Your Sales Training is Probably Lackluster. Here’s How to Fix It

by Frank V. Cespedes and Yuchun Lee

U.S. companies spend over $70 billion annually on training, and an average of $1,459 per salesperson — almost 20 percent more than they spend on workers in all other functions. Yet, when it comes to equipping sales teams with relevant knowledge and skills, the ROI of sales training is disappointing. Studies indicatethat participants in traditional curriculum-based training forget more than 80 percent of the information they were taught within 90 days.

As alarming as those numbers are, they shouldn’t come as a surprise if you consider how sales training is usually conducted. On-boarding, for example, is usually a one-off session in which reps are expected to absorb large amounts of information in a limited amount of time. Then, further training is usually limited to new production introductions or annual “kick-off” meetings to set quotas, where reps are flown in, given information and marching orders, and “fired-up” by a motivational speaker or exercise (more hot coals, anyone?). Further, on the off-chance that training is consistent and continuous, reps aren’t usually provided with coaching or given serious performance evaluations during which development (not only compensation) is discussed.

Although curriculum-based training — classroom-type courses typically focused on a selling methodology and activities like time management — has its place, it should only be treated as a foundation.

To increase retention and effectiveness, companies should offer reps additional training at times of need, provide them with access to supplemental material that reinforces what they’ve already been taught, and allow them opportunities to practice their skills in time frames connected to actual buying processes. They can do so by using the same technologies that are “disrupting” their customer-contact activities: videos and mobile apps that reps can view on their devices before, during, and after training initiatives.

In addition to providing reps with easier and timelier access to information, videos and apps improve comprehension when someone hears information, they remember about 10% of it three days later, but, when a picture is added, retention increases to 65%.

Here are some ways to incorporate better technology into training:

Before. Salespeople must learn about strategy and sales tasks at your firm, not only a generic sales methodology. They must learn how other functions affect, and are affected by, selling activities: for example, product management, marketing, pre-sale application support, and post-sale service. They don’t need to know how to do those jobs. But increasingly they do need to know what those jobs are and how they affect customers.

Because of this, on-boarding should be treated as an on-going process, not a one-off event. This can be achieved through a smart combination of on-site and on-demand videos that can be used anytime and anywhere while delivering consistent messages to your reps.

Consider Salesforce Commerce Cloud. To supplement their quarterly “boot camps” for new hires, the company uses a mobile platform to give sales reps access to the most relevant content, product positioning, and messaging. As one new rep testified, the videos quickly brought her up to speed on company messaging and customer stories. As a result, she felt more connected to Sales Commerce Cloud and confident in her corporate knowledge and relevant sales tasks before her start date.

During: In order for reps to develop new behavioral skills, they must practice a behavior multiple times before it becomes comfortable and effective. And it has to be related to a relevant task. If salespeople are motivated by a deal, they’ll be more incentivized to learn. In other words, in order for training to be effective, you’ll need to deliver the content at a time of need.

Technology can help make this happen, allowing reps to continuously learn from mobile content that is customized to their needs. When combined with traditional training, this approach helps reps turn product, market, and selling factoids into coherent narratives and behavioral models.

For example, Pacific Life Insurance Company, which sells insurance, retirement products, and mutual funds to financial advisors via its field wholesalers, uses video coaching. This allows its wholesalers to record their practice pitches and share them with their regional sales managers (RSMs), who give feedback from their mobile devices when and where reps need it. This helps Pacific Life leverage its scarcest resource: face time with advisers.

Additionally, each wholesaler must articulate a positioning statement for a particular investment product via a five-minute video. Regional sales managers then select the best videos and use them as examples of engaging sales presentations. This helps the wholesalers refine, rather than improvise, their presentations, established best practices, and creates consistency. It also builds confidence in reps, increases their competency, and establishes continuous improvement process.

After. Like other professionals, salespeople improve by identifying specific areas where they must improve and then receiving clear feedback on performance. Feedback is crucial to getting people to practice the right things, eliminate bad or outdated habits, set priorities, and clarify accountabilities owned by the rep versus the manager or the firm — all keys to effective sales leadership.

Technology can help extend the reach of good sales managers. Pacific Life, for example, faces an increasingly common challenge: How can sales managers effectively coach a geographically-dispersed salesforce while minimizing time taken out of the field for training? Mobile video coaching has allowed RSMs to coach wholesalers without the need to be in the same time zone. It also enables managers to identify potential weaknesses and improve wholesalers’ message delivery, rather than have them practice on advisers.

Unlike many today, we do not intend to oversell the power of technology. Selling is not reducible to a two-minute YouTube video or a 17-minute TED talk, and managers who can’t or won’t do coaching and performance reviews will be ineffective regardless of the technologies they employ. Since companies already spend a ton on sales training, the leverage resides in how you spend that time and money, not how much.

How Sales Can Wield Its Most Effective Weapon: Pricing

Quotable, April 2017

Frank Cespedes, Senior Lecturer at Harvard Business School and author of Aligning Strategy and Sales

Pricing builds or destroys value faster than almost any other business action. Warren Buffet said it well: “The single most important decision in evaluating a business is pricing power…And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”

When you lose a deal, how many times have your salespeople said, “Our price is too high”? Few customers wake up wanting to pay a higher price. But most seek value, and it is the responsibility of the sales team to frame and deliver the value proposition, including price.

Some firms compete successfully on the basis of cost and their ability to make money at low prices. But in any industry there can be only one lowest-cost competitor. Most companies target customers willing to pay higher prices for products that deliver a performance advantage. Here are two core capabilities that sales managers at those companies, and the executives evaluating sales results, must cultivate:

  1. Determine customer value and costs.

Effective pricing requires understanding the value to the customer versus the firm’s cost to serve customers, and how both vary across segments. In most firms, the best understanding of customer value is held by a combination of people in product, sales, and service. Meanwhile, costs are managed in procurement, operations, and finance. How often in your firm do these people come together to discuss value, costs, and pricing in a disciplined way? Great pricers make that dialogue part of the culture, keeping the information flows current and fact-based.

Consider the example of a company whose business relies on big-project deals. It upgraded its traditional sales “win-loss analysis” to a cross-functional after-action review. One result was more precision about target customers, deployment and staffing of sales calls, and the true causes of wins and losses. As one of the company’s (non-sales) senior executives discovered, “It turns out that high price is what customers tell you even when the truth is that they won’t buy from you for other reasons.”

These meetings can also result in ongoing product and value proposition improvements, as well as an understanding of how value varies across customer types. Information shared via virtual user groups like Marketo’s Marketing Nation, Oracle’s Topliners, or the Salesforce Success Community allows customers to research products, prices, and usage experience before ever speaking with salespeople. When different customers derive different value from the same product (as in many software and data-analytics categories), then one price across these groups almost certainly means that some customers are, in effect, subsidizing others. Sooner or later, competitors or a supply-chain consultant or a good CFO will tell them. Conversely, these differences often only become apparent in account reviews — a core responsibility of sales leaders.

 

  1. Link sales incentives to your pricing approach.

Salespeople must be trained and incentivized to support a company’s overall strategy. Pricing that reflects value by customer or segment, while paying the sales force on volume, rarely works. Notice the message when the commission or bonus is linked to sales volume, independent of price, margin, or the cost to serve: Go forth and multiply because any customer willing to pay a certain price (often discounted to make the volume quota target) is a good customer. This approach soon generates an unwieldy array of sales tasks, undermines selling effectiveness, and makes profitable growth increasingly difficult. This is, in fact, the situation at many SaaS companies, and it’s a big impediment to investor expectations.

Consider Fortis (disguised name), which sells a bundled solution of equipment and consumables with presale application support and post-sale technical service. Fortis lost market share and profits after customers started to unbundle that package after the initial purchase. Meanwhile, the sales force continued to be evaluated and compensated on sales volume. Fortis charted the net price paid by each major account (after volume discounts and price exceptions) versus the cost to serve that account. The result was a revealing 2×2 matrix, with customers randomly distributed across all four quadrants.

Chart these variables by account — price paid and cost-to-serve — in your company, and see what you find. If the result is like Fortis, notice the implications. Customers who are low price and high cost will be negative economic-profit customers — a drain on capital — and selling to them is not sustainable even if they generate commissions for salespeople. Conversely, customers who are high price and low cost are profitable — but also vulnerable to competitors who do understand and manage these core selling and pricing variables.

What can sales managers do in this situation? Change incentives to align with pricing realities and follow-up in performance reviews. Effective reviews look at options ranging from pricing to reflect cost-to-serve, shifting support to lower-cost online channels, different ordering or delivery options, or perhaps offloading some activities to resellers who perform certain tasks more efficiently.  Too often, however, busy sales managers treat reviews as cursory, drive-by discussions of past performance versus quota, rather than focusing on the development of customer-facing behaviors, including pricing.

The same forces that empower customers also enable sales leaders to get smarter about pricing. Data to track the selling, service, and other costs by account are increasingly available. CRM systems can often supply the relevant data, but are they used? Activity-based costing reports typically uncover dramatic differences in costs and profitability by product, customer, and order, but does sales act on this information in setting goals and managing price exceptions? As usual in business, the important levers are leadership and management, not the technical means.

A price is not the same as pricing. By voting with their feet, customers ultimately determine a market price. But you and your organization have control over pricing where, as Buffet notes, the business impact (up and down) is tremendous.

 

 

Getting Your Money’s Worth: Improving Sales Compensation

In a previous article (“Rethinking Sales Compensation,” Top Sales Magazine, February 2017), I examined three common but false assumptions about money, motivation, and management in sales compensation practices. The message was that the purpose of any sales comp plan is to motivate the sales force to achieve the firm’s goals. There’s no such thing as effective selling if that selling doesn’t link to your firm’s strategy. Business history is full of firms that got what they paid for (e.g., reps who, responding to their volume-driven bonuses, failed to execute a premium-priced solutions strategy), and didn’t get what they didn’t pay for (e.g., individually-focused incentives in a team selling approach).

What, then, are the characteristics of strategically effective compensation plans? I’ll focus here on a crucial starting point: understanding the important sales tasks in your business and, therefore, what the sales person must do to drive strategy execution and results. In selling to retail trade customers, for example, sales tasks can usually be divided into three categories:

  1. Volume-Influencing Activities: selling new items, getting more shelf space for established items, selling point-of-sale materials or in-store displays, negotiating trade promotions, and so on.
  2. In-Store Service Activities: shelf audits, handling damaged merchandise, ensuring product freshness, handling queries from store managers are examples here.
  3. Supply-Chain Management Activities: sales forecasting by account, establishing and managing delivery schedules, and coordination with your firm’s operations people for that customer.

A comp plan should set priorities among these tasks, and it’s your strategy that should determine the priorities, not a generic selling methodology or organizational legacy. Companies with automated replenishment systems for customers, for example, have less need to focus on supply-chain tasks in their sales comp plans because these tasks are largely handled in non-sales areas, such as IT. Companies that use service merchandisers in their go-to-market efforts have less need to focus on in-store service tasks.

Similarly, in B2B businesses, comp plans affect which portion of selling is attention to delivery, price negotiations, building channel relationships, pre- or post-sale applications support, cold calling, or cross-selling to current accounts. The relative importance of these tasks typically changes over the course of the product-market life cycle. Early in the cycle in technology businesses, for example, customer education and applications development are often key sales tasks. But as the market develops and standards emerge, salespeople spend more time selling against functionally equivalent products or developing third-party relationships. Your comp plan should keep pace with these task changes, or strategy execution falters. For years in the pharma business, for example, call frequency on doctors correlated with sales results, so pharma reps had to make daily call quotas to make bonus. As managed care and other large entities become more prominent in purchasing, they reduce the number of relevant call points but increase the relevant buying unit. Comp design needs to change, or you’re paying for motion not results.

The point is to focus on how the salesperson makes a difference with customers today, not yesterday. It’s not the responsibility of customers to inform you when changes occur. It’s the seller’s responsibility to track and adapt to market changes. One reason for disconnects between comp plans and salesperson behavior is that, in many firms, the people designing pay plans do so according to an obsolete vision of sales tasks. If wining, dining, and attending trade shows or conferences are important, the plan’s treatment of expenses should reflect those tasks. If, in a de facto multichannel world, working with intermediaries is important, then the plan should provide incentives to work with influential resellers or value-delivery partners through cross-referrals, training, or joint sales calls. If it doesn’t, then salespeople often sell against these entities and both parties lose the sale.

There’s an important managerial implication here: in designing comp plans, there is ultimately no substitute for ongoing field interaction, including actual sales calls. The common practice of “benchmarking” a company’s compensation plan against an alleged “industry-standard” mix of salary and incentives can be dysfunctional. One reason is that the strategies, and therefore the target customers and buying processes encountered by salespeople, differ among firms even in the same industry. As an executive once told me, “Sales in most companies is managed as it should have been managed five years ago in that business. Because that’s usually the last time the senior people making the most important sales decisions were actually in constant touch with current market realities.” New technologies and “big data” algorithms are providing tools for better tracking and diagnoses of conversion rates, call patterns, and other aspects of funnel management. But as a character in a John le Carre novel puts it, “A desk is a dangerous place from which to watch the world.”

As I mentioned in my previous article, there are always links (intended or unintended) between money, management, and motivation. Among other things, how you pay will affect the kind of person attracted to your sales organization. My core advice to those in sales or the C-Suite about compensation design: start with the engine (understanding sales tasks as they exist today in your market, and therefore the behaviors you want from salespeople), and then install the transmission (the specific mix of incentives aimed at encouraging those efforts).

 

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

How the Water Industry Learned to Embrace Data

by Frank V. Cespedes and Amir Peleg

 

The water industry is using digital technologies and analytics to derive more value from its physical assets. The need for this sector to change and evolve could not be greater: The organizations that manage water supplies around the world are facing critical issues, and water scarcity is chief among them.

Because of changes in our lifestyles, including increased consumption of grain, meat, and cotton clothes, growth in water consumption per capita has doubled over the last century. And demand is increasing. According to a 2016 report from the UNEP-hosted International Resource Panel, water demand will outstrip supply by 40% by 2030. During the same period, according to the World Economic Forum, water infrastructure faces a huge $26 trillion funding shortfall. If not addressed, water scarcity will squeeze food and energy supply chains, and stall economic growth.

To help solve this problem, organizations are using digital technologies and data analytics to improve leak detection. According to the World Bank, the world loses about 25-35% of water due to leaks and bursts, and the annual value of this non-revenue water — water produced and lost by utilities — is $14 billion. Organizations are also using these tools to improve maintenance, infrastructure planning, water conservation, and customer service (including repair efficiencies and pricing).

Although members of the water industry have found success using digital technologies and analytics, they’ve also faced challenges when trying to transform the roles and mindsets of their employees and their internal- and customer-facing processes. But those that have managed to integrate their technological advances with two other key elements — people and processes — have created more than data; they’ve also created value for their enterprises and society.

People: Good leaders know that using and interpreting data is not only a search for insights; it’s also about enlisting the hearts and minds of the people who must act on those insights.

The challenge is that employees are used to doing things in a certain way, and aren’t always quick to change. For example, despite the social and efficiency value of using predictive analytics to prevent water leaks, many utility managers view themselves as heroes for responding after the leak has occurred. As one U.S. executive explains, “Most current practice is to wait for the service-failure event and judge performance by reacting to it, because the utility doesn’t get credit from regulators or the media for preventing leaks that the public doesn’t know about.”

Regulatory incentives often exacerbate this behavior. In many parts of the world, the increased operational and infrastructure costs are simply passed on to consumers. In other regions, however, (e.g. Australia, Israel, the U.K.), regulators steeply fine utilities for inefficiencies – and it’s no coincidence that a number of utilities in these countries have been leaders in adopting new digital tools.

But even with proper incentives, there are still challenges. For example, many U.S. utilities have installed smart meters — an investment that can easily surpass $60 million in cities with 150,000 water connections, or about 15% of average annual utility revenue and water rates. But after making this investment and charging consumers for it, there were false alerts about leaks, which caused expensive repairs and claims processing. The law of unintended consequences was also alive in operations: because of the initial problems, the field transmissions group distrusted the data — even after the IT problem was diagnosed and resolved – and therefore required additional training to assuage their doubts.

This is why it’s imperative to change roles, break down silos, and adopt new decision support systems when implementing new technologies. A water authority in Australia, which deployed a software solution for improving network efficiency, is a case in point. Its managerial team first formed a working group of personnel from business units across the organization — from retail and asset management to planning and maintenance crews. The group met weekly and by doing so they recognized that the software detected faulty incidents and provided a focal point to collect information (e.g., types of problems, magnitude, location, etc.) to make better decisions in other areas of the business. As a result, they created procedures that shortened the average repair cycle by 66%, saving millions annually.

Longer term, the information allowed the team to make more focused investments based on types and frequency of problems in each zone, and the ability to compare — and negotiate better terms with — vendors based on quality and performance.

Processes: As with other sectors, water utilities are going through a shift from treating users as connections who pay bills, to customers that have needs, habits, and strong opinions if things go wrong. And data analytics is enabling them to provide faster and more effective responses. “We can compare the efficiency in each of the six sectors making up our network and evaluate the response time it takes to identify potential damage, ensuring faster repair times,” an executive at one of Romania’s leading water utilities told us. “As well as smarter insights, the event management system ensures better managerial attention to continuous improvement in our operations and service to customers, and helps to prevent large-scale damage from hidden leaks.”

But in order to achieve those outcomes, the Romanian utility had to change its organizational processes and metrics. The utility had to re-define company metrics goals and create weekly and monthly processes for reviewing performance-against-goals. The software provided relevant data — e.g., the start time of a leak and when it was fixed, based on real-time information, not when reports were submitted. But it was new customer-facing processes such as setting repair-cycle targets and comparing performance-against-goal by region, which created a healthy sense of internal competition and led to more productive behaviors.

These issues aren’t unique to the water industry; they’re also relevant to companies in other industries that are using data and digital tools that are increasingly available.

For example, sales is the focus of potentially big improvements via new tools that can provide better lead generation, forecasting, and targeting. But in order to take full advantage of these tools, sales organizations will need to change their compensation incentives, internal processes, and the skill sets of their staffs, among other things.

More generally, while most current talk about big data seems to assume the replacement of physical assets by digital technologies, a larger and more impactful trend is the use of online tools to improve physical asset utilization in off-line businesses, as in the water industry. In that context, the role of data is not to make a manager sound analytical. Its role is to help make better decisions and drive value for the company. And you can’t do that only with technology or analytics, no matter how good they are.

Rethinking Sales Compensation

Compensation is probably the most discussed aspect of sales and the biggest chunk of the $900 billion that U.S. companies alone spend on selling. An estimated 85% of companies use incentive plans which, on average, account for about 40% of total sales compensation. Yet, in a survey of 700 firms, a whopping 20% reported that their comp plans had “minimal or no impact on selling behavior,” 12% said they “do not know,” and less than 9% said their pay plan “consistently drives precise selling behavior.”

That’s a lot of wasted money and managerial effort. One reason is that sales comp is typically based on some conventional wisdom that, in my experience, is often false. Here are three assertions that merit re-examination as you consider your sales plan for the coming year:

“Money is the Only Motivator”: You hear this in the often repeated assertion that salespeople are, like vending machines, “coin operated.” But examine this assumption. Are others in a firm not motivated, among other things, by money (unlike you or me, for instance)? Are sales reps somehow genetically distinct and immune from other factors that affect behavior in organizations: priorities, processes, pride, professionalism, and so on? In numerous studies of consumer behavior, risk perceptions, and responses to different framing of rewards, behavioral economics shows that people are, alas, not simply rote profit-maximizing machines. Do people suddenly become different people when they join a sales force?

Anyone who has ever managed in a market with hierarchical cultural traditions, for instance, knows the value that salespeople and others put on titles, rank, and other nonmonetary impacts on behavior. Across cultures, recognition ceremonies reflect this human need, as does feedback to reps about performance. People are social creatures concerned with their standing and how they perform relative to others. As I’ve heard more than one salesperson say, “we work for money, but strive for recognition.”

Money matters. But the point is that the right comp plan is a necessary but not sufficient cause of getting the selling behaviors you want. You can’t substitute money for management. That’s why ongoing performance reviews are a necessary complement to compensation and a key (but often neglected) sales management responsibility. Any comp plan is part of, not a substitute for, ongoing performance management practices in a sales force. People manage people.

“Comp Plans Must Be Simple”: Behind this assertion is an implicit view of salespeople: they may not be bright enough to understand a “complex” plan. But this view is contradicted (often by the same person making the simplicity assertion) by fears that a complex plan will drive gaming behavior by reps who maximize income with minimal effort.

I have yet to meet the sales force that, in the aggregate, does not understand within a month the economic implications in their comp plan. It’s a core human trait: if a policy determines how you will eat, you will study it in detail. Moreover, available data across firms indicate no significant difference in the percentage of reps who meet and beat quota under more or less complex plans.

Will some reps game the system, any system, complex or simple? Yes. As one CEO told me, “Salespeople become experts in their pay plan, regardless of its simplicity or complexity, and you can count on unintended consequences.” But then the issue is crafting a coherent win-win plan, not fear of taxing sales peoples’ brains. In a strategically effective plan, the company profitably acquires a good customer when the salesperson wins a bonus or commission. Also, more sales situations increasingly involve inherently complex bundles of activities: data analyses, team sales efforts, product-plus-service offerings, multichannel approaches, and so on. You can pretend the complexity isn’t there in your market and customer buying processes, but it is.

“We Pay for Results, Not Process”: It may seem tough-minded and “empowering” to say to reps, “It’s up to you to figure out the best way to sell and I’ll pay you for the outcomes.” But the process for providing rewards is always at least as important as the level of pay itself.

For one thing, a pay process reflects strategic choices and management norms, explicit or implicit. Incentive plans are always important company communications about what’s really important and are read that way by the sales force. At many firms, salespeople receive big bonuses for results. But the basis of the bonus (e.g., orders booked by an individual rep) contradicts what the company, its espoused strategy, and sales managers say they want (e.g., referrals, joint presentations, or other aspects of cross-selling). The result is demotivation or, worse, motivation toward the wrong type of sales effort. In turn, this can hurt both customer satisfaction and ethical norms. Consider the sales results, versus process, at Wells Fargo.

Like other people, salespeople want to maximize rewards and they want to know why they succeeded or failed in achieving a goal. In fact, they want to use that information to make more money next month, next quarter, next year. The process for clarifying or ignoring these cause-and-effect links affects future behavior. We may “pay for results, not process,” but if we ignore process in a sales environment, we often don’t get what we’ve already paid for.

Like it or not, your sales compensation plan is always part of motivational and ongoing performance management practices (good, bad, or indifferent) in your firm. Those three factors—money, motivation, management—interact and they affect both selling behaviors and strategy execution. They must be linked in an effective pay plan, and that’s a big part of what leaders—in sales and the C-Suite—get paid for.

[1] “Sales Compensation and Performance Management: Key Trends Analysis,” CSO Insights.

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

What Senior Executives Should Know About Sales

Business is more complex, data more abundant, and more specialists are needed to stay up-to-date with functional best practices. As a senior executive, you can worry all you want about disruption, but you need a salesforce aligned with strategy to do something about it.

There have been big changes in the C-Suite of companies globally. The number of executives reporting to the CEO has doubled in recent years, mostly an increase in functional specialists like CIOs and CMOs, not general managers responsible for cross-functional integration.1 Meanwhile, the number of Fortune-500 and S&P-500 companies with COOs has decreased to about 35%.2 Three decades ago, COOs outnumbered CFOs in those firms, not now. Business is more complex, data more abundant, and more specialists are needed to stay up-to-date with functional best practices.

These changes affect a core task of a CEO and other senior executives – the formulation and implementation of strategy – and the aggregate results have not been good. Consider:

• Surveys indicate that in most firms less than 50% of employees say they understand their firm’s strategy, and that percentage decreasesthe closer you get to the customer in responses from sales and service employees.3 It’s tough for people to implement what they don’t understand.

• Even worse: In a McKinsey survey of 772 directors, only 34% believed their boards comprehended their companies’ strategies.4

• Almost 3-of-5 senior executives (56%) say their biggest challenges are ensuring that daily decisions align with strategy and allocating resources in ways that support their company’s strategy.5

• The result is a performance gap: firms realise only about 50-60% of the financial return their strategies and sales forecasts promise.6 That’s a lot of wasted time, money, and managerial effort.

What must senior executives do to address this gap? They should start with a closer look at Sales. US firms alone spend about $900 billion annually on sales. That’s more than 3x their total ad spend, more than 20x their spending on digital marketing, and more than 40x their current spend on social media. Selling is, by far, the most expensive part of strategy execution for most firms. At a minimum, the C-Suite must manage the following cornerstones for organic growth:

Linking Customer Value and Profitable Growth. The goal of strategy is profitable growth, meaning economic value above the firm’s cost of capital. As Figure 1 indicates, there are basically four ways to create enterprise value: (1) invest in projects that earn more than their cost of capital; (2) increase profits from existing capital investments; (3) reduce assets devoted to activities that earn less than their cost of capital; and (4) reduce the cost of capital itself. In my experience, relatively few senior executives understand and operationalise the sales factors that affect each value lever:

• In most firms, the bulk of capital expenditures is driven by revenue-seeking activities with customers. Hence, the call criteria used in sales directly impact the first value-creation lever: which projects the firm invests in. Yet, how many in the C-Suite understand how compensation, deployment and other core sales management practices determine these criteria daily?

• Increasing profits from existing investments requires productivity improvements. In the past 15 years, production efficiencies enabled an average S&P-500 company to reduce its cost of goods sold by about 250 basis points – a big improvement. But selling expenses as a percentage of revenue have not declined.7 Where would you look next for a source of competitive advantage?

• Reducing assets devoted to negative-return activities requires good links with changing market realities and an understanding of how hiring, development, and performance metrics affect field behaviour. Without that understanding, asset redeployment becomes either an exercise that does not really affect behaviour – the “reorganisation merry-go-round”, as cynics put it – or an unwitting impediment to the use of assets that in fact remain essential to effective selling.

• It may seem that sales has little impact on the firm’s cost of capital. But consider the basics: financing needs are driven by the cash on hand and the working capital required to conduct and grow the business. Most often, the single biggest driver of cash-out and cash-in is the selling cycle. Accounts payables are accumulated during selling, and accounts receivables are largely determined by what’s sold, how fast, and at what price. That’s why increasing close rates and accelerating selling cycles is a strategic as well as sales issue.

salesfig1

Customer interactions affect all elements of enterprise value and, in many firms, the sales force is the origin and sum of those interactions. Strategy, growth, or attempts to increase the stock price or valuation without attention to this fact are at best limited and, at worst, going down the wrong path.

Strategic Planning Processes. According to surveys, about two-thirds of companies treat planning as an annual event, and the average corporate planning process now takes 4-5 months, typically as a precursor to the annual budgeting process. But sales must respond customer by customer in external market time, not internal planning time. In other words, even if the output of planning is a great strategy (clearly, a big if), the process itself often makes it irrelevant to daily customer-contact activities.

In many firms, moreover, the means for introducing and reviewing business plans exacerbates the separation of the C-Suite from sales. The typical approach is a kick-off meeting followed by a string of emails from headquarters with periodic reports back to headquarters on sales results. Each communication is one way, and there is too little of it. One result is that root causes of under-performance are often hidden from both groups.

A basic fact of business is that value is created or destroyed with customers. Hence, strategy is about confronting evolving market realities and their customer-contact requirements. Senior executives cannot do that solely through plans and big-data analytics. Good leaders know that interpreting market data is not just a search for truth and insights. It’s also about actionable dialogue with the people, especially sales people, who must use that data where value is created or destroyed.

Hiring and Development. Senior executives now routinely talk about talent management, but few deal systematically with these numbers: across industries, average annual turnover in sales is 25-30%. This means that in many companies the equivalent of the entire sales organisation must be hired and trained every four years or so. The challenge is compounded by the fact that there is no easily identified resource pool for sales positions. Of the over 4,000 colleges in the United States, less than 100 have sales programs or even sales courses. The situation is similar in Europe. And even if companies find qualified graduates, the increased data and analytical tasks facing many sales forces mean that productivity ramp-up times have increased. Each hire is now a bigger sunk cost for a longer time.

Companies typically spend more on hiring in sales than anywhere else in the firm, and it is leadership’s responsibility to keep relevant a resource allocation of that magnitude. The forces reshaping C-Suites are also changing sales tasks. As firms confront new buying processes driven by online technologies, required selling skills are changing. Figure 2, based on an extensive database of company sales profiles, indicates the changing nature of sales competencies at many firms.8 Competencies that, only a decade ago, were considered essential are now lower in priority. Yesterday’s sales strengths have become today’s minimum skill requirements.

salesfig2

This underscores the need for on-going talent assessments in sales roles, not just “at the top”. The tools for doing such assessments are more available and have more granularity. For many sales organisations, these tools are a big improvement over the standard mix of folklore, various embedded biases based on “how we’ve always done it here”, and glib generalisations about “core competencies” that often dominate C-Suite discussions about growth. It’s said that many companies maintain their equipment better than their people. If so, then in sales you will ultimately get what you don’t maintain.

These changing sales competencies also emphasise a competitive reality: markets have no responsibility to be nice to any firm’s strategy and legacy competencies. It’s leadership’s responsibility to adapt to the market as it operates today, not yesterday. As a senior executive, you can worry all you want about disruption, but you need a salesforce aligned with strategy to do something about it. Conversely, senior executives who talk about “leadership development” but ignore this aspect of development are just talking.

It indeed starts at the top. Reflecting on his experience as a CEO, Louis Gerstner put it well: “I came to see [that] culture isn’t just one aspect of the game – it is the game. In the end, an organization is nothing more than the collective capacity of its people to create value.”9 Because of sales’ central role with customers, changes in sales requirements always have wider implications which affect that collective capacity. Today, those changes are at the heart of many challenges and opportunities confronting firms: how to harness big-data technologies; how to respond to altered buying processes as customers utilise online channels of information; how to develop talent that can respond flexibly but coherently; how to encourage cross-functional efforts without destroying necessary expertise and accountability. Senior executives who do not remain engaged with these sales issues will inevitably share the fate of companies where “customer focus” is a perennial slogan but not an organisational reality. As I once heard a CEO tell his leadership team, “There ain’t many customers at headquarters!”

Sources: Frank V. Cespedes, What Senior Executives Should Know About Sales,” European Business Review (September/October, 2016)

To Increase Sales, Get Customers to Commit a Little at a Time

Most sales models include a conversion funnel in which reps try to convert a marketing-generated lead into a prospect and then a customer through sequential steps. In this model, sales people are expected to make the process as friction-less as possible for the potential buyer and to close the deal at the end by using certain phrases and techniques to “overcome objections.” This perspective is promoted in books and seminars, but research indicates it is not how people buy.

As one of us noted in a previous article, buyers work their way through parallel streams (rather than a funnel) as they explore, evaluate, and engage in purchase decisions via web sites, white papers, social media, and contact with other buyers through sites like Marketo, and so on.

This why the end of a sales process is the worst time to handle objections — prospects typically contemplate their objections long before “close,” and, to avoid conflict, often cite a socially-acceptable rationale such as price, which may not be the real barrier to buying. To better address this reality, sellers should ask prospects to make incremental commitments throughout the process.

Along with improving sales results, research has shown that incremental commitments can boost charitable giving, increase show rates for blood drives, and reduce smoking. In a seminal study, a team posing as volunteer workers canvassed a neighborhood and asked residents to put a large “Drive Carefully” billboard in their front yards. Most residents, over 80%, refused to do so, mostly because the signs would have obstructed the views of their homes. Researchers had better luck in a near-by neighborhood, however, by first asking residents to display a smaller, three-inch sign that read “Be a Safe Driver.” This request was met with almost universal acceptance. Then, two weeks later, when researchers returned and asked this second-group of homeowners to put the large “Drive Carefully” billboards in their front yards, 76% agreed to do so.

An incremental approach to sales has many benefits. It allows reps to glean more information from prospects and to gauge their commitment rather than just their comprehension — a crucial difference in a customer conversation. Usually, reps are taught to listen for phrases from prospects such as “that makes sense” or “that’s a valid point” or nonverbal signals such as head nods. But these cues mean only that a prospect is comprehending what you’re saying. They’re analogous to the conversational si in Spanish and many other languages, which means “I hear you,” not “I agree with you.”

Commitment, on the other hand, requires action. For instance, if you were to periodically prompt prospects to confirm that they agree with the data or objective you’ve cited, and then ask them if they’d be willing to act on that agreement via some small action, you’d receive much clearer feedback. If the prospect commits, you can move on; if not, you should identify the objection or barrier, and deal with it.

Because incremental commitments are so vital, you must be intentional in securing them. As a general rule, the earlier you can identify objections, the more likely the sale will occur.

Incremental commitments can also convince prospects to change, which is vital in selling new products or services. Unless the proposed benefits of a new product significantly outweigh their perceived losses of a change, prospects tend to stick with what they know, a phenomenon known as the endowment effect. The incremental-commitment approach can help to overcome status-quo inertia.

Consider Paccar, a designer and manufacturer of premium trucks, which has consistently introduced new products and maintained a price premium of 10-20% over its rivals. One reason for Paccar’s success is its online interactive that shows potential customers the expenses that accrue during the lifetime of owning a truck. You can input gasoline costs, tire rolling coefficients, and vehicle weight to quantify the benefits of a Paccar truck versus those of competitors. You can do the same for resale value, maintenance, driver retention (useful data if you run a fleet), and financing costs.

The interactive makes it easy for prospects to comprehend the relative economics at play and allows them to make small but meaningful commitments during the search and sale process, alleviating their fears. This is no small feat since truck owners, like Harley riders, are often beholden to a particular brand, and sometimes even tattoo its logo on their bodies. The process also improves prospecting and sales productivity because it allows reps to gauge the willingness of customers to commit before Paccar devotes expensive resources to closing the deal.

Other companies have found similar success. One firm, which sells complex technical services to telecom companies, was spending 9 to 12 months of its 24-to-30 month selling cycle in proof-of-concept meetings with multiple groups at the customer — a big sunk cost if the sale was not closed. By instituting demos at various parts of their buyers’ journeys, the firm decreased its selling cycle by 6 to 12 months, increased close rates, and freed-up more time for selling to other prospects.

To add to that, many companies are using content marketing campaigns to uncover potential objections, generate initial commitments to successive aspects of their value propositions, and identify more promising leads. This is more productive than relying on downloaded white papers or blogs, which often generate a broad and often unproductive array of leads.

New sales enablement tools are making it possible to make incremental commitments a measurable pipeline activity. Showpad and other services allow reps to forward materials to prospects and observe how the prospect engages (or not) with the content. Does the prospect look at the price list? Does she forward the document to others in the buying unit? Which collateral or trial offers do and do not generate action? This helps to pinpoint where incremental commitments can be best located.

It’s important to keep in mind that it’s not the customer’s responsibility to make selling easy; it’s the seller’s job to align sales activities with actual buying behavior. So don’t treat closing as the last step of a linear process; instead, you should always be closing — always — throughout the sales process via incremental commitments.

Interview with Harvard University professor and author of this year’s best sales book Frank Cespedes

Frank Cespedes

By: Kim Mi-yeon

Frank Cespedes teaches at Harvard Business School. His new book, Aligning Strategy and Sales: The Choices, Systems, and Behaviors that Drive Effective Selling (Harvard Business Review Press) has been called “the best sales book of the year” (Strategy + Business),“a must read” (Gartner Group), and “perhaps the best sales book ever” (Forbes). It will be published soon in a Korean translation.

He talked to the Maeil Business Newspaper in an-email interview.

1. Your book emphasizes the need for strategy. Can you define what strategy means and why it is so important in business and in sales in particular?

Strategy is about the future, not the past. In business, there is little profit margin in celebrating “the good old days.” Strategy is basically about the movement of an organization from its present position to a desirable but inherently uncertain future position. The path from here to there is analytical (a series of linked choices about objectives, where we will and will not compete, and our advantages in those areas where we choose to compete), and behavioral (the coordinated efforts of people who work in different functions but must align for effective selling to happen). A strategy should provide direction about how people, money and time in a company get prioritized and allocated.

It’s important for a few reasons. There is such a thing as luck in business as in most aspects of life. But you can’t count on luck, and it really is tough to accomplish good things in a competitive market without a strategy. Second, the goal of strategy is profitable growth and most businesses ultimately have no alternative to growth. As many Korean companies have discovered in the past decade, growth is required to meet the expectations of investors, to raise more capital, to attract and retain talent, and so on. And growth means sales, but effective selling is ultimately an organizational outcome, not only the result of smart and capable salespeople.

2. Your book focuses specifically on aligning a company’s strategy with sales and other customer-acquisition efforts. Why do many companies have a problem in achieving that alignment?

The research in this area indicates that, in companies around the world, less than 50% of employees say they understand their companies’ strategy and—here’s the really disturbing result—that percentage decreases the closer you get to the customer in responses from sales and service people in companies. It’s difficult for people to implement what they do not understand. So one big problem here is the failure of many companies to communicate their strategy effectively. When I ask executives why they do not spend more effort on communicating strategy, they cite “competitive” reasons. But that is a weak claim: you have bigger problems than competitors “knowing” your strategy if your own people—especially the people who talk to customers–do not understand it.

Second, many companies confuse things like “purpose” or “mission” or “values” with a strategy. Those are important but different and more abstract than strategy. As a result, many companies think they are providing strategic direction when they say things like “be customer focused.” But they are not. Those are fundamentally motivational speeches, not strategies that help managers make important choices about people, money, and priorities.

Third, strategic planning processes at many companies result in disconnection between strategy and the sales force. Most companies, including most Korean companies, treat strategic planning as an annual event, typically as part of the capital-budgeting process for the next year. Companies tend to do plans by business unit, even when sales sells across those units as in many larger Korean companies. The average corporate planning process now takes an estimated 4-5 months per year. While this is going on, the market does what the market will do. And sales people must respond issue by issue and account by account. So, even if the output of planning is a great strategy—clearly, a big “if”—the process itself often makes it irrelevant to sales executives.

3. How can firms deal with these issues and improve their alignment of strategy and sales?

The basic idea in my book is this. In any business, value is created or destroyed in the marketplace with customers. The market includes the industry you compete in, the customer segments where you choose to play, and the buying processes at customers that you sell and service. Those factors should inform strategy and required sales tasks—what your sales people must be good at to deliver value and so implement your strategy effectively.

Then, the issue is aligning selling behaviors with those tasks. Managers basically have three levers to do that. People: who you hire as salespeople, what they know, how you develop their skills so they can execute your strategy’s sales tasks, not those of a generic selling methodology or what they learned at another firm with a different strategy. Control Systems: performance management practices, including sales compensation, performance reviews, and the metrics used to measure effectiveness. Sales Environment: the company context in which sales initiatives get developed and executed, how communication works (or not) across organizational boundaries, and how sales managers (not just reps) are selected and developed.

This approach has very practical implications. If you’re a sales manager, this way of thinking may change how you select and use available selling resources, how you develop your people, and how you look at your own career. And if you are a CEO, strategist, or Board member evaluating sales numbers, it can help you to avoid glib generalizations about selling and enable you to dive deeper into the cause-and-effect relationships that help or hinder effective selling in your company.

4. Can you give some specific examples of companies that do this well?

Here are two examples. One is disguised and it’s about a start-up. The other is about a big corporation confronting market changes. So, it’s two ends of a spectrum.

In the book, I call the start-up “Business Processing Inc.” (BPI). Like many young companies, it grew to a certain level but then stalled. The leadership team had accepted any business and had never thought-through what its strategy and value proposition meant for target customers. When it did this, BPI sold more and faster and more profitably, with a smaller sales force. I cite this example because surprisingly few firms are clear about who is their kind of customer, and that’s essential to any strategy. Most sales compensation plans bonus salespeople purely on volume. So the message to reps is, any customer is a good customer. They then sell to customers who make many conflicting demands and fragment the selling company’s resources. Remember that most investments in companies are made to get and keep customers. Soon, it really does not matter what the strategy documents say. The real strategy of the firm is the aggregate investments driven by this essentially ad hoc sales process.

The other example is Dow Corning. For decades, Dow sold through a solutions-oriented sales force which bundled products with relevant technical services—a common approach for many big and diversified Korean conglomerates. But growth stopped in the late 1990s as smaller, low-cost firms entered the market through online channels. Dow eventually realigned its sales approach and strategy, developing different business models and sales approaches for different customer groups and then using the levers I highlight in my book: People, Control Systems, and Sales Force Environment. I mention this example because all the current talk about “disruption” leads many companies into a false either/or mentality that ignores market realities: most companies must deal with both transaction and solutions customers, and there are practical ways to do this. Conversely, when you are under attack by lower-cost competitors, you can worry all you want about “disruption,” but you need a sales effort aligned with strategy to do something about it.

5. We hear so much about digital transformation and how social media and online technologies are “disintermediating” or replacing sales forces. How does this affect sales and strategy?

Yes, based on the business press, you could easily assume that social media or digital marketing now determine business success. But consider the basics: US companies spend, annually, more than 3X on sales forces than they spend on all media advertising, 20X more than their total spend on digital marketing, and 40X more than their current spend on social media. It is simply not true that sales forces are being replaced by ecommerce or even getting smaller. In the U.S., for example, official labor statistics indicate that as many people now work in “sales” jobs as did in 1992—before the rise of the internet. And this almost certainly under-estimates the real numbers: in an increasingly service economy, business developers are often called Associates or Managing Directors, not placed in a “sales” category for reporting purposes. The same is true in Korea.

Digital media are changing sales tasks, not replacing sales people. For example, few cars—either in the U.S. or Korea—are actually bought online. But about 90% of Americans now research the purchase via online sources before going to the auto dealer. The average U.S. car shopper now spends more than 11 hours online and only 3.5 hours in trips to dealerships. This makes selling in the dealer more important, not less, because it puts more pressure on the sales person’s ability to add value during the shorter sales experience. Smartphones, online reviews, social media blogs—all these tools have a similar effect across many other buying/selling situations.

6. What advice would you give to executives at Korean companies who want to improve their ability to link strategy and sales?

First, make sure your company has a strategy and not just a mission statement or nice slogan. Many executives say things like “Our strategy is to provide superior products . . .” or “constant innovation” or “great service,” and somehow expect a coherent response in the field. But that’s unlikely if you have not specified what this means for the customer value proposition, sales tasks, and other activities.

Second, given a strategy, you need disciplined hiring, focused and customized training initiatives, and on-going attention to broadening salespeople’s skills as markets and sales tasks change. Someone once told me that many companies maintain their equipment better than their people. If so, you ultimately get what you don’t maintain.

Third, always remember that it’s not the market’s responsibility to be nice to your current strategy and sales process. It’s your responsibility to understand the changing market and adapt. And you cannot do that from headquarters or solely through data analytics. You must keep in touch with actual customers, no matter how senior an executive you are, because “a desk is a dangerous place from which to watch the world,” especially the sales world.

More Universities Need to Teach Sales

By Frank Cespedes and Daniel Weinfurter

For decades, Sales and Academia remained worlds apart and the business world did fine. But Sales is changing, Academia is out of touch, and this is bad for business and the academy.

Compared to professions like engineering or business disciplines like Finance or Operations, the concept of a dedicated salesperson is relatively recent. Sales was traditionally seen as a form of service work, with an emphasis primarily on developing moral character. The Order of United Commercial Travelers, for instance, was founded to “improve character and instill temperate habits,” and Gideon bibles were originally put in hotel rooms to help “eliminate gambling, drinking, dirty jokes, Sunday trading and other forms of temptation peculiar to traveling (sales) men.”

As Walter Friedman documents in Birth of a Salesman, sales wasn’t seen as a function that required specialized training or education until well into the 20th century. And companies performed the training, not schools. Salespeople were told what to say (word for word), how to dress, what expression to wear, how to hold their hands, and even how to hold a pen when handing it to a customer to “sign on the dotted line.” You still see this Taylorite assumption that selling can be deduced to a series of behaviors in various areas: generic assessment tests, selling methodologies and “pitches” that allegedly apply across all sales situations, and chic “neuro-marketing” factoids about buying and selling.

For their part, universities viewed sales as “trade-school” stuff and didn’t typically offer sales-related courses. Even when the boom in MBA programs coincided with the rise of Marketing as a discipline, Sales was treated like a stepchild at best. As Theodore Levitt, the great former-Harvard marketing professor and editor of HBR, once put it, “Selling is preoccupied with the seller’s need to convert his product into cash; marketing with the idea of satisfying the needs of the customer by means of the product and the whole cluster of things associated with creating, delivering, and finally consuming it.”In other words, why serve hamburger when you can teach people to cook steak?

This mentality is still prevalent. More than 50% of US college graduates, regardless of their majors, are likely to work in sales at some point. But of the over 4,000 colleges in this country, less than 100 have sales programs or even sales courses, and of the more than 170,000 students who earn MBAs annually, only a tiny fraction learn anything about sales.

This gap used to be less of a problem, for a few reasons. In the past, MBA programs often favored applicants with work experience, and many incoming students already had some sales experience. So a school could legitimately prepare a student for a business career while omitting training in sales. Now, however, students’ college and pre-MBA experience is more likely to be in a finance area or perhaps in coding. Similarly, years ago, selling in most industries was less data-intensive and more dependent upon contacts and extra-curricular social relationships than now. Many Wall Street firms, for example, were unabashedly overt about hiring the “Harvard or Princeton man” (rarely a woman), and it wasn’t because of their grades in economics courses! In its own blunt and unfair way, the world outside the classroom bridged the gap in education and preparation.

But a lot has changed.

Take, for example, the impact of online technology. Buyers now have easy-click access to information about products, prices, and other buyers’ opinions and usage experiences. Does this mean that all business goes online? No, despite the fact that the internet has existed for over 20 years, eCommerce accounts for less than 10% of retail sales and less in most B2B situations. But this contextual change does impact how sales people must navigate the needs of clients and customers as well as their own organizations.

Selling is increasingly a research-based activity. If you want to see big-data analytics in action, don’t just go to Google or Facebook. Look at what consumer goods salespeople must now do to get shelf space, design promotions, and garner in-store support at retailers. You might assume that wholesale distribution, where firms resell products manufactured by others, is a simple transaction sale. But a study for the National Association of Wholesaler-Distributors finds the same need for business-acumen and analytical selling skills in this sector — in part because transactional sales can migrate to the web. As one interviewee stated, “Relationships are retiring every day,” which requires distributor sales reps to do more to secure their place in the channel.

Web sites, blogs, and other digital media have also made vendors’ organizations more transparent to buyers. Prospects now touch a company at many points during their buying journeys and they expect the rep to purposefully orchestrate those interactions. As the phrase implies, a sales representative represents her company to the customer. Academics call this a “boundary role”— someone who operates at the boundaries of different organizations and must respond to the often conflicting roles and procedures of each.

Salespeople must work across their firms’ functional boundaries, and, depending upon the buying process, with multiple people and functions at clients. Each group has its own operating procedures. Many salespeople (typically a majority in our experience) now cite navigating their own organizations as a bigger challenge than managing customers and clients.

Because of these changes, companies are having trouble finding suitable people to fill sales roles. According to Burning Glass, a labor-market analysis firm, almost 60% of job postings for wholesale and technical sales reps now require a bachelor’s degree at a minimum and employers spend an average of 41 days trying to fill sales jobs compared with 33 days for all other jobs. Further, “quality of fill” is not tracked; if it were, the results would generally be more discouraging.
Better dialogue between Sales and Academia is timely, and society can benefit: studies show that jobs in sales are among the highest in career lifetime value, and, given the amount spent on sales forces in our economy (about $900 billion annually—by far, the most expensive part of strategy execution for most firms), this is also a significant productivity issue.

What can colleges and universities do to mind the gap? That’s a big topic in its own right. Selling is not a science reducible to timeless rules, and many variables affect market performance and sales success. But effective training and development should begin with awareness and shelf space in the curriculum: making sure that sales is a topic in management education worthy of the name.

It should continue with the cross-disciplinary study relevant to realistic training in the area. Right now, there is a significant supply-side problem: PhD programs for future faculty rarely focus on Sales, and academic promotion increasingly relies on big data-set research within a discipline, not the interplay of economics, psychology, and dyadic behaviors that are at the heart of most sales tasks.

And it should probably culminate in action-learning practicums that require the help, support, and sponsorship of companies. These would expose students to real-world customers and experienced practitioners.

It’s in the best interests of companies to support Academia. As markets change more rapidly, relevant selling behaviors will change as well. If students are better prepared, companies will have a better supply of talent to choose from. And make no mistake: it’s still human talent, not websites, that is the key in sales. Despite hype about the death of the salesperson, the Bureau of Labor Statistics indicate that in 1999 there were 12.9 million workers in sales occupations in the U.S. In 2014 (the most recent data available), the BLS indicated an increase to 14.25 million. Almost all serious research about talent underscores the abiding necessity of training and development, and, at 10.5% of the total employed workforce, salespeople should be a major focus for companies and educators.

Please don’t misunderstand: we are not arguing for old-time trade-school courses, glib “pitch” fests, or making university research and course development a subsidiary of corporate R&D. There should always be creative tension between forward-looking educational institutions and profit-maximizing companies. But there’s a difference, and a mutual value-destroying gap, between creative tension and ignorance or indifference.

Selling to Customers Who Do Their Homework Online

Book Extract: Rethinking sales compensation

By Frank V. Cespedes & Jared Hamilton

Alfred P. Sloan, GM’s CEO from the 1920s to the 1940s, and the architect of the U.S. auto distribution system, summed up the car buyer’s challenge well: “The automobile…is a highly complex mechanical product. It represents a large investment for the average purchaser. He expects to operate it, perhaps daily, yet the chances are he possesses little or no mechanical knowledge. He depends on his dealer.”

Sloan’s statement remains relevant today, even in the era of internet shopping. Although consumers do a lot of online research — the average U.S. car shopper now spends 11 hours online and only 3.5 hours offline, including trips to dealers — the vast majority still end up purchasing their cars in person. According to a 2015 DrivingSales study of more than 1,300 active car shoppers (where most of the statistics from this article derive from), the changing behavior of buyers has placed even more emphasis on selling at the dealer. And yet because buyers can access prices, reviews, and other information via online searches, their attitudes toward negotiations, pricing, online engagement, and sales reps are changing.

Sales tasks are continually evolving in all industries, and companies must keep their sales forces up to speed to meet the demands of their customers. Auto dealers again provide an illustrative example. The required changes may surprise you and raise questions about effective selling in your market.

Not everyone likes negotiating price, but a lot of people do. The common sentiment about price negotiations is, “I just wish they would set one price and stay there.” But the reality is this: Only 13% of car shoppers say, “I don’t like to negotiate and I would like to buy a vehicle that is market priced and everyone pays the same,” while 45% said, “I like to negotiate until I get the vehicle to a price I feel is fair to pay,” and almost one in five people said, “I like to negotiate and will grind hard until I’m confident I’m getting the lowest price possible.” As in most industries, buyers’ preferences vary. Neither a “one price” model nor a negotiation model appeals to all shoppers. And it’s the seller’s responsibility to adapt to the buyer’s preference, not the other way around.

Shoppers should be able to get the asking price without having to talk to anyone. Compared to their tolerance for negotiations, buyers are inflexible about knowing the asking price up front. More than 50% of car shoppers will leave the dealership if a test drive is required to get the asking price of the vehicle. Nearly 40% will not patronize a dealer whose website doesn’t list vehicle prices; a slighter higher percentage will leave a dealer if prices aren’t posted on the vehicles.

In the auto industry and others, third-party sources have changed customers’ shopping behavior and expectations about list price. Among other things, many consumers want to browse without engaging with the sales staff. In the car study, nearly 75% of buyers had not contacted the dealership before visiting, and 25% left without talking to anyone. This points to a disconnect between sellers and buyers: Even when done with good intentions (“I’m here to help you”), some traditional sales practices now unwittingly increase dissatisfaction.

Most of your online advertising and social media spending is probably being wasted. For car shoppers, online tools are a complement to, not a substitute for, in-person dealer visits. They use independent websites for model comparisons and reviews, and OEM sites for detailed model information and videos. When they do visit dealer sites, they’re typically looking for specific vehicle photos and information about local inventory.

According to the National Automobile Dealers Association (NADA), dealers now spend about $600/unit sold on advertising, and the internet takes up the single biggest chunk of that spending. But few shoppers buy or even contact dealers online: Only 5% engage in online chats, and fewer than 10% will fill out an online contact form or communicate via email. Yet nearly 90% rank the dealer visit as the most important source of information during the buying process.

Any strategy is about priorities and trade-offs. Car sellers should certainly be investing more in improving their point-of-sale processes and less in their social media budgets.

At the same time, sellers must manage their existing digital media budgets a lot better. According to Sprout Social Index, dealers respond to only 16% of the online messages they receive. And this is actually better than a 15-industry average of 12.3%! “Having a presence” on social media or a web site is not a sales strategy. Sellers must figure out when online does and does not make a difference in their customers’ buying processes.

To close sales with more-informed customers, you need to retain more-knowledgable sales staff. Pricing information, including dealership wholesale costs, is now widely available on independent websites, along with information about vehicle options, trade-in policies, and performance. But this flood of often conflicting information has created a new challenge in the minds of consumers: Which sources should they trust? As a result, consumers prefer dealing with one responsive, knowledgeable, and trusted representative to help them evaluate what they found in their own research, manage the test-drive experience, and efficiently complete the sale.

Many dealers fall short. The traditional sales process, with hand-offs (“Let me check with my manager and get back to you”), delays, and high variance among sales reps’ product knowledge, is a big source of residual dissatisfaction. Turnover compounds the issue. According to NADA’s 2015 Workplace Study, the average annual turnover among dealer sales reps is 72%, with 50% of new hires leaving after three months. Female sales turnover is 90% annually.
To improve retention rates, dealers must create welcoming sales cultures, institute flexible hours, and invest in the development of their sales reps. It’s good for business. Dealers with the highest rates of retention report gross margins 3%–4% higher than the lowest performers — an enormous difference in an industry with an average net profit margin of 2%.

A knowledgeable sales staff is especially important as technology continues to advance. High-end cars have over 100 million lines of software code, and mass-market cars aren’t far behind. HIS automotive group estimates there are now about 27 million web-enabled vehicles on the road, a number that could rise to over 82 million by 2022. And since cars and smartphones are seamlessly connected, there are a lot of software-as-subscription possibilities that will increase exponentially in the coming years.

Yet how many auto dealers have equipped their salespeople with the knowledge and skills to sell subscription services for the “app store” that the car is fast becoming?

The good news is over 60% of buyers leave a dealership satisfied and view dealers as trustworthy. Contrary to conventional wisdom, the research indicates that this is more true with younger auto shoppers than with older ones. But dealers still have work to do.

The message to the auto industry: You can worry all you want about disruption, but you need to nurture and adapt a sales effort aligned with buying behavior to do something about it.

The message to other industries: Profitable growth is determined by how the buyer buys today and tomorrow, not yesterday, so don’t chase abstract generalizations about the internet while ignoring the point of sale.

This won’t be an easy process, of course. As Alfred Sloan said, “Changing the viewpoint of [an] organization with respect to any particular way of doing any particular thing” is the “hardest problem” in management. “We all know how great is the inertia of the human mind.”