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.”

The Dialogue That Rarely Happens

The Dialogue That Rarely Happens                                                                                                         

Frank V. Cespedes

Originally published in Top Sales magazine (February, 2016)

 

In any organization, influence is bestowed as well as earned. It requires relevant expertise and results, but also being recognized by others as adding value.  Sales managers are no exception to the rule. In many firms, Sales is still treated as a mysterious black box—essential for meeting quarterly revenue targets, but hermetically sealed off from other functions as a tactical tool that’s rarely part of strategy formulation. Moreover, many Sales leaders like it that way. But those days are passing. Consider what’s happening between Finance and Sales.

 

In the past two decades in U.S. companies, the number of executives reporting to the CEO has doubled, largely driven by more functional specialists (CIO, CMO, etc.), not general managers responsible for integrating activities across functions. Business requires more specialist knowledge. Simultaneously, Fortune-500 and S&P-500 companies with COOs have decreased to about 35%.[1] COOs once outnumbered CFOs in those firms, but the proportions have flipped.

 

Finance now plays a prominent role in strategic planning and in evaluating sales’ execution of strategy. A function called Financial Planning and Analysis (FP&A) evaluates sales effectiveness in companies ranging from Dunkin Brands Group to internet domain seller GoDaddy. At Dunkin, 36 people work on FP&A projects involving customer acquisition and retention, and the CFO (who ran FP&A before becoming CFO) notes that “We stick our hands in absolutely everything”; at GoDaddy, FP&A focuses on analyzing performance metrics and reallocating marketing and sales spending.[2] The function is growing. The Association for Financial Professionals offers credentialing programs in FP&A and thousands have enrolled. Similarly, the burgeoning number of Sales Operations groups—charged with applying analytics to sales processes and selling expenses–are often staffed by people with Finance backgrounds.

 

How well prepared are Sales leaders for this increased scrutiny? In my experience, most understand the funnel activities that currently drive the top-line in their company. But they rarely understand other financial components of selling beyond sales volume. For example:

 

Efficiency (doing things right) versus Effectiveness (doing the right things).  Depending upon a firm’s strategy, some sales forces require cost-efficiency measures while others require effectiveness metrics. A simple expense-to-revenue ratio, for instance, can shed light on the relative cost efficiency of the current sales process but not its cost effectiveness, which is a more complex relationship between selling expenses, revenues, margins, and customers acquired through one or another means of organizing sales efforts.

 

Price versus Cost-to-Serve.  Profit is the difference between the price customers pay and the seller’s cost to serve customers, which can vary dramatically. Some customers require more sales calls; some buy in large, production-efficient order quantities, while others may buy more in total volume but with many just-in-time orders; customers differ in their product customization and post-sale service requirements. Most sales compensation plans (about 70%, according to surveys) bonus reps solely on volume, so the message is that any customer is a good customer. But differences in cost-to-serve are important to understand and manage if, like Finance, you take seriously the notion of positive returns on invested capital. When Sales leaders ignore this and simply chase volume, their people are typically driven by competing price proposals, resources are not allocated optimally, and the firm is ultimately at the mercy of competitors who can manage their true costs.

 

Conversely, while Finance rightly demands value-creation plans from Sales leaders, many in Finance are often unaware how sales decisions affect enterprise value. Hence, many FP&A professionals are perceived as “financial bureaucrats” who only focus on missed budget projections. There are basically four ways to create value for shareholders and daily sales activities are crucial to each:

 

Invest in projects that earn more than their cost of capital. Most projects are driven by revenue-seeking activities with customers. Hence, customer selection criteria and sales call patterns materially impact which projects the firm invests in and its capital expenditures.

 

Increase profits from existing capital investments. Here, key determinants are the interactions that ensue once a sale has been made and that accrete costs, time, and asset utilization patterns in the firm.

 

Reduce assets devoted to activities that earn less than their cost of capital. This requires understanding cost-to-serve different customer groups and how performance metrics affect selling behaviors and deals closed.

 

Reduce the firm’s cost of capital. Financing needs are mainly driven by the cash on hand and the working capital required for conducting and growing the business. Most often, the 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 and financial issue, not only a sales task.

 

How well prepared are Finance leaders for this scrutiny? How many understand how compensation plans, territory design, metrics, and other factors affect selling? Without that understanding, reallocating Sales spending becomes either an academic exercise or an unwitting impediment to the use of assets that do remain essential to profitable selling.

 

Changes in companies are altering what it means to be seen as an effective Sales leader. It requires more informed dialogue with Finance, because there is no such thing as effective selling if it’s not connected to business goals and value creation. In turn, effective leaders can transform Sales into what it should always be: a core agent of strategy, not only a vehicle for a given selling methodology.

 

Frank Cespedes teaches at Harvard Business School and is the author of Aligning Strategy and Sales: The Choices, Systems, and Behaviors that Drive Effective Selling (Harvard Business Review Press).

 

 

ENDNOTES

[1] Julie Wolf, “The Flattened Firm: Not as Advertised,” California Management Review (2012) and Jason Karalan, The Chief Financial Officer (New York: Public Affairs Books, 2014).

 

[2] Alix Stuart, “Metrics Sell Doughnuts and More,” The Wall Street Journal (December 21, 2015).

Hiring Star Salespeople Isn’t the Best Way to Grow

By Frank V. Cespedes and Jacco van der Kooij

You see Pareto’s Principle applied to sales all the time — the top 20% of a sales force produces 80% of a company’s revenues and margins — and it’s applicable in a variety of sectors. In B2B contexts, for example, rep performance in similar territories often varies by 300% between top and bottom quintiles, and in retail stores selling productivity typically varies by a factor of three to four. So it’s no surprise that a company’s usual response to stalled growth is to hire more stars.

There are a few problems with the hire-stars approach, however. First, there are only so many stars to go around since everyone is fighting over the same candidates. Second, even if you do manage to hire stars, their unique skill sets may not be easily portable. Research indicates that there’s good chance that a star at Company A won’t be a star — or even productively relevant — at Company B. The third reason is simple math. Even though 80% of sales may currently come from 20% of reps, incremental improvements in the majority’s performance will have, in the aggregate, a much bigger impact on growth than stars do.

We’re not arguing that stars don’t matter, because they definitely do. But, at the same time companies must do more than rely on stars if they want to improve their overall sales performance.

Companies that have adopted a subscription-as-service model (SaaS) are a great example. In the early years of a SaaS venture, stars typically generate the bulk of revenues, and they are often revered and feared internally for the relationships and power they wield. But, as the venture matures, and they continue to close a few big annual deals, they can limit growth since the SaaS model requires higher volumes.

Although it’s easier than ever to create a SaaS business, it’s also harder to scale one. There’s a lot of competition, which keeps a lid on prices and increases customer acquisition costs. A recent survey of 159 SaaS firms with at least $2.5 million in revenues found that almost 55% were spending more than a dollar to get a dollar in annual contract value. It’s also a tough talent market, especially in sales.

If companies want to scale, they need to improve their sales processes, and this is especially true of SaaS businesses. It is as important as the products and services they sell and the customers they sell them to, and it’s a key to competitive advantage.

Here are three core elements for putting in place a scalable sales process:

Understand the sales tasks. When it comes to sales effectiveness, managers need to consider the tasks that reps must perform, not just their personalities and generic selling skills. These tasks will depend on your company’s strategy, the customers targeted by that strategy, and the business model you’ve put in place to acquire and retain those customers.

Consider a SaaS service such as file sharing or various communications tools such as collaboration or meeting software. These applications aren’t typically mission-critical for customers, and are sold at relatively low monthly subscription prices. Buyers can gather a lot of pre-sale information via an online search, which allows them to act more quickly and decisively. On the seller’s end, “dialing for dollars” is paramount. They conduct online demos and provide prospects with a semi-customized proposal with a few clicks on the website to make the initial sale. But scaling this type of business typically requires “land and expand” sales tasks such as up-sells (getting the customer to purchase a premium version of the product) and cross-sells (getting the initial customer(s) to provide positive referrals to others in that organization). For example, ScriptLogic, which sold simple IT diagnostic tools to system administrators in the IT departments of small and mid-sized companies, built a good business with this sales approach and a “Point, Click, Done” value proposition.

A SaaS platform service such as CRM or MAS (Marketing Automation Service), on the other hand, requires sophisticated integration to install annual or multi-year contracts. This is a complex initial sale with a longer selling cycle that is harder to do online or by phone. To add to that, reps often have to involve the vendor’s engineers in the selling process.

Reps selling CRM services have vastly different tasks than reps selling communication tools. They must focus on landing renewals, increasing price through new functionalities and premium packages sold to different decision makers, and minimizing customer churn. They must also deal with a different decision-making process and budgeting procedures at accounts. The same approach which served ScriptLogic so well in SMB was not effective in selling its products to enterprise accounts, and ScriptLogic was eventually acquired by Quest Software, which employed a very different sales approach in the enterprise segment.

It’s also important to keep in mind that sales tasks typically change over the course of a product-market life cycle. Generally, customer education and applications development are often key tasks in early stages. But as the market develops and standards emerge, sales people spend more time selling against functionally-equivalent brands or developing third-party relationships. If your sales process doesn’t keep pace with these changes, strategy execution and growth will falter.

Match your sales process and resources to the buying process. Most sales organizations spend a lot of time and money tracking progress (or not) through their sales “funnels.” But selling is always more about the buyer than the seller, and most customer buying journeys resemble a meandering path rather than a progressively tapering funnel. B2B buyers, for example, tend to work through four parallel streams to make a purchase decision. So it’s important to understand where customers are in their journeys and how to interact with them appropriately at a given stage.

With SaaS, the initial stage usually starts when the potential customer recognizes a fixable problem or opportunity. The seller can help to trigger that recognition in any of a number of ways, including starting a content marketing or SEO campaign to generate inbound leads, cultivating referrals from existing customers, making sales calls, planning conferences, sending emails to build awareness, and using social media to generate word of mouth.

Subsequent stages again depend on buyer behavior and strategy. Most SaaS businesses have three tiers: a self-serve tier that allows for trial evaluation, a second tier that allows a single or departmental decision maker to engage and experience, and a third tier that requires selling to multiple stakeholders at the customer.

Although some stars can navigate across all tiers, most reps can’t. So, in order to optimize the productivity of your sales force, you must determine where in the process different reps should get involved. Often, high-velocity inside sales reps are productive at the lower tier but counter-productive at higher tiers, which involve a more complex, cross-functional decision-making unit.

Use tools to turn data into information. Considering the average U.S. company already has more data in its CRM system than in the entire Library of Congress, you probably feel overwhelmed by Big Data. That’s why it’s important to keep in mind that the role of data is to help you make better decisions, and in order to separate signal from noise, you need to know what you are measuring and use the right tools to measure it.

Think about forecasting. Most firms put their pipeline information into a CRM either weekly or monthly and then review the volume and value of leads in that pipeline. In order to forecast for the following month or quarter, they typically extrapolate future performance from that snapshot: “Bob did $200,000 in sales last quarter, so let’s budget him for $250,000 next quarter,” and so on.

But buying streams, especially for SaaS, are more like a motion picture than a snapshot, which means you should be measuring flows such as “what is Bob’s ratio of Monthly Recurring Revenue to Sales Qualified Leads (SQL)?” or “what is Sally’s ratio of Commits vs. SQLs?” These questions will inform a big decision: hire more people like Bob or find out what Sally is doing right.

The minimum data streams include the categories outlined below:
Minimum Sales Data Streams for a Subscription-as-Service Organization

These categories will help you separate signal from noise.
Website Pic

With this data and the relevant analytic tools, you can make distinctions that will help you build a scalable sales process. For instance, depending upon your business model, you can look at any or all of the following and make better use of your Marketing and Sales budget:

Volume Data: metrics that track volume by tracking Wins from number of Marketing Qualified Leads (MQLs) and SQLs.

Conversion Data: ratios that track, for instance, how many MQLs result in SQLs.

Opportunity Costs: extrapolations across multiple metrics. For example, you may compare the cost and Monthly Recurring Revenue generated by a marketing campaign in 30 days versus alternative uses of that money, the customer acquisition costs of your online versus field-sales team, up-sell and churn percentages, and so on.

Many sales efforts need this process because business now changes often and fast. It’s true that any process is only as good as the people managing that process. But hiring Sales Operations or other “data analysts” without an iterative process in place is a recipe for frustration and expensive failure. And failure doesn’t scale.

Conversely, make sure not to follow your process myopically or in a rote manner. Remember to look up: there are stars. But also remember that you don’t need to move everyone to the 90th percentile. Moving up a quartile would be a big deal, and that’s the role of a relevant sales process.

 

Don’t Turn Your Sales Team Loose Without a Strategy

By Frank V. Cespedes and Steve Thompson

When formulating a strategy, markets and segments are important categories to consider. But a market never buys anything. Only customers buy. To borrow a telecom industry metaphor, a deal with a customer is the “last mile” in connecting any strategy with business development efforts and marketplace results.

So, for most firms, de facto strategy is the aggregate result of the deals their salespeople bring in. The problem is few firms clarify their deal selection criteria. Either directly in meetings or implicitly in their compensation plans, they basically tell their sales forces to “Go forth and multiply!” And that is exactly what happens.

As a consequence, salespeople tend to sell to anyone they can, often at discounted prices to make a volume quota target. There are also opportunity costs: since money, time, and people are allocated to customer A, they are not available to customers B, C, and so on.

This is ineffective deal management, and it eventually leads to loss of positioning with customers, and, over time, the nurturing of “commodity competencies.” In other words, the sales force gets better and better at striking deals that more customers value less and less.

To avoid this, some companies establish a Strategic Deal Profile — guidelines and parameters that its sales force can use in conversations with actual customers — and make it part of selling behaviors through performance management practices.

Consider the case of Alphatech (a disguised name), which sells software that allows businesses to deploy applications consistently across their desktops, laptops, and other devices. Since every business has a somewhat unique combination of hardware and software, Alphatech grew by taking responsibility for integration and after-sale support. But by 2012 growth slowed, revenues flattened, and margins declined. At that point, Alphatech’s management reassessed its strategy and sales approach.

Here’s how:

Identifying good customers. Management first evaluated who were, and who were not, good customers. Previously, Alphatech considered any organization in which workers used laptops as a prospect. Because of this, selling cycles were lengthy, and, even when reps did close deals, they did so at highly discounted prices and were forced to include unwieldy service requirements. As a result, false positives and negative-value prospects littered the sales funnel, and about 75% of margins came from just 25% of the deals—almost all of which were managed-services contracts versus one-off “project” installations.

With analysis, Alphatech identified regional hospitals—which faced mandated digital-records requirements, and usually lacked the scale and IT staff to do that on their own—as their best customers.

Hospitals presented two advantages. They were accessible because Alphatech could oversee integrations remotely via the internet. And, since they were spread out across a geographically diverse area, they represented a large enough market to support renewed profitable growth.

Creating the right sales processes and incentives. Next, Alphatech set out to redesign its sales processes in order to support its new strategy. It did this in a few ways. It reorganized its sales force to focus on specific segments within the hospital market, and trained both its sales and service teams (which now visited sites early in the sales cycle) on outcome-based selling. It changed its sales compensation incentives from revenue bookings to commission payments tied to margins, service mix, and duration of subscription agreement. It also standardized its proposals to include managed services offerings as an option, and changed its marketing collateral to emphasize its new value proposition. In turn, it tracked the number of calls its salespeople made to hospital administrators at assigned accounts, and included this as a metric in performance reviews.

Following a strategic “Deal Profile.“ At this point, Alphatech knew it wanted to sell its services to the regional hospital market and felt it had the capabilities to do so. But it needed a Deal Profile first — a set of guidelines that would link the company’s strategy with the approaches used by its salespeople.
The first component of a Deal Profile is figuring out how to define success. Sales calls now focused on defining success with the customer, including specific outcomes such as time to deploy applications and system up-time guarantees. These metrics were critical because many of the applications affected patient care, hospital reimbursements, and health-care confidentiality requirements, and various stakeholders had different perspectives.

Establishing a common language of value helped customers to communicate internally, which, in turn, accelerated sales cycles when Alphatech won a deal and minimized selling expenses when a customer and Alphatech could not agree on outcomes.

This method of selling also tended to involve more senior decision makers. In the past, sales reps sold to IT system administrators, but now they were conversing more with CFOs and other executives, which better positioned Alphatech to expand at accounts where it did land deals.

Second, Alphatech had to decide how to communicate value. Alphatech was selling a change process as well as hardware and software services. That meant that to be effective, they really needed monthly conference calls with the customer and periodic Customer Business Reviews (CBR) with IT and administrators after implementation.

For customers, the calls were reviews and reminders of agreed-upon success outcomes. They were also opportunities to talk about best practices and to troubleshoot any issues they were encountering.

For Alphatech, the CBRs provided opportunities to extend or expand a contract, or both. Since a longer term contract needed approval outside IT, it was in Alphatech’s best interest to keep key senior execs involved in the process.

Pricing guidelines were the third key factor. In the past, Alphatech’s pricing had been driven by competing proposals, often from competitors with lower service levels. The sales force was often closing initial deals at a loss in the hope that the value they ultimately delivered would lead to higher prices.

But hope is not a method. With Alphatech’s Deal Profile, sales people were only able to offer 5-10% discounts off book prices if the customer bought at least three months of services. The three-month period was beneficial to both parties. It lowered customers’ risks of trial, while the network and service terms gave Alphatech access to better information about value drivers and change requirements at that account.

Further, experience indicated that, despite value delivered, it was difficult to get higher prices after an initial discount. So pricing with the new Deal Profile provided a basis for profitable future business if and when expanding service became a reality.

The Deal Profile also specified payment terms with pricing. This is an important and often overlooked aspect in many strategy discussions. Any deal affects a company’s economics and valuation. Financing needs are driven by the cash on hand and the working capital required to conduct and grow the business. For most firms, the biggest driver of cash out and cash in is the selling process. Accounts payable accumulate during selling, and accounts receivables are determined by what’s sold, how fast, and at what price, and payment terms. That’s also why a Deal Profile is a strategic issue as well as sales issue.

Finally, there’s measuring results. Business results were outstanding: EBITDA more than doubled in the first year and ROIC increased almost 300%, with fewer sales people. And, while the Deal Profile meant that Alphatech was saying “no” more often than in the past, customer churn for done deals decreased and customer lifetime value and profitability increased as a result.

Not everything went without a hitch. With the Deal Profile in place, many sales people left because they found the new selling behaviors alien to their skill sets and preferences. But the most important lesson here may be this: it is not the customer’s responsibility to inform you when you are barking up the wrong tree. It’s your responsibility to make that judgment and make it real through execution. And a Deal Profile is a basic building block in linking strategy and sales.

The Best Ways to Hire Salespeople

By Frank Cespedes and Daniel Weinfurter

Many firms talk about talent management, but few deal systematically with a basic fact: average annual turnover in sales is 25 to 30%. This means that the equivalent of the entire sales organization must be hired and trained every four years or so, and that’s expensive.

Consider these stats. Direct replacement costs for a telesales employee can range from $75,000 to $90,000, while other sales positions can cost a company as much as $300,000. Moreover, these figures don’t reflect the lost sales while a replacement is found and trained. In sectors like medical devices, big capital equipment, and many professional services, including these opportunity costs can push turnover cost to $1 million or more per event.

The challenge is compounded by the fact that there is no easily identified resource pool for sales positions. According to Howard Stevens in Achieve Sales Excellence, more than 50% of U.S. college graduates, regardless of their majors, are likely to work in sales. But of the over 4,000 colleges in this country, less than 100 have sales programs or even sales courses. And, even if companies are lucky enough to find qualified grads, 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.

Bottom line: companies typically spend more on hiring in sales than they do anywhere else in the firm. So how do you improve the returns on this investment? Here are four places to start:

Hire for the task. In business, you hear so many opinions about what makes for a good salesperson. But most are a bland summary of the Boy Scout Handbook, with traits like extroversion, assertiveness, empathy, modesty, and an “achievement orientation.” These platitudes are often reflected in firms’ competency lists and are so broad that, at best, they simply remind us that people tend to do business with people they like (but not always and not as often as many sales trainers assume). At worst, these abstractions are irrelevant to the execution of business strategy, and they make hiring, in sales and other functions, a classic example of the cloning bias: managers use these slogans to hire in their own image.

Selling jobs vary greatly depending on the product or service sold, the customers a salesperson is responsible for, the relative importance of technical knowledge, and the people contacted during sales calls. A review of hundreds of studies about sales productivity finds that “[t]he results of this research have simply failed to identify behavioral predispositions or aptitudes that account for a large amount of variance in performance for salespeople. In addition, the results of this research are quite inconsistent and, in some cases, even contradictory.” Common stereotypes about a “good” salesperson (e.g., pleasing personality, hard-wired for sociability, and so on) obscure the realities you face.

Selling effectiveness is not a generalized trait. It’s a function of the sales tasks, which vary according to the market, your strategy, the stage of the business (i.e., startup or later stage), the customers targeted by your strategy, and buying processes at those customers. This is true even for firms in the same industry. Think about the difference between sales tasks at Nordstrom, where personalized service and advice are integral to strategy execution, and Costco, where low price and product availability make sales tasks less complex and variable.

The first step in smart hiring and productivity is understanding the relevant sales tasks in your market and strategy and then reflecting those tasks in hiring criteria and a disciplined hiring process.

Focus on behaviors. Research based upon thousands of exit interviews shows that a primary cause of poor performance and turnover is poor job fit. People, especially salespeople with a variable pay component, become frustrated when they’re hired for tasks that are a poor fit with their skills and preferences. Conversely, as the saying goes, “You hire your problems.” Zappos CEO Tony Hseih estimates that bad hires have cost his firm $100 million. Famously, Zappos will pay people to leave voluntarily after a few months on the job.

The key is to focus on the behaviors implied by the sales tasks. In many firms, this means upgrading assessment skills. Managers are excessively confident about their ability to evaluate candidates via interviews. In reality, studies indicate a low correlation (generally, less than 25%) between interview predictions and job success, and some indicate that interview processes actually hurt in hiring decisions: the firm would have done better with blind selection procedures! The best results, by far, occur when those making hiring decisions can observe the potential hires’ job behaviors and use a recruitment process based on a combination of factors, as illustrated in the following graphic:

W151021_CESPEDES_HOWTOEVALUATE

There are many ways to do this, including simulations, interviewing techniques, or (as at Zappos) providing an incentive for self-selection after recent hires experience the required behaviors. Especially in expensive sales-hiring situations, many organizations could emulate the practice used by investment banks and consulting firms when hiring MBAs: the summer job is, in effect, an extended observation by multiple people at the firm of the candidate’s abilities before a full-time offer is extended.

Then, immerse reps in the tasks they will encounter in working with customers. At HubSpot, which provides web-based inbound marketing services to businesses, Mark Roberge has sales hires spend a month in classroom-style training but also doing what their customers do: create a website from scratch and keep that site populated with relevant content. Roberge notes, “they experience the actual pains and successes of our primary customers: professional marketers who need to generate leads online. As a result, our salespeople are able to connect on a far deeper level with our prospects and leads.”

Be clear about what you mean by relevant “experience.” Previous experience is the most common criterion used by sales managers in talent assessment. In one survey, over 50% of respondents cited “selling experience within the industry” as their key selection criterion, and another 33% cited “selling experience in [an] other industry.” Driving this view is a perceived trade-off between hiring for experience and spending money on training. But because selling effectiveness depends upon a company’s sales tasks, “experience” is an inherently multidimensional attribute. It may refer to experience with any (or any combination of) the following:

A customer group: e.g., a banker or other financial services recruit hired by a software firm to call on financial firms; or, in health care, firms sell different products, but many sell to hospitals.
A technology: an engineer or field-service tech hired to sell a category of equipment.
Another part of the organization: a service rep moved to sales because internal cross-functional support is a key sales task and that rep “knows the people and the organization.”
A geography or culture: a member of a given nationality or ethnic group who knows, and has credibility within, the norms of the relevant customer’s culture.
Selling: an insurance agent or retail associate with experience in another sales context.

The relevance of each type varies with your sales tasks. So consider what type is, and is not (see below), relevant, and require the people doing sales hiring to clarify what they mean by experience.

On-going talent assessments. Markets have no responsibility to be kind to your firm’s strategy and sales approach. It is leadership’s responsibility to adapt to markets and develop the competencies required today, not yesterday.

As organizations confront new buying processes, required competencies are changing. The figure below, based on an extensive database of company sales profiles, indicates the changing nature of sales competencies at many firms. Competencies that, only a decade ago, were considered essential are now lower in priority.

W151021_CESPEDES_SALESPEOPLEREQUIRE

Does this mean that developing leads, qualifying prospects, and adapting to different buyer motivations are no longer important? No. Rather, as one should expect in a competitive activity where success is ultimately measured by relative advantage, the focus of productivity improvement in sales is shifting. Yesterday’s sales strengths have become today’s minimum skill requirements.

This underscores the need for on-going talent assessments to stay in-touch with changing tasks and required behaviors. The good news is that the tools for doing such assessments, based on behavioral research findings, are more available and have more granularity and practicality for sales leaders. Conducting a skills inventory and determining the best fit for your sales tasks need not be the standard mix of folklore, various embedded biases by front-line managers, and the content-free platitudes about “selling” that populate many blogs. And it is increasingly necessary because companies must ultimately be worthy of real talent.

It’s often said that many firms maintain their equipment better than they do their people. If so, you ultimately get what you don’t maintain, especially in sales.

What Salespeople Need to Know About the New B2B Landscape

By Frank Cespedes & Tiffani Bova

Selling has always been more about the buyer than the seller. So any effective sales model must adapt to changing buying protocols, not ignore or resist them. This is a big transition for firms whose marketing, sales-training and enablement tools, and wider organizational processes reflect outdated assumptions about purchasing in their markets.

For a century, buying has been framed in terms of moving a prospect from Awareness to Interest to Desire to Action (AIDA). The AIDA model and its variants are the basis for sales funnels at many B2B firms. The typical funnel starts with a marketing-generated lead for a “suspect” that, after qualification, becomes a “prospect,” and then a customer through steps that are measured and managed. In each step, sales people are expected to perform a series of tasks, usually sequentially, in order to close. It’s an inside-out process and CRM systems are there to provide data about progression (or not) through that company’s funnel steps — the famous “pipeline” metrics that dominate so much talk about sales.

But Gartner research (see here and here) indicates a very different contemporary buying reality. Rather than moving sequentially through a funnel, buyers actually work through four parallel streams to make a purchase decision.

Let’s examine these activities, one by one:

Explore: Here, buyers identify a need or opportunity and begin looking for ways to address it, usually via interactions with vendors and self-directed information search on the internet.
Evaluate: Buyers take a closer look at options uncovered while exploring, again leaning heavily on self-directed search and peer interactions as well as vendor sales representatives.
Engage: Buyers initiate further contact with providers (or accept proposals from providers) to get help in moving toward a purchase decision.
Experience: Buyers use a solution, increasingly in pilots or proof of concepts, and develop perceptions about its value based on that usage.
With these changes in mind, understanding where customers are, and how to interact with them appropriately in a given stream, are now central to effective selling.

Here are a few tips and insights to help you navigate these shifts.

The sales force is more important than ever. Regardless of which path customers take, or in which order they take them, they want to deal with people who can help them move toward a purchase decision, be the internal champion at the vendor, and bring it together for that customer. In fact, B2B buyers report that, compared to other sources of information, these interactions are the most influential in their decision making process:

W150729_CESPEDES_MOSTINFLUENTIAL

The source considered the least influential is social media. Don’t believe the hype. Sales people have not been replaced by digital, and providing relevant solutions remains key in most B2B buying scenarios.

One reason why the sales force remains so important to the B2B customer is that most products and services sold to business organizations are components in a wider usage system at that buyer, and customer value ultimately resides in that usage, not just the individual product.
To add to that, business buyers must justify a decision to others in the organization, especially as capital expenditures flow less liberally in many industries since the financial crisis of 2008. And you are naïve or spending too much time on your smartphone if you believe that a combination of economics, solution identification, product application, risk management, and political journey through the buyer’s organization is now handled predominately online in most buying scenarios and without knowledgeable and savvy sales help.

The research also found that, across all buying streams, buyers emphasized that interactions with sellers — technical demonstrations, sales presentations tailored to my company’s need – should be about the buyer’s needs. Among the least valued interactions are sales calls in response to registering for webinars or events. That is, core solution-selling and account-management skills still matter.

Lastly, although buyers certainly use online search, they use it as a complement to, not a substitute for, interactions with sales reps, channel partners, and others at their suppliers. If anything, access to information online has increased awareness that relevant alternatives and best practices about product applications and service requirements often reside outside one’s firm. In turn, this drives the B2B buyer’s propensity to seek information from vendors who work with companies across regions or vertical segments, and who can use that knowledge to help frame and deliver solutions for that buyer’s needs.

Buying is a continuous and dynamic process. Specious talk about disintermediation of salespeople obscures the real issues facing firms. Sales people are not disappearing, but buying processes and therefore sales tasks are changing.

For example, note that in the second figure above customer references are a close second in terms of influence, and the nature of references has changed. In the past, a buyer might ask for references and that seller would cite a few satisfied customers. But through the web, customers connect with each other and get unedited versions of others’ experience through review sites such as bazaarvoice and PowerReviews, and they gain access to thousands of people at other companies who can share experiences and options through community sites such as SAP Developer Network and Marketo Marketing Nation.

Also playing important roles are events, white papers, and the seller’s website — activities that are typically part of marketing’s domain, not sales. This puts pressure on a notoriously fraught relationship: improving coordination between sales and marketing, two functions that are increasingly interdependent but different in their perspectives and procedures. The marketing–sales relationship now tops the agenda of concerns in a survey of B2B executives.

More generally, it’s important to recognize that web sites, blogs, and other digital media have made vendor organizations more visible and transparent to potential buyers, which has disrupted the inside-out funnel approach. Prospects now touch your brand and company at many different points (online, offline, marketing collateral, and so on), when they want, and each touch has an impact on selling tasks. Buyers value interaction with others at your firm besides the sales person (e.g., product specialists, technical experts, professional services personnel, delivery personnel, pre- and post-sales applications resources). In their buying streams, they expect the rep to orchestrate those interactions purposefully, and efficient coordination of these interaction points must be reflected in an effective 21st-century go-to-market strategy.

Finally, if you consider the streams that now characterize B2B buying and what buyers value in their suppliers’ behaviors, a big disconnect becomes apparent. Despite huge advances in technology over the past two decades, most sales models and performance practices are the ad-hoc accumulation of years of reactive decisions, often by different managers pursuing different goals. This is why many B2B sales models firms are incapable of dealing with the reality that buying is now continuous and dynamic — an on-going movie, not a selfie or snapshot in a funnel.

Choices are often false. Despite what you often hear, no single tactic — e.g., a given selling methodology, “challenging” the customer, or more “big data” analytics — will address the new reality. Aligning buying and selling is a process, not a one-shot deal.

Going forward, many B2B sellers will need to reconfigure their selling processes more effectively and efficiently for each buying stream. They should not waste lots of time and energy debating whether to be online or in-person, interacting via the web or through sales reps, digital or human. They need to do both, and create the right mix for their go-to-market programs.

It’s also important that every group within an organization that deals with customers has a shared vision of how customers buy and, more importantly, a clear sense of their company’s strategy. The cross-functional communication and coordination that is required to navigate this change is the job of leadership. Is your organization, not just your sales force, ready to deal with this purchasing reality?

Finally, to paraphrase Churchill, it is not “the end of solution sales” and it’s not the beginning of the end. But it should be the end of glib generalizations about sales and selling, which remain complex, changing, and people-dependent activities in most B2B markets. As a leader, understanding how buying really works is the place to start in order to spur effective selling, profitable growth, and better resource allocations in your firm.