

Cost-based pricing is easier to explain.  Evidence supports this intuition. Behavioral researchers have charted a phenomenon across countries, cultures, and economic systems: people in Communist countries reacted to various cost-based pricing scenarios in ways not very different than people in Beverly Hills. But when you are providing differentiated value, the issue is framing price appropriately.

At the gas pump, the credit price is typically the default price, while paying by cash garners a “discount.” Over a century ago, Marshall Field pioneered the concept of the retail bargain basement. As a place for slow-moving or out-of-fashion goods from upstairs, the basement helped keep higher-margin offerings on the main levels and, by relegating specific products downstairs, buyers from each department freed up shelf space for faster-turning items. Customers did not object; they bought. Few customers wake up in the morning wanting to pay a higher price. But most seek value.

Price Testing. Price is a dynamic variable in any business, affected by changes over the product life cycle or as a company seeks to move from early adopters to more mainstream customer segments. Hence, testing prices as buyers and buying behavior changes is crucial. But relatively few companies do that. Or, they rely primarily on surveys and there are systematic differences between how people respond to surveys and their actual behavior in the marketplace.

Admittedly, testing price in a business context presents challenges that are qualitatively different from the circumstances surrounding academic market research or clinical trials. There are relatively few opportunities for randomized controlled experiments in a changing, competitive market. But increased access to data, new technologies for A/B tests, the ability to change prices online, or run online ads with different prices at different times, are all making price testing more accessible. There is less excuse not to test prices on an ongoing basis. As usual in business, the real constraint is managerial.

  • Frank Cespedes teaches at Harvard Business School. He ran a professional services firm for 12 years, has consulted to companies in many industries, and has been a Board member of start-up firms, established companies, and private equity organizations. He has written for numerous publications, and is the author of six books including Aligning Strategy and Sales (Harvard Business Review Press, 2014) which was cited as “the best sales book of the year” (Strategy & Business), “a must read” (Gartner), and “perhaps the best sales book ever” (Forbes) and Sales Management That Works: How to Sell in a World That Never Stops Changing (Harvard Business Review Press, 2021)

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ENDNOTES

[1] See the BLS website for sales employment: https://www.bls.gov/oes/current/oes410000.htm.

[2] For data about auto buying, see Frank V. Cespedes and Jared Hamilton, “Selling to Customers Who Do Their Homework Online,” Harvard Business Review (HBR.org March 16, 2016). For data about buying and sales interactions across a variety of other industries, see Frank V. Cespedes and Tiffani Bova, “What Salespeople Need to Know About the New B2B Landscape,” Harvard Business Review (HBR.org August 5, 2015).

Media Bias? But Not What You Think It Is

Frank Cespedes: Media Bias? But Not What You Think It Is.

This article originally appeared on Medium on May 18, 2020.

Media Bias? But Not What You Think It Is

Frank V. Cespedes

In the current crisis, news outlets have doubled down on a certain narrative about online channels and virtual business models. But the evidence is not so clear.

The media are often accused of political bias. But news outlets reflect many political beliefs in a fragmented media environment. However, an almost across-the-board bias is how news media talk about online channels, and the pandemic has exacerbated that bias. It’s become routine to assert that because social distancing forces us to do more buying online and communicating thru social media, this will accelerate a permanent big shift after the crisis to more ecommerce and virtual business models.

In the first months of social distancing in the U.S., online sales at many retailers indeed surged compared with the year-earlier period — and so did in-store sales and sales of toilet paper, puzzles, and walkie-talkies.[i] It’s not clear what we learn from panic buying, contagion fears, and enforced isolation. So let’s look at what was happening online before the virus of 2020.

Ecommerce has been here for 30 years. Books.com was selling online while Jeff Bezos was working on Wall Street. After decades free from sales taxes, ecommerce was 11.4% of U.S. retail sales in 2019, according to the Department of Commerce.[ii] Meanwhile, social media usage had been essentially flat over the previous four years, had declined among Americans less than 35 years old, and the only group using Facebook more were people 55 or older.[iii] As a marketing medium, online channels were cluttered and increasingly viewed with suspicion as media attention to hackers raised awareness of cybersecurity issues. Combined with the ability to block ads, the rapidly growing costs of acquiring customers online,[iv] the experience of “Zoombombing,” and controls on consumer data by EU regulators and others, it’s unclear how much buying and selling will happen online in the future.

Similarly, most news reports about retailers begin with a familiar trope: “No industry is failing faster than retail. . . .” The number of malls in the U.S. was about 300 in 1970, 1,000 by the year 2000, and 1,200 by 2019, and outlet centers went from a handful to about 400 during the same period.[v] Most mall closings thru 2019 were older shopping centers that lacked trendy retailers, lively restaurants, and other things associated with a good shopping experience. Demographics change and so does retail. A study of closings found that newer shopping centers, not ecommerce, were the most common cause.[vi] As the old adage puts it, the three most important things in retailing are location, location, location.

In the U.S., spending in retail stores increased every year from 2009 to 2019, an average of 48 million square feet retail space was built annually, mall traffic also increased(and was at a multi-year high in 2019), while base rental prices and sales per square foot also increased steadily and occupancy rates never dipped below 90% during the same period.[vii] Years before the current crisis, times were already bad for Sears, Kmart, Payless Shoes and others with too many stores, too much debt, and merchandising that lagged demographic and stylistic changes. As in any market, there has always been disruption in the sense that some figure it out and others don’t. Check out departstoremuseum.org for an online tour of defunct retailers over the past century and more . . . and their innovative successors.

In fact, before the virus, the biggest retail trend was “clicks and bricks,” even for once pure-play ecommerce firms like Birchbox, Bonobos, Casper Sleep, Warby Parker, Wayfair and — yes, indeed — Amazon, among others. Yet the press has generally followed the Liberty Valance mode of reporting about retailers: “when the legend becomes fact, print the legend.”

One reason this happens may be attributable to the experience of journalists in the 21st century. The U.S. newspaper industry employed more than 400,000 people and recorded its highest revenues ever in the year 2000 (at the time, more people and money than the movie industry), when print advertising was still a strong source of revenue. Print media firms then experienced an average decrease in ad revenue of 9% annually from 2010 to 2017.[viii] By 2019, employment had fallen by more than 60%, with layoffs in digital media companies as well as newspapers.

To put this in perspective: the employment decline for journalists in the 21st century was deeper than job losses over the past three decades in the coal mining, iron, steel, or fishing industries.[ix] In 2019, even Starbucks stopped selling The New York Times, Wall Street Journal, and USA Today.

Journalists have seen their industry and livelihoods negatively disrupted by technology in a short time, and certainly notice that Jeff Bezos can buy a national news outlet with a digital check from his personal account. It’s then easy to assume this must be happening everywhere. That’s understandable, but it’s still a bias and leads to publishing stories that fit an assumed narrative. Meanwhile, if you’re in business, you must make decisions now about the marketing and sales investments relevant during and after the crisis.

Good journalism, like good management, asks relevant questions and provides context. Will social distancing make people more eager to transact online, or simply demonstrate the limitations of communicating virtually? Epidemics were a recurring norm for millennia.[x] Yet, buying and selling have been social as well as economic transactions since the Roman Forum and thru decades of internet use. Will months-long confinement significantly change that deep-rooted human behavior? Let’s get healthy and find out.

Frank Cespedes teaches at Harvard Business School

[i] Sarah Nassauer, “Stockpile Surge Boosts Sales at Walmart,” The Wall Street Journal (April 4–5, 2020): B3; and Sarah Krouse, “Copy That: Walkie-Talkies Are No Longer Over and Out,” The Wall Street Journal (April 13, 2020: A1.

[ii] http://www.census.gov/programs-surveys/e-stats.html

[iii] Edison Research, 2019 Social Habit Report: https://www.convinceandconvert.com/social-media-research/social-media-usage-statistics.

[iv] “Unit Economics Aren’t What They Used To Be” at https://tomtungunz.com/cac-increase/.

[v] Data from International Council of Shopping Centers as cited in “Mall Owner Bets Outlet Bargains Can Thrive Online,” The Wall Street Journal (October 7, 2019).

[vi] https://seekingalpha.com/article/4184162-retail-apocalypse-wake-experience-renaissance?

[vii] “Misleading Headlines In the Mall Space — Things Are Actually Much Better”: https://seekingalpha.com/article/4288734-misleading-headlines-mall-space-things-actually-much-better.

[viii] Pew Research Center, “Newspaper Fact Sheet,” http://www.journalism.org/fact-sheet/newspapers/.

[ix] Evan Horowitz, “Even fishing and coal mining are not losing jobs as fast as the newspaper industry,” The Boston Globe (July 3, 2018); Gerry Smith, “Journalism jobs cut at highest rate since 2009,” The Boston Globe (July 1, 2019).

[x] William H. McNeill, Plagues and Peoples (Doubleday, 1976).

Predictions, Prophets, and Restarting Your Business

This article was originally posted in Harvard Business School’s Working Knowledge on May 4, 2020.

Businesses are starting to plan their re-entry into the market, but how do they know what that market will look like? Frank V. Cespedes warns against putting too much trust in forecasters.

“Predictions are risky, especially about the future,” according to a popular expression. Still, business is inescapably about the future—that’s what managers’ decisions are about. In the current crisis, we have daily grand predictions about “new normals,” and managers must restart their business and make decisions based on assumptions about the future.

The problem: Most of these prophecies about what is to come are basically straight-line extrapolations of a few weeks of data or sermons about what that prophet believes should happen. These won’t be of much use to business leaders making cold, hard decisions about returning to the market.

Here’s a common prediction: Social distancing forces people to do more buying online and communicating through social media, thus accelerating a permanent, big shift after the crisis to more ecommerce and virtual models. The evidence, however, is not so clear-cut.

“A PROBLEM WITH MEGATREND PREDICTIONS IS THAT, EVEN IF THEY TURN OUT TO BE GENERALLY ACCURATE, THEY’RE NOT MANAGERIALLY USEFUL.”

In the first month of social distancing in the United States, online sales at Walmart and Target indeed surged by double digits compared with the year-earlier period—and so did in-store sales as well as sales of jigsaw puzzles and walkie-talkies. It’s not clear what we learn from panic buying. So let’s look at what was happening online before the virus of 2020.

Ecommerce has been part of the internet for 30 years. Books.com was selling online while Jeff Bezos was still working on Wall Street. After decades of tax-free sales, ecommerce was just 11.4 percent of US retail sales in 2019, according to the Department of Commerce.Meanwhile, social media usage on the major platforms had been essentially flat over the previous four years. (In fact, social media usage had declined among Americans less than 35 years old, and the only age group using Facebook more were people 55 or older, according to Edison Research.) As a marketing medium, online channels were cluttered and increasingly viewed with suspicion as media attention to foreign hackers raised awareness of cybersecurity issues.

Combined with the ability to block ads, the growing costs of acquiring customers online, the experience of “Zoombombing,” and controls on consumer data by EU regulators and others, it’s unclear how much buying and selling will be done online in the future.

So, what’s a manager to do given the uncertainty of both predictions and prophets? Here’s some advice to CEOs, CFOs, sales managers, and others who allocate the major resources in most firms. Whatever else you do in thinking about the future of your business, pay attention to the following:

Shorten selling cycles

The crisis demonstrates, painfully, the importance of cash. In his famous essay “The Yield from Money Held,” the economist William Hutt described cash in your pocket or on the balance sheet as “a fire engine when there are no fires.” Or, as the song in the musical Oliver puts it: “Money in the bank, that’s what counts / Money in the bank in large amounts.” The selling cycle is usually the biggest driver of cash out and cash in: Accounts payable accrue during selling, and accounts receivable are mainly determined in most firms by what’s sold at what price and how fast.

In surviving and recovering from a crisis, increasing close rates, the efficiency of a sales model, and its segment focus are strategic issues, not only sales management tasks. Consider: when commerce resumes, what’s the impact on your business from shortening selling cycles and accelerating time-to-cash by one week, two weeks, or more? If you don’t know, find out now and work to shorten ramp-up time and increase productivity in your sales team after the crisis.

Consistent messaging to customers

A problem with megatrend predictions is that, even if they turn out to be generally accurate, they’re not managerially useful. Companies sell to customers, not to a trend, and priorities must be set. Make sure that key customers are aware of supply disruptions or other problems. Do not assume that, in a global pandemic, “everyone knows.” They are absorbed with their own business issues.

Big accounts drive a disproportionate amount of a company’s revenue (the 80/20 rule), and reliance on large customers has grown. Publicly traded US companies must disclose any customers that account for more than 10 percent of their revenue. A study of this datafound that, in many industries, these buyers represented 20 percent to 25 percent of sales by the second decade of the twenty-first century, up from less than 10 percent two decades earlier. In other words, even before the pandemic, there was a big change in the customer portfolio of many companies.

Your salespeople must send consistent messages, not ad hoc responses. Don’t leave this aspect of crisis management to emails about your “commitment” to customers, or telling salespeople to “stay focused and take care of customers.” That’s an invitation for fragmented responses, multiple promises, and longer-term costs to the brand and strategy. Managers must manage. In an extended disruption, it may even be in your long-term interest to find supply alternatives for a customer. Few quota-carrying salespeople will or can do that.

Use data, don’t hoard it

Important data is account profitability, your cost-to-serve customer A versus customer B. My experience on boards of directors and in work with leadership teams is that “vision” discussions are fun, and quarterly financial results are tracked closely. But despite much talk about big data, the customer information required to survive and then restart the business after a major downturn is often lacking.

One reason is that, in many firms, the relevant information is effectively the “property” of an individual rep, not the company. That makes it difficult to set account and segment priorities. Use the current frightening hiatus from business-as-usual to get this data and establish a process for keeping that front-line information flowing and timely. Otherwise, “customer focus” will remain a perennial slogan, not an organizational reality. Oversight over this activity is as important as it is in the capital budgeting process, innovative ideas in the virtual crisis war room, and the speech about resilience.

It’s unclear whether social distancing has made people more eager to transact online, or whether it simply demonstrates the limitations of communicating virtually. The historian William McNeill documented in Plagues and Peoples how epidemics were a recurring norm, not the exception, for millennia. Meanwhile, buying and selling have been social as well as economic transactions since the Greek Agora, the Grand Bazaar in Istanbul, malls in the twentieth century, and through decades of internet use. Will months-long confinement change that deep-rooted human behavior?

Get back to basics

Finally, for what’s it’s worth, here is my prediction: The coronavirus will eventually abate and few will remember the many false predictions made during a crisis—but you will still have to live with your business decisions.

Do your best to separate hype and headlines from market-driven data and options. When much of the world economy is shut for weeks and possibly months, cascading bankruptcies and higher debt loads probably mean a tightening of purchasing decisions and capital expenditures in many consumer and B2B markets. Your business-development efforts will need to be more focused and productive after the crisis. Start now and take care of these customer basics before you possibly follow a prophet into the wilderness.

About the Author

Frank V. Cespedes is a Senior Lecturer in the Entrepreneurial Management Unit at Harvard Business School and author of Aligning Strategy and Sales.

Sales Leadership During and After the Crisis

Note: This article originally appeared in Top Sales Magazine May 2020 issue pages 28-29. You can find digital access to this article here.

Even in good times, life in a sales organization is filled with short­ term deadlines and pressures: sales per quarter, sales per rep, did she or didn’t she meet quota. As a sales manager once said to me, “In this job, if you don’t survive the short term, you don’t need to worry about the long term.”

So, it’s not surprising that, in the current crisis, sales managers daily receive advice about the short term: “3 Steps to Survive the Downturn . . . 4 Ways to Embrace Your Customer . . . 5 Ways to Do Online Events,” and so on. These suggestions are relevant: survival is at stake for many businesses. But eventually the pandemic will abate, and you must live with the resource decisions you make now.

Sales managers’ responsibilities extend beyond keeping the lights on. Their leadership makes a difference across the business because, for better or worse, selling activities always affect core drivers of enterprise value. The current frightening hiatus from business-­as-­usual is an example. In thinking about how to restart business, sales managers—whatever else they do—should pay attention to the following:

Cash and Selling Cycles. The crisis has demonstrated, painfully, the importance of cash. As the song in the musical Oliver puts it: “Money in the bank, that’s what counts / Money in the bank in large amounts.” The selling cycle is usually the biggest driver of cash out and cash in. Accounts payable accrue during selling, and accounts receivable are mainly determined by what’s sold at what price and how fast.

In surviving and recovering from a crisis, increasing close rates, the efficiency of a sales model and its segment focus are vital activities. Consider: what’s the impact on your company from shortening selling cycles and accelerating time­-to-­cash by 1 week, 2 weeks, or more? Who are the customers and segments where that is more likely? If you don’t know, now is the time to find out. It’s also the time to work on better customer on-boarding and training practices that can accelerate time­-to­-productivity for your sales team and company after the crisis.

Scope and Customer Selection. “Scope” is the strategy term for the choices companies make about where to play. Every firm is always making it easier or harder for different types of customers to do business with it. In practice, scope is not determined by senior executives sitting in a room and discussing the market: that’s brainstorming. Scope is determined by the daily call patterns of the sales organization: where that time, effort, and selling expenses are or are not allocated.

No company sells to a market. It sells to specific customers. In crisis situations, you can’t do everything and must set priorities. Make sure that key customers are aware of supply disruptions or other problems. Don’t assume that, in a pandemic, “everyone knows”: they are absorbed with their own business issues. Big accounts drive a disproportionate amount of revenue at most firms (the 80:20 rule), and reliance on large customers has grown. Publicly traded U.S. companies must disclose any customers that account for more than 10% of their revenues. A recent study found that, in many industries, these buyers were 20 – 25% of sales by 2015, up from less than 10% two decades earlier. In other words, even before the pandemic, there was a big change in the customer portfolio of many companies. 

Your salespeople must send consistent messages to customers, not ad hoc responses. Don’t leave this aspect of crisis management to emails about your “commitment” to customers, or telling reps to “stay focused and take care of customers.” That’s an invitation for fragmented responses, multiple promises, and longer­-term costs to the brand and strategy. Managers must manage. In an extended disruption, it may even be in your long-­term interest to find Data and Process: To do the above, you need good customer data: the profitability of different accounts, your cost­-to-­serve customer A versus customer B, who at accounts are the buyers and influencers with whom we must stay connected, and so on. My experience on Boards is that visioning discussions are fun, and quarterly financial results are tracked closely. But the customer information required to survive and then restart the business after a downturn is often lacking. One reason is that in many firms that data is effectively the “property” of the individual rep, not the company, making it difficult to set segment and customer priorities.

Use the current time to get this data and establish a process for keeping that front­-line information flowing and timely. A key process is performance reviews, because much of the relevant information is at the account level. When sales managers do sloppy reviews, they perpetuate a culture of under-performance and inhibit the flow of this information. Then, during and after a crisis, “customer focus” remains a slogan, not organizational reality.

Let me be clear: my message here is not a version of “chin­-up: every crisis is an opportunity.” Maybe, maybe not. My message is that because customer acquisition and retention are the lifeblood of a company, sales managers establish foundational conditions for a business. When much of the world economy is shut for weeks and possibly months, cascading bankruptcies and high debt loads mean a tightening of purchasing decisions, cap­-ex and other expenditures in most markets. Your sales efforts will need to be more focused and productive after the crisis. Stay healthy and start now.                               

Frank Cespedes teaches at Harvard Business School and is the author most recently of Aligning Strategy and Sales (Harvard Business Review Press).

Sales Methodologies and Selling

Sales methodologies play an important role. A common approach in a sales force allows for consistency, dissemination of best practices, acceleration of learning, and it helps the firm to scale because management then has common metrics to monitor and evaluate.

Hence, the allure to sales leaders of methodologies that purport to provide “the playbook . . . predictable revenue . . . and a repeatable cadence.”

However, it’s rare that the same methodology is relevant across buying-selling situations. Over time, most salespeople must deal with new products, new competitors, substitutes, and changing buyers and influencers at their customers. At any point in time, moreover, most salespeople have multiple accounts and face a changing array of customers and tasks. One buyer is primarily concerned with innovative product features while another is most concerned with just-in-time delivery. The “out” vendor typically faces different tasks than the seller of the existing solution at that account.

Developing and maintaining a relevant selling approach is a process, not a one-and-done event determined by a particular methodology. It’s crucial that reps adapt to different buying situations. If not, then (as is often said about academics) a methodology leads your people to “learn more and more about less and less.” It’s your responsibility to evaluate the fit of a methodology with the required tasks and to change the approach when needed. The following are useful distinctions to keep in mind in analyzing sales tasks and keeping selling up-to-date in your business:

Differences within an industry. Probably the most common response I get when I ask managers where they sell is a broad vertical-market answer like “health care” or “financial services.” This is too abstract for determining sales tasks. Sellers of medical equipment must be especially good at managing and closing complex deals that involve price negotiations and custom applications. Meanwhile, in biotech, salespeople must be knowledgeable about the research and results of clinical trials. A methodology which is indifferent to these differences will have limited impact.

In financial services, a brokerage firm like Edward Jones relies on local networking and relationship-building skills in selling a relatively simple set of products to its buy and hold customers; Vanguard Sales methodologies play an important role. A common approach in a salesforce allows for consistency, dissemination of best practices, acceleration of learning, and it helps the firm to scale because management then has common metrics to monitor and evaluate. Frank V. Cespedes relies on a self-service model for selling its no-load index funds; and Goldman Sachs sells a broad array of everchanging complex financial instruments primarily to institutional accounts. A meaningful sales methodology in any one of these industry sectors has much less meaning in the others.

Differences within a category. Sales tasks also differ within the same category. Companies that sell software-as-a-service (SaaS) are a good example. Consider a SaaS service like collaboration software or file sharing. These applications are typically not mission-critical for customers and are sold at relatively low monthly subscription prices. Buyers can gather much presale information via an online search. Here, inside sales organizations—“dialing for dollars”—are paramount. Sellers can conduct online demo’s and provide a proposal to prospects with a few clicks on the website. Key sales tasks include activities such as upsells (getting the customer to purchase a premium version of the product) and selling more seats. A SaaS platform service such as CRM, on the other hand, requires sophisticated integration for multiyear contracts. This is a complex initial sale with a longer selling cycle that is harder to do online or by phone. Selling often involves the vendor’s engineers and key tasks focus on increasing product applicability and price with new functionality sold to different decision-makers, while minimizing customer churn.

Differences when target buyers change. Because sales tasks are ultimately determined by buying processes, using “product” as a determinant of selling approach is dangerous. An example is when companies move from SMB to Enterprise customer segments. ScriptLogic sold diagnostic tools to system administrators in the IT departments of small and midsized companies (SMB). It built a growing business with a land-and-expand selling approach and a “Point, Click, Done” value proposition where the administrator could expense the purchase on the company credit card. But this approach was not effective in selling to enterprise accounts. Why? Selling the same products to enterprise customers meant a change in sales tasks and channel requirements. The same software sold to SMB accounts on a straightforward ROI basis must be integrated into the Enterprise customer’s IT systems and go-to-market model. In SMB, the owner of the business is often the buyer and decision-maker: point, click, done! But in Enterprise accounts, the decisionmaking the process is more dispersed and operating budgets that are set over 12
years are hard to reset for any vendor.

Among other things, these differences in usage and purchase criteria shift the basis of the seller’s credibility: from knowledge of the software and best practices in standalone inside sales processes to knowledge of that Enterprise customer’s business model and how the software fits into extant customer-acquisition activities.

This means a different way of demonstrating ROI, the ability to shepherd a project—not only a product— through the buying process, and salespeople who can work with systems-integration partners on presale applications development and postsale integration and service issues at those customers.

Training firms that develop and deliver sales methodologies have an incentive to apply their particular method everywhere. But buyer beware.

Mort Lachman wrote for comics. He said that you can write for someone else only if you can “turn him on in your head. . . . You have to hear their voice and their inflections as you type; and hear the difference between how [each person] would say it.” Lachman advised that “if they sound all alike to you, be a plumber. You’ll make more money.” The same goes for selling: if all customers sound alike to you and your sales methodology, do something else; you’ll make more money.

Frank Cespedes teaches at Harvard Business School and is the author of Aligning Strategy and Sales, and is writing a new book on what is (and is not) changing in selling and the implications.


TOP SALES MAGAZINE | NOVEMBER 2019

Why ‘Tell Them Something They Don’t Know’ Is Bad Advice in B2B Sales

PCHYBURRS/GETTY IMAGES

by: Frank V. Cespedes and Tracy DeCicco

This article was originally published in Harvard Business Review on August 19th, 2019

Few people in sales would dispute the importance of bringing insights to customer conversations. One might call this the Jane Austen rule of selling: a seller in possession of a desired prospect must be in want of a relevant insight. Or as one executive says to sellers who call on him: “Your job isn’t to ask me what keeps me up at night. It’s to tell me what should be.”

Over the years, we’ve observed many salespeople who successfully make developing and delivering meaningful insights a core part of their approach. Their experience and our research indicate that, at a minimum, you need to do more than “tell people something they don’t know.” That approach can lead you to develop irrelevant factoids. Instead, we suggest crafting a strategy based on whom you’re talking to and where you are in the sales cycle.

Who Are You Talking To?

In general, as one salesperson told us, “the higher you go up the chain, the more industry insights matter.” If you’re talking to a C-Suite or Line-of-Business executive, insights are crucial; if you’re meeting with a mid-level IT Director, you’ll probably want to spend more time on product functionality and ask more questions.

Choosing the wrong approach can have negative consequences. This is supported by data by Gong.io, which recorded and analyzed sales meetings from thousands of deals made on web conferencing platforms. At meetings with an SVP-level buyer or higher, the data indicate a strong negative correlation between asking discovery questions and closing deals. Once you’ve asked a few questions, every additional question with a busy senior buyer decreases the odds of success. On average, successful meetings here involved about 4 questions while unsuccessful meetings averaged 8. For meetings at lower levels, however, successful sales calls averaged 11 to 14 questions. When developing your strategy, keep in mind that lower-level managers are gatekeepers; their job is to vet vendors and their products. Senior-level managers, on the other hand, focus on business issues, which makes them more receptive to insights.

Here’s an example. Eric sells data-analytic tools for an IT firm. He called on a large U.S. retailer shortly after a winter storm had shut down its largest distribution center, which represented about 25% of inventory shipped to its stores. In conversations with Eric, lower-level managers framed the issue as a logistics problem, so Eric explained to them how his firm’s tools could provide data to help optimize flows and reduce delivery costs while the distribution center was being repaired.

But at subsequent meetings with more senior executives, Eric went beyond logistics costs and framed the issues and solution differently. Since the chain was also in the early stages of implementing an omni-channel bricks-and-clicks strategy, Eric brought examples illustrating how markdowns and out-of-stocks have a bigger impact on margins than logistics costs; why it’s important to make pricing and other elements of the in-store and online customer experience as seamless as possible; and how other stores have utilized data-analytic tools to do this. Senior executives approved the sale and at a scope wider than a purchase for logistics software.

Where Are You in the Sales Cycle?

In an early meeting with a senior buyer or influencer, it’s typically important to demonstrate that you can articulate how your product relates to key trends, opportunities, challenges, or evolving best practices in that market. You can do this by indicating who you know (people and companies using your product to drive business value and financial benefits) or what you know (your firm’s viewpoint about industry trends and the so-what implications), or both.

“Senior executives,” a senior partner in the consulting practice at a Big 4 firm notes, “are typically impressed when informed about the reality in their market, how it applies to their strategic goals, and how we can help execute required initiatives in their company with their people.” If she were selling to a retailer, she told us, she’d look beyond the common-held belief that retail is in a massive decline.

For example, U.S. spending in retail stores has increased every year since 2009; an average of 48 million square feet of retail space has been built (not shuttered) annually since 2010; chains operating more than 50 locations opened about 4,000 more stores than they closed in 2017; and analysis suggests that the biggest cause of mall closings has been newer shopping centers in that area, not ecommerce.

Industry examples can be useful, too. Since adopting products and services usually requires customers to make changes to a wider usage system, they’re usually hesitant to buy. Here, examples can provide what researchers call “social proof”: the fact that people are more likely to act when they know others have. As one salesperson emphasizes, “Start with something that demonstrates you understand how people make decisions in that sector. At this stage, it’s typically not competitors you should worry about; it’s the status-quo because 60% of all buying ‘decisions’ are to postpone a decision. So in initial meetings, I look for an industry issue or example they need to know about to make a decision.”

At later stages, senior leaders have different needs. As the senior partner in the Big Four accounting firm said, “The selling difference then is typically how we can uniquely frame and implement a solution for their organization.” Why? Senior buyers often need to justify a significant purchase to others in their organization, and they typically do so by addressing a market challenge or opportunity. Moreover, in many service, software, and professional services categories, ROI is inherently “experiential value”— that is, the buyer doesn’t really know the nature or magnitude of the value until they experience it in post-sale usage. At this stage, they want to know how you’ll follow through at the implementation stage. In fact, a classic study found that across industries the top criterion senior executives use to judge the salespeople they meet is the salesperson’s ability to marshal the selling firm’s resources.

Providing insights is indeed a foundation and difference maker in many buyer-seller interactions. But, as always in sales, influence is bestowed by the buyer as well as earned by the seller.

How B2B Companies Can Win Back Customers They’ve Lost

by: Frank V. Cespedes and Leon Poblete

This article was originally published in Harvard Business Review on June 3rd, 2019

Most research and training in sales focuses on acquiring customers, but, as ecosystems become increasingly dynamic and discontinuous, it’s also important to focus on winning back customers you’ve lost.

Reacquisition is especially important for B2B companies. Because of current trends— increase in the number and size of mergers, the variety of choice in global markets, and uncertainty about trade wars—customers are constantly re-evaluating their relationship with suppliers and making changes. Losing these customers is increasingly costly. As recently as 2014, for example, “the average publicly traded manufacturing firm received over 25% of its revenue from large buyers, up from 10% in the early 1980s.”

The process for reacquiring a customer requires a different approach than acquiring new ones. For one   thing, your previous customers will have prior experience, knowledge, and long-held assumptions about   your people and capabilities. Conversely, you have a basis for judging if that customer is worth  pursuing.

In our study of 26 broken customer-supplier relationships, we found that companies that had  successfully won back a customer followed a similar pattern. They identified the reasons for the initial dissolution, applied the right cost-benefit analysis, conducted an honest conversation with the customer, and accommodated their specific requirements.

To illustrate the process, we’ll use two companies, which we’ve disguised: Brex Tech and RILF. In 2009, Brex Tech, who supplied RILF with electronic components for its optical devices, lost RILF as a customer, but managed to win them back in 2012. Here’s how they did it.

Reasons for dissolution. The first step in the reacquisition process is to identify the reason why the relationship ended. Some buyer-supplier relationships have contractual end-points (e.g., projects scheduled for a specified period). Others may simply fade away due to a lack of attention. Pricing pressures, alteration of product specifications, or changes in ownership are also factors.

Your analysis needs to include who or what was responsible for the decision. It also needs to be ruthlessly descriptive, not prescriptive, focusing on what happened, not what should have happened.

In Brex Tech’s case, it had restructured, increased its prices, and laid-off key staff members. The CEO at RILF noted that “When their prices were raised by roughly 30%, we informed them about our concerns   but they kept the increased price.” What started as a pricing issue then led to disputes and loss of trust between executives from both firms, which in turn generated more problems, and RILF lost interest in continuing to work with Brex Tech.

Cost-benefit analysis. All customers are not equal and not all relationships are worth re-establishing. Therefore, before you re-connect with a previous customer, weigh the costs of winning them back against    the benefits.

Brex Tech did this in a few ways. After gleaning information from its previous transactions with RILF, including revenues, margins, and investments, Brex Tech’s CEO said that “RILF had accounted for more than 15% of turnover and we now had idle equipment in our plant that had been customized to manufacture products for RILF.”

Next, Brex Tech looked at both the economic and organizational requirements for re-establishing mutual  trust and reliability. Brex Tech had a few things going in its favor. Since manufacturing and delivering high-quality products on time had never been an issue in their past relationship with RILF, Brex Tech managers believed they had a good case to make to RILF. After the break up and as part of its   restructuring, moreover, Brex Tech was eventually able to increase factory productivity, which allowed it    to decrease its prices without compromising quality or delivery times. The production head at Brex Tech noted: “We knew RILF was interested in three parameters: delivery reliability, quality, and price. If we   could excel within these parameters, we could re-establish the relationship and make them switch  back.”

Brex Tech knew it could offer RILF price reductions, better technical assistance than its current supplier   in the relevant product categories, order-size flexibility, and other areas where the customer could   quantify the benefits of a reactivated relationship.

Interactive dialogue. Though your business case may look good on paper, people are the ultimate deciders.

When Brex Tech re-initiated contact with RILF in 2012, the key players were different at both firms. This led to a time-consuming process. A Brex Tech executive noted, “The discussions with RILF started at the operational level, then meetings with middle management to move on with the process, and finally— because of the strategic importance of the products involved—with top management.” Similarly, a sales manager recalled, “We went through a period in which we met at least weekly with the customer.

Management representatives were present but also engineers and technicians of the two companies.”

Knowing who does what, where, how and at what levels—the necessary rules of engagement–is imperative for successful reacquisition. For example, Brex Tech had discussions with employees that had been involved with RILF and with personnel not familiar with the account. While top management at both companies had been unable to reach an agreement, production personnel at both firms shared positive relations and unique know-how about products that RILF required. This was a key to reacquiring the account and underscores a repeated finding in management research and practice: people do business with people.

Accommodate specific requirements. When you are a supplier, the status-quo bias works in your favor. But when you seek to reacquire a customer, you must offer a better deal than the current supplier to motivate change.

RILF made it clear that Brex Tech would need to modify elements of its production processes, administrative routines, and IT systems—and provide special product designs while lowering price. But   the information collected during the reactivation process also allowed Brex Tech to adjust and optimize    its activities in these areas.

The resulting agreement justified the effort. Brex Tech’s sales and net profit from the re-established relationship with RILF were soon higher than in 2009. As Brex Tech’s CEO noted, “the fact that RILF purchases higher volumes compared to the past indicates the mutual value.” Moreover, the reacquisition helped to initiate positive word-of-mouth among other buyers in this market. Brex Tech gained two new customers as RILF recommended them to other companies. For RILF, meanwhile, more flexible and customized orders with Brex Tech increased its ability to sell and service in new segments.

In personal interactions, we often fear that others will judge us harshly and irrevocably if we make a  mistake in pursuing a goal. But research indicates that, in many circumstances, correcting a past mistake generates a more positive impression (if the mistake is not repeated) than never making a mistake in the  first place. The same is true in account relations.