1. Potential (size of the responsible area)
2. Synergies
3. Goals

1. The main function of Sales is to exploit a certain potential. So, the potential should be large enough in order to be attractive for the individual sales persons. And “attractive” means, it should enable them to achieve their sales goals over multiple years and to build up a large enough funnel considering the assumed hitrates. Keeping that in mind, the potential you provide in form of a region or segment should be reasonably large. Obviously, if you set the ceiling too low, they will not only be physically kept from jumping very high, they will also lose their ambition to jump higher and higher. Here are some hints for sizing the sales territory right:

• Assume 3-5 years time (usually required to gain a significant market share and to build up the experience that your sales people can use to leverage)
• Apply your historical or assumed hitrate (= the ratio of number of approached prospects and number of actually won customers)
• Calculate the resulting required number of target accounts and draw the territory accordingly

Example:

Total annual revenue target per account manager:  1 mill. EUR/USD

Average deal size per customer: 100.000 EUR/USD

Resulting customers required per year: 10

Average hitrate: 25%

Resulting prospects to be approached per year: 40

Total number of prospects required over 3 year time frame: 120

So, in this example, the total sales territory should include at least 120 target accounts with a potential deal size of 100.000 EUR/USD per account. Check if the region really provides the sufficient potential. If the territory is too small, your sales managers will have no room manage their funnel in a flexible way and to create sufficient backup.

2. Another important point is regional or segment synergies. Such synergies can be:

• Concentrated travels to visit multiple customers and prospects
• Leveraging customer references or experiences that are region- or segment-specific (culture, purchasing behavior, cooperation, etc.)

Splitting up a region, country or segment across several account managers and assign overlapping territories therefore doesn’t make much sense because you will destroy these synergies and in addition tremendously increase internal account coordination efforts.

3. An entrepreneurial approach also means giving your sales managers generic, not account-specific goals. And this not only short-term but also long-term. Such a goal can be, for example, to win a certain number out of the Top 10 accounts or to achieve a certain market share for a specific segment, country or region or simply to achieve a certain revenue and leave it completely to the responsible sales manager how she achieves it.

So, if you give your sales guys a large potential to tap, combined with stretched goals, it will make them think “big” and long-term oriented. They will also become creative and very motivated to jump over the bar (to stay with above analogy) even if it is raised every year. By setting rather general goals, they will have to manage the dynamics of the sales process by themselves and have to make sure to create a sales funnel, keep it sufficiently filled and to balance their closing and prospecting activities accordingly. In the end, they will become little sales entrepreneurs.

The contrary approach is, what I call a static approach. This is still seen quite often in sales organizations. It means to assign a fixed number of actual accounts to sales persons with hardly any room for backup or for optimizing the account selection and prioritization (sometimes it just makes sense to win some accounts first and then tackle the related accounts, which is not possible when your responsibility is limited to certain accounts). Also, you as a sales person are under large pressure to move forward on these specific accounts, which often results in a very aggressive account approach. This however, can lower your chances to win this customer quite substantially. Sometimes, it is simply not the right time to approach a prospect. Not respecting this can be harmful for your account manager’s reputation, motivation and your company’s overall sales performance. Therefore, leave the account selection up to your sales people as much as possible.

So, by setting the sales potential, synergies, and goals right, you will unleash your sales people’s entrepreneurial capabilities. The results you will see in your top line.

© Stephan Hesslich

All that keeps the myth that trade shows are a place where business is made. While they are still a great place to meet and communicate face-to-face, you cannot rely on trade shows to be a strong lead generator. Why? Because, in order to be that, trade shows would have to provide you an effective platform of introducing yourself to the right contacts of your targeted customer groups. Now, let’s see why that is not possible:

1. Audience

We know that your audience should be selected and targeted carefully in order to make sure, your offering fits to them. The audience at trade shows however is not targeted. You cannot control who visits your booth and who not. All you can do is to try to lure the right crowd to you but that rarely works.

Another thing is that the decision makers or main influencers rarely visit trade shows to scout new solutions, if they even go. Usually mainly junior product managers or technical people go to trade shows. Many important members of your prospect’s buying center don’t go to trade shows at all. This is especially true for large organizations. And, the people who go are usually very busy with meeting existing partners or with people they already know.

2. Frequency

Exhibiting at trade shows is usually linked to substantial costs and efforts within your marketing organization. Therefore, you can only afford a certain number of such events per year. Too few to be enough to build a sustainable sales funnel for the year, even if you manage to win a few prospects at the shows.

3. Transparency

The sheer size of today’s large trade shows and the number of exhibitors is overwhelming for most visitors. Even the focused ones of them can find you only by accident. You can optimize your booth location and appearance as much as you want, you will still have to rely on luck to be discovered by your target prospects. The number of booths and vendors in relation to the available time and overview of the visitor is just too large. For smaller shows the – let’s call it “discovery rate” – might be much better. However, there you also have a smaller number of visitors, which might result in a similar total number of prospects.

As a consequence of all that, you leave your lead generation at trade shows to chance. I have been to quite many shows as an exhibitor in my life and I can tell you by my own experience that it is very hard and very rare to meet the right people there (unless, of course, you made previous appointments).

Trade shows are an excellent branding opportunity though. It’s a great chance to introduce yourself to the world and to get noticed, at least unconsciously. To be present there is also important to establish your brand and to reconfirm that you are a major player in the industry. But in order to generate new sales leads you need to rely on other marketing activities and on a more proactive sales approach.

© Stephan Hesslich

That new focus provides two kinds of challenges:

1. To manage the transition from presales to postsales
2. To manage treating your customers differently than in the past

Regarding  1.: Postsales customer management is very different from presales customer activities. It’s a little bit like in a personal relationship: In the phase of winning the partner, you only show your best side, you try to avoid any conflicts and you are still very flexible and generous in your behavior. After both sides made a commitment of staying together (e.g. got married), the relationship now requires the ability to constantly resolve conflicts and to work together in a way that both parties feel happy and satisfied. We all know this from our own relationships and it is very similar in customer management.

In the presales phase mainly negotiation and convincing skills are required, the conflict potential is usually very limited to disagreements on the terms and conditions. In that phase, the customer relationship is still lose and unbinding. In the postsales phase however, conflict resolution skills are required as well as the capabilities to constantly coach, motivate, and consult your customer to become an attractive sales partner for you. Each sales person must be able to manage that transition smoothly and to change their roles during this process.

Re 2. The latter part becomes additionally challenging since you now need to be demanding and to manage your customer in a performance-oriented way. You need to be strict and to able to address issues immediately and in a direct way, and sometimes you have to be even willing to apply sanctions. Otherwise you will lose a main chunk of your planned and forecasted revenues.

It is a difficult balance to be both the service-oriented supplier you still need to be, trying to make the customer happy, and to be a demanding business partner.  To treat your customer like that, creates two other challenges:

A. Social Skills

It requires special communication skills in your sales persons. They also have to be senior enough, so they are respected by the customer in conflict situations. And they need to have the confidence, and sometimes even the courage, to address the issues with the customer when they arise.

This communication and personality requirement is often underestimated, I have seen very senior sales managers that sometimes got scared of treating the customer that way and who tried to slow down their account managers.

B. Accommodation

The customer also needs to adapt to be treated like that by their suppliers. Especially large customers are well aware of their bargaining power and they are used to get pampered by the vendor. The “new behavior” of their account manager can be very irritating for them if they do not prepare from the beginning for the new form of their cooperation with the vendor. Sometimes they seem to forget that it is also in their interest to get the most business out of the supplied solution and to be successful with it.

So, Sales executives should be aware of these challenges. They should support their sales people even when it gets a bit difficult with the customer. And they should make a special effort in developing the required skills in their staff and to establish the necessary culture within the organization.

© Stephan Hesslich

1. If you have non-profitable customers it has an impact on your bottom line; in order to address this you have to know which customers these are
2. Especially in start-ups, customer profitability relates to opportunity costs, which matters much since resources are scarce and growth goals aggressive

The key in realizing the importance of customer profitability in start-up companies lies in understanding opportunity costs. Opportunity costs are profits you could generate if you spent the resources on alternatives. Thus, sales resources spent on a customer that requires quite a lot of efforts should better be spent on another customer bringing in the same revenue but requiring less efforts.

Example:

Account manager A has three customers with 100.000 USD/EUR revenues p.a. each. They require all of her time, equally spread across the three of them. Each customer has the following profitability:

Customer Profitability A = 100.000 USD/EUR p.a. – 33% of the account manager’s annual costs

Account manager B has three customers with 100.000 USD/EUR revenues p.a. each that only take up 75% of his time. Therefore, each customer has a profitability as follows:

Customer Profitability B = 100.000 USD/EUR p.a. – 25% of the account manager’s annual costs

The remaining 25% of his time the account manager can spend on managing another customer with the same profitability, also bringing in 100.000 USD/EUR p.a. revenues. Therefore, account manager B generates 400.000 USD/EUR revenues (33% more than account manager B) with the same effort just by managing more profitable customers.

As this example points out, it is not only the fixed personnel costs of your sales force that matters for total company profitability but also individual customer profitability. Therefore, each customer’s profitability should be calculated based on their contributing revenues and the company resources these customers require.

Now, there are two practical difficulties with calculating customer-associated costs:

1. While measuring customer-specific costs is fairly easy in consumer direct marketing settings, it is rather difficult in high-tech sales. Time that people spent on customers is usually not recorded.
2. Sales people’s productivity varies largely. That makes it difficult to compare associated costs. One not so productive account manager might create more costs on a customer than a more productive account manager, therefore making this customer less profitable then he could be if managed by another sales person.

To address point 1. you can start with high-level estimates. You can guess, survey or even for a limited time record the resources spent by company functions like administration, finance, presales, and top management on e.g. customer visits, customer calls, and contract reviews. Count the number of customers per customer segment managed by one account manager and then compare. Measure the helpdesk support load per customer. Then put a cost value to all customer-related activities like resolving a support issue, having top management involved, developing a non-paid feature or communicating with the customer.

To get a feeling on productivity in point 2., you can compare the profitability of account managers that serve similar customers. However, customer management also varies by region and even within one rather homogeneous customer segment, customer profitability can be different. That’s why it can be helpful to compare how customers are actually managed in detail and how account managers spend resources. For example, do some account managers have the tendency to frequently set up an on-site meeting or pull in top management? Or do others rather meet every customer request even though that might not always be necessary?

Now, once you have a good estimate on your customer’s profitability the big question is:  What do you do with the results? Abandon all less profitable customers? Generally reducing the total sales efforts by assigning more customers to each account manager?

Well, the answer is not so simple. Reducing costs might result in losing the customer and in fact is often not so easy to do in practice. And letting a customer go is a very tough decision and requires quite solid data to justify it. Therefore, a better way is to educate your sales force that not only revenue but also customer profitability matters. Try to identify best practice examples. Create a consciousness for being careful with using company resources. Encourage your sales people to consider costs for customer requirements before fulfilling them.

Focusing more on customer profitability certainly requires a paradigm shift for usually strictly revenue-oriented sales organizations. But if you don’t do it, your company will not grow as much as it could. Plus, you will end up with less profitable customers, which will hurt your bottom line.

© Stephan Hesslich

While it is certainly important to keep paying customers that contribute revenues to your company, this post focuses on the profitability that long-term customers generate compared to not so loyal customers. We also look at this mainly for settings where a service provider has many, comparably small customers. Obviously, customer loyalty has a different importance in high-tech companies where you have only a few but large customers that provide substantial revenue contribution. But even there it is important to look at customer profitability and not only revenue.

Loyal customers are supposed to be less expensive to serve and to have a lower price sensitivity, which means that prices can be raised on them more easily without compromising on demand. As I outlined in one of my previous posts, customer retention costs are usually higher than initial acquisition costs. Retention costs therefore need to be compensated by high, regular revenue and sufficient gross margins per sales in order to ensure overall customer profitability.

There has been some excellent marketing research on the topic. For example, Werner Reinartz and V. Kumar (“The Mismanagement of Customer Loyalty”, Harvard Business Review, July 2002) investigated the link between customer loyalty and profitability in four example companies. The result of their study was that the link between customer loyalty and profitability is very weak. The picture below shows the relations between profitability and loyalty, clearly showing that long-term customers can have both high and low profitability, the same as short-term customers.

The study also showed that the assumed smaller price sensitivity does not exist with long-lasting customers. These customers often use their bargaining power to pay even lower prices than short-term customers, also resulting in lower margins per transaction.

I assume why companies still focus on keeping their customers as long as possible is the following:

1. It is more comfortable for the sales force. Dealing with customers that you already know is easier than hunting for new customers, which involves a lot of uncertainty and risk.
2. Especially service providers invest a lot of upfront money in acquiring new customers, e.g. free hardware, free months of service (used to be very popular for DSL), however have comparably small marginal costs for delivering their service. Therefore, a certain revenue contribution over time is required in order to compensate for the initial costs. What service providers often neglect is, that these high acquisition costs are not really a prerequisite to win new customers and that overall margin counts, not only margin on service delivery.
3. Especially the telecommunications industry is fixated on churn rate as a key performance indicator and not profits per customer or for the company. That seems to justify overly investing in customer retention and loyalty initiatives.

With this knowledge in mind, take a look at your loyalty programs and their real impact on profitability. Try to monitor profitability per customer, invest in your customers more carefully based on their duration/profit ratio, and get rid of customer retention as the key metric to measure your company performance.

References: 

The Mismanagement of Customer Loyalty, Werner Reinartz and V. Kumar, Harvard Business Review, July 2002

Getting the Most out of All Your Customers, Jacquelyn S. Thomas, Werner Reinartz, and V. Kumar, Harvard Business Review, July-Aug. 2004

© Stephan Hesslich

A common assumption is that satisfied customers are more loyal in the sense that they stay in a longer relationship with the supplier. However, marketing research has proven that this linkage is not always so strong and that it largely varies by customer segment and industry. Therefore, vendors and service providers should not rely on such effect, also because the stand-alone value of customer loyalty is not very clear as I will outline in one of my future posts.

A much clearer benefit of customer satisfaction seems to be a positive effect on willingness to pay and price sensitivity (per item but also in terms of overall spending).

So, if customer satisfaction has a price-related value, the question then is: What influences customer satisfaction?

Product quality

Well, one important driver in both consumer and business settings is product or service quality. In addition, for business customers the following attributes related to vendor performance have an impact on customer satisfaction:

Sales representative performance

This includes the ability of sales representatives and account managers to address customer issues, to understand key strategic issues of the customer, to know the customer business processes, to be easily reached, and to provide information on current market conditions. Interesting here is, that a longer relationship between the account manager and the customer has an additional positive effect and can compensate for weaker performance in the other areas.

Product line

This relates to the breadth of the product line portfolio and the ability to deliver a comprehensive solution.

Responsiveness

This means the time between an addressed inquiry or issue and the response by the sales representative, the time to resolve issues, and the ability to provide quote responses in time.

Delivery

This relates to the vendor’s ability to deliver the solution in the agreed time and quality. It also includes the degree of matching committed and delivered functionality and features as well as the ability to provide flexible delivery options.

Revenue and margin

For cloud product vendors additionally important, but not crucial, criteria for customer satisfaction are the revenue and margin that your product generate for the customer (who in this case acts more as a channel partner).

Another two key findings are:

1. Negative performance has a greater impact on overall satisfaction than does positive performance
2. The link between customer satisfaction and willingness to pay is non-linear, so that from a certain point on increasing satisfaction does not translate into higher willingness to pay

The combination of these two suggest to focus more on avoiding customer dissatisfaction than on investing too much in customer satisfaction. To maximize overall satisfaction, attribute performance should be optimized, not maximized. For any given factor, negative performance should be eliminated first before focusing on positive performance. Also, it is important to always monitor customer satisfaction, so you can react early enough and balance your measures.

Since you want exploit higher willingness to pay also for higher prices, you need to create customer satisfaction already in the pre-sales phase as well. For that it is very important to both enable the customer to trial your product or service before the actual purchase and to have an excellent product presentation highlighting all the benefits without setting false expectations.

References:

Linking Customer Management Effort to Customer Profitability in Business Markets, Douglas Bowman and Das Narayandas, Journal of Marketing Research, Nov. 2004

The Effects of Customer Satisfaction, Relationship Commitment Dimensions, and Triggers on Customer Retention, Anders Gustafsson, Michael D. Johnson, and Inger Roos, Journal of Marketing, Oct. 2005

Do Satisfied Customers Really Pay More? A Study of the Relationship Between Customer Satisfaction and Willingness to Pay, Christian Homburg, Nicole Koschate, and Wayne D. Hoyer, Journal of Marketing, April 2005

Satisfaction is Nice, But Value Drives Loyalty, William D. Neal, Marketing Research, 1999

Do Satisfied Customers Buy More, Kathleen Seiders, Glenn B. Voss, Dhruv Grewal, and Andrea L. Godfrey, MSI Working Paper, 2005

© Stephan Hesslich

• A plausible categorization of the partners into the various partner levels
• Attractive program-specific benefits for the partners

Probably 90% of all partner programs offer the three partner levels Silver, Gold, and Platinum. So, if you design a new program, you can be a bit more creative in naming the partner levels. Sometimes it can make sense to have more than three levels, but that really depends on how fragmented your partner base is. I think it should never be more than five, because then it will begin to be confusing for the partner.

In most partner programs, the partner categorization is done based on the performance of the partner (usually revenue they make for you) but in my opinion it is more effective to categorize based on the partner potential. Of course, linking partner benefits to their actual results is a strong incentive to perform well. On the other hand, partners with large potential should be more attracted to your partner program than partners that are already in the program. An outlook to gain large benefits at some point in the future when business with your solution is still uncertain, is often not very attractive for potential partners. Besides, partners with large potential are often aware of their capabilities and simply expect to be treated accordingly from the beginning. The criteria for assessing a partner’s potential can be linked to their installed base, for example the number of existing customers, website visitors, number of stores, etc.

Be accurate with designing the bands of the partner levels. There should not be much overlap, the levels should be a real-world reflection of typical partner segments and it should be very easy and transparent for each partner to understand their categorization into the individual partner level.

Now, let’s look at designing the program benefits. The most common benefit is a price discount. Such discount can be quite easily assigned to the various partner levels. The price discount should enable an attractive margin for the partner and should consider that better performing partners might have higher sales costs per unit (COGS = Costs Of Goods Sold). So, higher revenue should not be punished with lower margins by the program.

A bit more difficult is to decide on additional benefits for each level. Such additional benefits should include the following elements:

1. Generosity:

Offer more things that you usually charge for. This can include for example training sessions, professional services, printed manuals, marketing material, etc.

2. Enabling:

This may sound counter-intuitive but to offer more education and tools to enable the better performing partner to be even more successful can be specifically rewarding for strong partners. Since they have already made some investments into selling your product and apparently acquired some skills, such partners can benefit above average from additional enabling efforts. Also, especially marketing support can be more effective with partners that already built up a brand as a seller for your products. Enabling tools can include marketing material and training as well as individual account management and in-depth performance analysis together with benchmarking against other partners.

3. Flexibility:

Allow more room for customization and individual adaptation for the higher partner levels. This is often greatly appreciated since it enables a stronger differentiation and even more competitiveness for the strong performing partners. Also, since in many cases the stronger partner are also larger companies, their processes and IT landscape might be more individual and actually require more customization. Beside customization of the product or integration with other systems or processes, also more flexibility regarding the terms and conditions can be a big benefit and an incentive to be categorized in a higher partner level.

Once you have designed your partner levels and the benefits, it cannot do any harm to verify it with some partners and ask for feedback, both before you have introduced it in the market and after.

© Stephan Hesslich

• You signal to the market that you have many interested partners, in fact so many that you need to manage them through a generic program. That message makes your company appear very attractive for partners and gets them interested in learning more about it.
• Your sales team can efficiently manage partner prospects by providing information on prices and benefits based on the program. Dealing the same way with every partner ensures that your partners feel treated fairly and in a professional way. It also enables partner performance assessments, comparisons, and drawing conclusions, which can lead to an adaption of the program and resulting better partner performance.

There are three important elements of each partner program:

1. An effective and credible categorization of the partners
2. Revenue commitments
3. Program-specific benefits for the partners according to their partner level

The categorization of partners and how to design different partner levels and benefits I will discuss more in Part II of this article.

So, why a revenue commitment? Well, usually there are well performing partners and not so well performing partners. There is no way to know in advance, before they actually become partner. In my experience there is no general criterion that – if fulfilled – guarantees the success of a partner. Therefore, you need to secure a certain revenue level, even if the partner does not perform as desired. Another, not unimportant, aspect is that if your partner accepts the revenue commitment you can assume a minimum level of financial strength of the partner company.

Also, products from companies that require revenue commitments are usually more successful for the partner itself:

• With the revenue commitment, the partner company makes an investment. That usually puts the product higher up on the strategic agenda. Because there are costs to be compensated, resources within the partner company are assigned more easily and with higher priority.
• Programs that require a commitment single out partners that just look for products they can offer opportunistically to their customers. Therefore, revenue commitments ensure a certain qualification level of the reselling partners in the market and can avoid price dumping.

So, the big question then is: How high should the revenue commitment be? Obviously, there is a trade-off between upfront secured revenue for you as a company and the business case and incentive for the partner. Therefore, the commitment should be as conservative as necessary and as stretched and ambitious as possible.

How high the commitment should be, depends on how your product is sold by the partner. Usually you can assume that they can sell it into their existing customer base, otherwise there would be no leverage. Therefore, the number of existing customers can be a good basis. Depending on how your product is bundled with, complemented and positioned next to the core offering of your partner, a realistic target typically is to win 1-10% of the existing customer base. Remember, the commitment should be incentive-compatible, so it should still be a bit below of what your partners believe is realistic. It should also be achievable within a short time (usually within 6-12 months), so your partner can achieve a fast break-even on the commitment. Therefore, when you first introduce the program, you might want to start with a low commitment and monitor how your partners perform. After a while and with some reference partners you can then adjust it and increase the commitments bit by bit if desired.

© Stephan Hesslich

However, “price fear” and the resulting low-price-strategy are wrong! Here is why:

1.  Price is based on value

If you did your homework, your price is based on the great value that your new product delivers (see also one of my earlier posts). Of course there usually is some price adaptation to do when you first enter the market. You now get feedback from your prospects and can see if they have the same value perception. But once that is verified, you should be confident that the value that you provide justifies a good price for it. Be aware that compromising on the price will diminish the value of your product in the eyes of your customers.

2.  Establish a premium brand

To base your brand on being the cheapest in the market is no credible positioning for a start-up. Low prices are usually associated with mature, standard products that are easily available and for which quality, sustainability, etc. do not matter as much. Your target audience will therefore assume the same about your product, which doesn’t work very well for innovative products. For a new start-up company it should always be the goal to establish a premium brand in the market. And premium brands always go along with high prices.

By defending your price you will also establish an image in the market that reflects confidence of your sales and marketing people, a strong belief in your products, and strong negotiation skills of your sales guys. Those things are also key in order to build up a strong brand.

3.  Low-cost-strategy not viable strategy for high-tech start-ups

Low prices can only be sustained in the long run if they are based on low costs. However, low costs require economies of scale. And economies of scale require long experience in the market, large volumes, streamlined processes and a rigid cost structure in your organization. All those things do not exist in start-ups that normally try to use all their creative power to develop and market innovative products. Therefore, a low-cost strategy can never be valid strategy for innovative high-tech start-ups.

Ok, so prices should be high in principle. But what about the so-called distribution pricing strategy? Distribution pricing strategy means to start with low prices, get a large market share and then increase prices. While this is still a valid strategy in many areas, there are three problems with it for start-ups:

1. That you follow such a strategy will not be transparent to your customers. Therefore, as long as you are offering the “distribution prices”, you will still position your product as a low-price product. To change that positioning will require quite some efforts.
2. Your customers will get used to the low prices and it will be very hard to raise prices again. It might result in losing many customers again, which will defeat the purpose of this strategy.
3. This strategy requires time and therefore capital. Obviously it takes some significant market share and bargaining power to be able to raise prices. To achieve such a position is usually a fairly long process.

So, justify your price and resist the temptation to provide large discounts or constantly lower the price just because customers ask for it. Arguments like “I don’t ever want to lose a deal to a competitor” or “I want my sales people to meet their targets even if that requires large discounts” are too near-sighted. They will create a “low-price oriented” culture in your company, something that is very hard to change. In the long-run you will pay for such potential “quick wins” with declining revenue growth and slim margins, a trade-off you don’t want to make.

© Stephan Hesslich

Costs for customer-related expenses in such a comparison can only be accounted in total, meaning for the entire customer lifecycle, or per customer transaction or purchase.

1.       Total Customer Lifecycle

Let’s first look at this from the high-tech sales perspective: Presales time in high-tech sales is usually 3 to 24 months. However, the average customer lifecycle is usually 2-3 years, often even 5 years and more. Therefore, a conservative ratio of presales to after-sales time can be assumed with 1:3.

It can be assumed that time correlates with effort here. In the presales phase there might be more sales resources involved, after-sales you usually have more technical, helpdesk and finance/administration resources involved. Presales might require a higher frequency of communication with the prospect; however, also customer retention requires constant account management and regular customer communication. So, alone from the time and effort spent it is clear that customer retention requires a lot more effort and resulting costs across the entire customer lifecycle.

This especially true for cloud products where customers have rather become sales channels. It usually takes quite some effort to enable the new partner to sell your product effectively. Such efforts naturally only begin after the deal is signed.

While this is specific to high-tech sales, it is similar in other settings. Initial costs for marketing and branding, which are assigned to customer acquisition might be quite high, but also existing customers need to be reassured of the value of the supplier’s offering and marketing and branding is still required to keep even existing customers loyal.

For some products or services, e.g. in telecommunications there might be large initial setup costs to either register the customer as such in the company with all involved process or to provide the product or service to them. However, nowadays, the internal customer setup costs are usually very slim and one-time costs related to initially providing the product or service to the customer are either charged separately or priced into the core product or service.

2.       Customer Purchase

So, let’s have a look at individual customer (repeat) purchases. An assumption for above sales myth could be that customers, once they are won, might require less efforts (and therefore costs) to be served and to conduct repeat purchases than for the initial purchase. Arguments on that include that existing customers are more familiar with the company’s transaction processes, require less helpdesk support and less presales consulting.

However, as also demonstrated by the groundbreaking research from Werner Reinartz and V. Kumar (“The Mismanagement of Customer Loyalty”, Werner Reinartz and V. Kumar, Harvard Business Review, July 2002), existing customers, especially large key accounts, often know how to exploit their bargaining power. That results for example in constant requests for specific features, demands for premium service, custom-tailored purchase and support processes, not to mention specific price discounts. That often leads to unprofitable repeat purchases, which means that retaining the customer not only costs more than acquiring them but even more than they actually return in revenues.

As we see, costs for acquiring a customer – as long and stretching it might sometimes seem for the responsible sales persons – are much lower than for retaining that customer. In more advanced customer management, acquisition and retention costs can actually be optimized and balanced in order to optimize customer profitability but that will be the topic in one of my future posts.

References:  The Mismanagement of Customer Loyalty, Werner Reinartz and V. Kumar, Harvard Business Review, July 2002

© Stephan Hesslich

There is an interesting study by the US Office of Fair Trading, conducted by the University College London. They investigated how customers react to various promotions. Even though it was an academic text design and the setup was consumer-centric, I believe it represents general customer behavior and can be applied to other settings as well.

Five different promotion types were subject of the study:

• Drip pricing, where buyers see only part of the full price up front and price increments are dripped through the buying process
• Sales pricing, in which a sale price is given and a pre-sale price is also given as a reference, e.g. “was 2,- EUR and is now 1,- EUR” (actual prices are identical to baseline pricing)
• Complex pricing, where the unit price requires some computations, e.g. “3 for the price of 2”
• Baiting, in which sellers may promote a special price but there is only a limited number of quantities actually available at that price
• Time limited offers, where the special price is only available for a pre-defined, short period of time

The result of the study was, that – unlike predicted by standard economic theory – buyers make different purchase decisions than they would with straight unit pricing (here called baseline pricing). For each price frame, the study investigates the overall revenue for sellers, advantages for the first seller offering the promotion as well as purchasing errors (buying too few or too many units than was optimal).

The quite surprising result is that Complex pricing provides the largest benefits for sellers with the least purchasing errors and welfare loss for the customer.

Time-limited offerings are very popular but such a promotion only provides an advantage if you are the only or the first seller offering it and if the promotional price is competitive. However, even for the first or only seller, revenues are just a little bit higher than with baseline pricing. In any case, Time-limited offerings can be used as a tactical instrument to accelerate the purchase decision. Some buyers in the study reported that this frame compelled them to buy and some others reported that the special offer enticed them to buy without searching further. But be aware that this only applies to settings where bargaining power of your customers is smaller than your selling power, meaning you as one provider have many buyers. If there are only few buyers and they are aware of their purchasing power, Time-limited offerings can become ineffective.

Baiting provides significant benefits for the first store/seller visited by the buyer, so the comparative advantage for a seller can be strong. However, this price frame is not really feasible for service providers and software vendors since they usually do not have limited quantities of their products and services. Besides, since you cannot control that customers come to you first before other providers, you would have to make sure you are the only one offering it in order to benefit from the promotion.

Not recommended at all can be Drip pricing. It provides no increase in revenues compared to baseline pricing, but creates the largest welfare loss for customers due to purchasing errors. This can be assumed to lead to lower customer satisfaction and brand value of the seller, which could lead to less repeat purchases. The study reports that surveyed customers felt annoyance, disappointment, and irritation because the additional charges were not shown with the base price. Also, in some industries and countries there are some legal issues with such a price frame.

References:  The Impact of Price Frames on Consumer Decision Making, Office of Fair Trading, May 2010 (http://www.oft.gov.uk/shared_oft/economic_research/OFT1226.pdf)

© Stephan Hesslich

In my experience of selling cloud products (and really, in high-tech software sales there will be nothing else pretty soon) I identified four key buying influences:

1. Product management
2. The technical buyer
3. The economic/financial buyer
4. The buyer representing the customer (if that is not product management)

Re 1.: The most important group is the product management group. They decide whether or not it makes sense to add your product to their portfolio. Usually they also cover the financial part and develop the corresponding business case. In most cases they also represent the customer’s view and understand the addressed market very well. In some organizations, where product management is more technical oriented, the customer perspective is covered by either Sales or Marketing departments.

Re 2.: Another buying influence, often as powerful as product management, is the group of people that is responsible for assessing the technology of your solution. For cloud products, that usually relates to the capabilities to integrate into the existing IT landscape as well as to easy and inexpensive operations.

Re 3.: Also an important influence is the financial decision maker, especially when they are significant upfront investments. That can either be the CFO of the company and/or the finance head of the respective business unit. However, in most cases they rely on the business case developed by their product management.

In the past, when the focus in software was mainly on users, the buying center also included someone that represented them. With cloud products the user is now the customer of the buying company and therefore usually represented by product management.

There are some books that claim to have identified a so-called coach as another buying influence. Well, I have never seen such role in a buying center. I wonder who would that be since it obviously would be someone not directly involved in the decision but rather moderating and helping to get the right information. I certainly have seen people in such a consulting role but they have hardly been a significant influence.

Now that we identified the key buying influences, the question is how to win them for your product. Many books suggest that you as an account manager need to manage each buying influence individually. In my opinion you should be very careful with that. There is always one main contact that manages the evaluation project and drives the decision internally. It is also the task of this person to convince all other decision makers internally. They are assigned by their management to do so and it’s their own understanding of their role. Usually, their internal convincing power is much greater than any external party can ever have. Therefore, bypassing that person and approaching the other parties directly needs to be well managed and in coordination and agreement with the main contact. Otherwise you will make the internal coordinator and owner of the decision process look stupid and you signal that you don’t trust her to convince all internal buying influences sufficiently. Often it is sufficient to convince the key person driving the decision (in our case typically the responsible product manager or head of product management).

Another common stereotype is that the decision is always done at the top level of the company and you always need access to the Chief Executives in order to convince the company to decide for your product. In my experience this is not true. In very rare cases the decision is done at the top level based on your input and relationship. Usually, the top Executives rely on the responsible people in their own organization and that for a good reason: They hired them to make such decisions and they trust their competence and opinion (otherwise they probably wouldn’t have moved them into that position). If they decided against them or would allow to be influenced directly by the supplier, they would make their own employees look unnecessary and not trustworthy. No one who is really great at his job would accept such “top-down overruling” in the long run. And in fact, no top manager who is really great at her job would do it.

The resulting strategy to approach a customer organization is typically a bottom up strategy. Identify the responsible business head or project leader. It sometimes might make sense to approach the Chief Executive level directly but then only to get referred to the right contact within the organization. Consider this in your customer communication and tactics!

© Stephan Hesslich

If we look at definitions of outsourcing, they mainly focus on either one of the following criteria:

1. Contracting out the task
2. Having the task performed outside of the company

Both criteria do not really seem to capture the main issue.

The mere development of a contractual agreement that specifies the terms of outsourcing is not a big deal. Also, in today’s flexible world of freelancers, consultants, part-time employees, etc. we often already have contractual relationships with people that practically act as in-house employees and not as outsourced contractors.

If we look at the second definition, outsourcing means giving the task to an outside company. In terms of Sales Outsourcing, that just means adding such a company as a sales channel. Scaling your sales through channels is a common means, so in that sense Sales Outsourcing is absolutely useful. If you have built-in or design-in products, it might make sense to completely outsource your sales. Otherwise, sales channels are useful in addition to a direct sales force. Especially for start-ups that sell directly to customers, it is very important in the beginning to learn from  customer interactions in order to adjust the offering. Here it is crucial to select the right partners and to manage them effectively (but that will be the topic of another post).

Therefore, Sales Outsourcing, at least partly, can be a good way to scale your business. However, there are also companies that call themselves Sales Outsourcing companies. In order to decide whether or not to work with such companies, the second definition above seems incomplete because Sales Outsourcing also depends on how the external companies provide sales functions. That is why another main aspect related to outsourcing is how information is transferred. Classical channel partners usually provide the complete stack and sell your products and services under their own responsibility. Sales Outsourcing companies do not act as autonomous sales partners but rather provide specific sales services, mostly on behalf of their client company. So far, I have seen two kinds of Sales Outsourcing companies:

Tele-Sales Agencies

These companies usually only generate more or less qualified leads through their own marketing and contact channels. They act as a black box for standardized customer contacts. Therefore, tele-sales agencies are only effective for easy-to-explain commodity products either with a strong brand or already established in the market. Tele-sales agencies are usually paid with a fixed fee per customer contact or meeting, sometimes combined with a success bonus.

Sales Outsourcers

Sales Outsourcers only provide partial sales process management or lead generation. They usually also act as a black box that calls in (pre)sales resources from the client company. They therefore sort of work as a direct sales force with much less control and less transparency. This is very critical for start-ups that require close and instant market feedback and that still often need to adjust their positioning, offering, product presentation and customer communication. Sales Outsourcers usually require high upfront setup fees as well as high monthly fixed fees, plus sales commission and communication costs. It is much more effective and less expensive to build up a direct sales force yourself.

There is also the specific case of Sales interim managers. That is not really outsourcing. They usually don’t do operational sales but rather focus on Executive sales management like managing the sales team, developing the sales strategy, etc. They are usually daily present in the office and are fully transparent in their work.

© Stephan Hesslich

In general, Net Neutrality means that carriers, network operators or in general Internet access providers (and not, as often stated, mere service providers), which provide users access to the Internet, should treat all content equally in terms of access speed and load performance. (Note: To make my point clear, I will use the term Internet access providers in this article, commonly they are called Internet Service Providers). This concept is mainly related to web content, to prioritize applications like voice (VoIP) with technologies like PVS or MPLS is already common practice.

When discussing whether or not content providers should pay to get their traffic to users, two aspects need to be considered:

1. What is the actual structure of the value chain?
2. What is the potential impact on innovation and overall economics?

Regarding 1. – value chain:

If you look at a typical service value chain then each link of the chain procures services from the preceding link, adds value to it and sells the, now value-enriched, service to the next chain link or the end customer. Therefore, each service at any stage of the value chain includes the services of all preceding chain links.

So, if a service provider pays the network operator to use its network, the service provider must be able to include network access in its own service. Just like a train ticket already includes usage of the railroads and just like energy from a utility already includes access to the energy grid through the plug.

But that’s not how it works with content providers today. Content providers are not able to include network access in their services. Access to the Internet, either through DSL, Cable, GSM, UMTS or others, is provided by Internet access providers, which usually procure it from network operators.  Therefore, the business model is not in place that allows charging content providers for network utilization. Content providers themselves don’t use the network, their customers do. And they already pay another company for network access.

As we see, end customers and Internet access providers are in one value chain. Internet access providers provide network access, the end customers pay for it. Content providers and end users are also in one value chain, where users pay for (well, maybe not always, but actively choose) services provided by the content provider. However, content providers and Internet access providers are not in the same value chain. If content providers now try to get individual deals with network operators to get their traffic prioritized over others, regulatory authorities should be alarmed. With such a dea,l the content provider would get an advantage, which the end customer does not explicitly pay for, probably isn’t even aware of and certainly not always wants (because the user might prefer other content that comes from a company without such a network prioritization agreement).

Regarding 2. – impact on innovation:

There is also the argument, mainly coming from venture capitalists, that giving up Net Neutrality would discriminate start-up companies because they would have to bear high additional costs to get their content to their customers.

Due to my profession I usually take the side of start-up companies, but in this case I find it hard to follow the argument. If network providers would charge them for their traffic, this would have to be based on the total bandwidth utilization and therefore on the number of users. However, the number of users usually correlates with the growth of the company; therefore the associated costs would increase with the company’s size just like most other operational costs such as office space and employee-related costs. Of course, for companies like YouTube with a lot of high bandwidth traffic and comparably low revenues (if any at all) this would be more difficult, but I see that as specific to the respective business model and not as a general obstacle for innovations or new start-ups. Some start-ups just have higher costs and need larger investments than others.

© Stephan Hesslich

But again, what is cloud computing? Have a look at the following video for a pretty good introduction. It is 4:52 min. long:

Cloud computing has a deep impact on the way software is offered to the customer. The main differences are:

1. You need a service delivery platform that can host your software and provide it as a service to your customers. If you don’t want to or are not able to build up this infrastructure on your own, you need partners that can provide the service for you.
2. The software needs to be specifically designed for it. As Microsoft, SAP and many others painfully learned, software designed for on-premises installation simply can’t be turned into a SaaS application. It needs to be re-developed.
3. What used to be one-time perpetual license revenue is now subscription revenue spread over many months. That has a great influence on revenue growth and cash-flow.

The challenges that arise from these differences need to be addressed by every software vendor. However, if you as an ISV can manage 2. then points 1. and 3. can also provide some advantages:

• You can offer your software to be resold by service provider partners like hosters or ISPs. Since the largest of them have millions of users, they provide a completely new dimension of sales channel. Main condition however is, that your software fits into their portfolio and they are able to market it effectively.
• You can build up a guaranteed revenue funnel for the next years. Even with a high churn rate you have revenues secured from your existing customers at the beginning of each fiscal year. Therefore, your revenue (and forecast) for the year does not completely depend on getting new customers. For details on this, please see also one of my previous posts.

So, with cloud computing, software sales in ISVs has shifted to both selling a service instead of a software license and to managing service provider partners, which used to be the job of specific channel managers.

From a product and strategy perspective there are two more points to keep in mind:

1. Competition will intensify as the number of sales channels will shrink. If service providers become the main sales channel it is clear that they will focus on one (usually leading) application per category. Also, for many categories there are much less service providers than application vendors. For example, there are currently more than 1,000 CRM applications in the world but only ~200 large service providers. As not all vendors will find service provider partners as channel, a large consolidation of vendors will be the consequence.
2. With SaaS you are closer to the customer and to the user. Since they now pay for a monthly service, they have different expectations to the frequency of updates. You can use this virtually stronger presence of your product to get better feedback more often from your customers in order to adapt and improve your product faster.

© Stephan Hesslich

Face-to-face meetings are only one way of communicating with the customer, besides telephone and email. Meeting the customer face-to-face is only required if:

• You need to add a social or emotional component. That is usually required in the beginning of the sales cycle in order to build trust and a personal relationship with the prospect. It can also be necessary later in convincing buying influences or in price negotiations.
• You need to explain or resolve a complex matter. That can include a detailed, comprehensive  introduction of your offering. Other examples could be resolving complex problems or frictions, misunderstandings, etc. that might have occurred.

That implies that customer meetings are only required in project business (and project here relates to the way you sell, not to the way you implement your solution). For standardized or inline sales, no meetings with the prospect should be required at all (unless the volume requires a sales project).

In high-tech project sales, you have sales cycles of typically 3 to 12 months, during which you have frequent interactions with your prospect (total sales cycles might be even longer). In my experience, with customers I had the most intense interactions, I had on-site meetings every 2 months. However, in most cases you have customer meetings every 3 months at average.

To be conservative let’s assume you can meet only one customer per day, the rest of the day you spend travelling. That means you meet 5 customers per week or ~22 per month. With the assumed meeting frequency of one in 3 months that would translate into 66 prospects that you would have to manage simultaneously (and actually also quite a large territory to cover).

Another aspect is sales costs. As a general rule of thumb I would assume that, if the initial deal size is below 50,000 USD or EUR, you should try to avoid meeting the prospect at all, unless they reside nearby or you can easily meet them at trade shows or other events. But even if the deal size is higher than 50,000 USD/EUR you might want to adjust meeting frequency to the deal size. Costs per meeting are usually between 2,000 and 10,000 USD/EUR, depending on how far you have to travel and with how many colleagues you appear. If you meet the customer 4 times during a sales cycle of 12 months this would add up to comparably quite large travel expenses. If the deal-size then is only 50,000 USD/EUR you would give up a substantial portion of your gross margin. Even if you are a software company it will be difficult to make that a profitable customer.

Now, if we assume you meet prospects with smaller deal-size less often than propsects with larger deal-size, the number of concurrently managed sales projects would even increase (assuming the same sales cycle of 12 months for both). Just to illustrate an example:

• 50% of your prospects have a deal-size of 50,000 USD/EUR and you visit them only once
• The other 50% of your prospects have a deal-size of 100,000 USD/EUR and you visit them 4 times
• Then you would take 11 of your monthly visits to 50,000 USD/EUR prospects, of which you then would have 132 (if you visit each once per year, you visit all of them in 12 months, 11 visits x 12 months = 132 prospects)
• The other 11 visits you would take to 100,000 USD/EUR prospects, of which you would then have 33

It is pretty obvious that managing 165 prospects at the same time is impossible. Also, considering the usual hitrate of 25% and a sales cycle of 12 months, this would mean closing more than 40 key accounts per year and achieving new bookings of ~2.5 mill. USD/EUR. Well, I have never seen a single sales manager that is able to make that kind of bookings per year and at the same time close such a high number of key accounts p.a., year over year.

There are also some other issues for sales people with always being with the customer on-site:

• It is impossible to schedule all customer meetings so they perfectly line up right after each other.
• When are the poor sales guys supposed to do all the back-office work like preparing information, writing proposals, creating quotations, etc.? While travelling? Not to mention submitting internal sales reports, clarifying internal product issues or attending product training and last but not least – managing their existing customers.
• Traveling is exhausting. If you send your sales people 5 days a week traveling, they will burn out very soon.

So, think twice before you ask your sales people to spend “as much time as possible” on-site with the prospect. Meeting customers is not an end in itself. It should be done whenever strongly required by the prospect and when the circumstances command it.

© Stephan Hesslich

The reason behind it is that most Sales Executives believe lower prices will help them sell more. Well, that is usually true if you only look at the number of quantities, but in most cases you want to increase revenues, not quantities. To understand the interrelationships between price, quantities and revenues let’s have a look at the demand curve. The demand curve exists for almost all goods and – if they are sold quite frequently – it always looks similar to the following:

Obviously, revenue (= A in above picture) is the product of the number of sold quantities and the price per quantity (= seat, license, unit, etc.). Therefore, revenue can be maximized by finding the optimal price, which leads to a corresponding optimal number of sold quantities. However, the demand curve concept is used here only to demonstrate the general impact of changing prices and not to calculate the optimal price point. Quite frankly, in high-tech sales, the exact demand curve is never known.

There are two important things to understand about the demand curve:

1. It is usually not a straight line with a constant gradient but an isoquant, there is only one optimal combination of price and number of quantities, which maximizes revenues
2. The demand curve might change over time and each customer segment might have its own demand curve

So, if there is one ideal price point, the goal should always be to reach that optimal price and maximize revenues (provided that this goal fits your strategy).

Therefore, lowering prices only makes sense if you are above the optimal price level. This can be the case if you have started with high prices because so far you have been addressing a less price-sensitive audience in the high left part of the demand curve (usually early adopters or enthusiasts) and now want to address a broader audience. This could be more mass market type or more price aware customers. In that case, it absolutely makes sense to lower prices. But think twice if that is really the case or if you just assume you would reach more customers. Also, lowering prices should always go along with lower costs of goods sold (COGS), so you will not destroy your margin. Of course there can be economies of scale that come into effect but addressing a broader audience often also requires more standardized products, less customization and a more streamlined sales and product delivery process.

Vice versa, raising your price only seems valid if you are below the optimal price point. This can be the case, for example if you used a penetration price strategy to reach a large market share and offered an especially low price or even offered your product for free. It can also be that you are simply not aware of the willingness to pay of your customers and how much value they perceive in your product or solution. In that case and especially if price-sensitivity of your customer is believed to be fairly small, raising prices might not have much effect on the number of customers or quantities and can help you to increase revenues. But, also raising prices should be done carefully. If you do it a critical point of the demand curve, the effect on the number of customers or quantities might be strong.

So, here are some things that you can do to manage the uncertainty about the demand curve and to get a better feeling on what it might actually look like:

• Monitor closely the reaction of your customers; is it easy for your sales force to sell the prices or do they get a lot of resistance
• Test price changes with a small group of customers of the same segment and compare (however, sometimes here the issue is isolating this group from other customers, so customer price differences do not become visible in the market)
• Experiment with discounts; give your sales force various discount options and monitor the provided discounts closely; however, this method is not as powerful since customers react to relative prices (compared to the list price) and they react to price changes by Sales; therefore the achieved prices might not reflect ideal market prices

There can also be a strategic reason to stay with your price above or below the optimum:

To set your price above the optimal price point can make sense if you want to position your solution as a luxury good with explicitly high prices. Another reason might be that you want to (or need to) limit the number of sold quantities due to capacity limits of your organization. This can be a very clever move indeed, but also takes some courage, especially in start-ups, which are always impatient and eager to grow (even though they often cannot manage the growth and lose customers they cannot serve properly).

To stay below the optimum price can make sense if you want to position yourself as someone offering the lowest price in the market because that is part of your marketing and branding strategy. It is also a valid approach if you want to reach a high number of sold quantities in order to realize economies of scale. In that case you should make sure your economies of scale enable at least the same gross margin that you would have with lower quantities but higher prices (unless of course there is some other strategy that justifies trading a large market share against profitability, for example to win certain customer segments before your competitors do).

© Stephan Hesslich

To view the HBR article click here:

The BP Brand’s Avoidable Fall

As I outlined in my post from 28 Feb., branding activities (which are usually comparably expensive for any company) become quite ineffective if you make a brand promise that you cannot deliver on. In fact, this does more damage to your brand than not having a brand promise at all. You have to make sure that:

• Your branding campaigns leverage your competitive advantage
• Your brand promise is clear and credible
• You can fulfill your customer’s expectations that your brand raises.

To read my blog post again click here:

Effective Branding

© Stephan Hesslich

In my experience the following 5 factors are crucial to sales success and sustainable revenues:

1. Exact Customer Segmentation

When you first look at the market you want to serve, you usually identify all customers that might see some value in your solution and are willing to pay for it. However, very often customers vary by purchasing behavior, price sensitivity and by the type of requirements they have to the solution or the sales process. It is important to identify the differences and to cluster your customers into segments accordingly.

2. Specific, Complete Offering

The main purpose of such a segmenting exercise is if course to be able to provide a specific solution to each segment. The solution can be based on the same product and technology but needs to address the individual segment needs, for example through different packaging, positioning, pricing, etc.

3. Connected Sales Strategy

The sales strategy defines how to approach the market and how to provide your solution to the customer. That includes lead generation, customer prioritization, channel selection, etc. It is important that the sales strategy fits to the individual customer segments and specific offerings.

4. Effective Management of Sales Process

Managing the sales process as a whole from lead generation to closing as well as managing the individual processes with the prospects from first contact to PO is also an essential success factor.

5. Consequent Customer Care

Often neglected, especially in “hunter”-organizations focused on new customer acquisition, the post sales process is very important as it determines repeat purchases and also can influence other prospects through word of mouth marketing.

When you look at your sales success, especially in the early market introduction phase (which for most start-ups can last several years), it is important to consider all 5 success factors. Often Executives in start-ups underestimate the effect of the more strategic elements and focus too strongly on individual sales manager performance and process efficiency.

To demonstrate the meaning of a holistic approach, let’s have a look at two examples:

First example: Revenue growth not strong enough

Weak revenue growth typically leads to efforts in improving the sales process, in generating more leads or in expanding the sales team, while the main reason might lie somewhere else. Considering the sales success factors described above, the default focus usually is on success factor 4, however, other reasons might be:

• “Wrong” customer segments defined or none at all (factor 1 not fulfilled)
• Offering not adequate, incomplete or price not right for the targeted customer segment (factor 2 not fulfilled)
• “False” customer approach, not enough or not the right sales channels (factor 3 not fulfilled)
• Customer care issues prevent subsequent sales from existing customers (factor 5 not fulfilled)

Second example: Low customer satisfaction

Efforts to increase customer satisfaction usually only focus on improving customer care (success factor 5). However, also here the problem might be caused by issues with other success factors:

• Customer segments not defined right or “wrong” customers selected (factor 1 not fulfilled)
• Offering makes false promises on customer value or scope of application (factor 2 not fulfilled)
• Customer-critical issues are not controlled by direct sales force or partners (factor 3 not fulfilled)
• Wrong expectation-management during the sales process with the customer or top-down push within customer organization without user buy-in (factor 4 not fulfilled)

If all success factors are carefully considered and implemented well, your approach to market becomes more effective and revenues can be generated more systematically.

© Stephan Hesslich

It’s a myth for anyone with no sales experience and especially in start-ups that one of the key challenges in Sales is to know the right people in the targeted customer organization. To understand the meaning of contacts, let’s again have a look at the sales process, for which I introduced an example in one of my previous blog posts.

If you look at the individual process stages, to have good contacts with the customer can be very helpful for the first process stage before C1 in order to start the sales process and to get the chance to introduce your solution and your arguments to the key people. However, even to take that first step often depends on current strategy, resources, and priorities of the customer’s organization, which need to fit as well and which are mostly quite independent from your contact’s influence and good will.

At the later process stages (which are equally difficult to enter) the meaning of initially having contacts is not as relevant anymore. In high-tech Sales, the buying center is normally a group of quite a few people (and not only one person), which will always try to take a rational decision based on arguments and not on personal relationships. Therefore, to move forward towards a positive decision you need to establish good relationships with the buying center, convince them of your offering, and negotiate a deal that is attractive for both sides.

So, we see that having good contacts can sometimes be helpful to speed up the first step in the sales process but is far from being crucial for winning the deal. And that is good news, because there are also scalability issues with relying on sales people with “excellent contacts in the industry”:

1. Recruiting that kind of sales people is limited to organizations that also serve your target customers. Those are usually only your competitors, your or other sales channels, and suppliers of complementary products. Recruiting from competitors creates major issues, because your sales persons have a credibility problem and – if they were good – they already sold your competitor’s product to the customer (which they now would have to replace with yours). That leaves the fairly small space of sales partners and suppliers of complementary products.
2. No matter what they claim, no sales person in the world has good contacts with all potential customers in their territory. Selecting sales people with complementary contacts will be very difficult and in general, good contacts are something that is very hard to verify upfront, before employing a sales person.
3. Also, you certainly do not want to bet your product’s success on your sales people’s personal relationships. That would make them quite irreplaceable and your sales organization very inflexible and dependant.

Therefore, many new contacts need to be acquired pro-actively anyway. Also, markets change and new potential customers appear, for those also new contacts need to be identified and relationships built.

For that reason it is much more important to have sales people that know the targeted customer’s purchase behavior, their typical issues and strategies and how to talk to them to be respected as peers. Even more important is to have sales people that are able to systematically understand a customer’s organization, to identify the right contacts, and to build up good relationships with them.

© Stephan Hesslich

When it comes to managerial decisions, people respond best to arguments given at peer level or higher, but rarely below their own hierarchical level. This is especially true, when they deal with external companies. There is some flexibility in this of course, but you as an account manager have to accept that convincing higher management levels is more effective if it is done by someone who is equal to their position. How far you can reach from your level depends on your own position, your experience and the relation of your company’s size to the one of your prospects. An account manager in a Fortune 500 company can certainly communicate effectively with a CEO of a small company. If the prospect’s company is a medium-sized company with 200 or more employees it might not be adequate anymore to talk to the CEO directly.

With multi-level selling you pro-actively overcome that limitation by pulling in the corresponding level from your own organization. That enables you to convince all buying influences most effectively. You as account manager determine the reach of your influence according to your position in your company. Then you decide whom and when to involve from your company’s organization in order to match the levels of all parties on the customer side.

There are some rules for your own organization in order to guarantee success:

• Define and agree on the roles for each member of the sales team (and in this context even the CSO or CEO becomes a member of the sales team) for the particular sales situation
• Always stick to your assigned roles
• Communicate well within the sales team and explain the goals and tasks for each role in the specific situation
• High commitment and availability as well as a good sales understanding of the higher management levels

There are also two common mistakes often made with multi-level selling:

1. The account manager tries to do everything by themselves because of wrong vanities, egoism, wrong fear to involve management, and so on. However, this will overstretch their role and their influence on the prospect will be not as effective. This can lead to longer sales cycles or lost sales.
2. Sales superiors and management constantly intervene and proactively seek direct actions with the account. This will irritate the prospect since they position themselves as the main contact for them. It will weaken the position of the account manager and will make it very hard for them to defend their role, which can eventually lead to large frustration.

As a general guideline, here some typical tasks of the various roles:

Account manager:

• Acts as direct contact and follows up proactively with the customer
• Drives sales process, agrees on next steps
• Provides information and involves technical colleagues as needed
• Provides and explains business case
• Prepares, sends out and explains quotation
• Coordinates involvement of higher management levels

Head of Sales organization:

• No pro-active customer contact, contact only when involved by account manager
• Provides information and perspective beyond account managers sales area or region, for example customer references and anecdotes
• Explains important company decisions regarding product, roadmap, policies, etc.
• Confirms and defends prices
• Involved in negotiation if peer level is involved on customer side

CSO/CEO:

• Provides information and perspective at company level, for example product or company strategies
• Involved in arbitration and issues that are critical to the general customer relationship
• Final negotiation if C-level is involved on customer side and customer company size is adequate

© Stephan Hesslich

1. Competition
2. Customer value

1. People mainly respond to relative prices. That means they compare the price for your products with alternatives in order to assess the attractiveness of the price. If you offer “20% off” in a sales promotion, customers compare with the list price. If you offer a new product, customers will compare it with existing solutions. Competitive pricing means to analyze the competition and the capabilities of your new offering and define the price based on it. Competition generally encompasses all available solutions from other vendors that provide the same or a similar value. But, your competition also includes all alternative ways to create the same value or solve the same task. If you offer a software PBX, people will compare with a hardware-based telephone system. If you offer a cloud service application, customers will compare with an on-premises application. Therefore, one difficult task with competitive pricing is to analyze the available value/cost combinations correctly. Alternatives to your product might be not quite as good but much less expensive or they might be much better but have a much higher price. To assess where your combination fits in and where you can find the right spot so customers value your product right, can be quite challenging.

2. In the case of competitive pricing the value that you create is cost savings. Other types of comparative customer value can be additional revenue, higher user comfort, a stronger brand, cross selling effects, and so on. It is very important to define and quantify your customer value carefully and to make sure your customers can actually perceive it. You must be able to provide all the required arguments and to know the costs for the alternatives.

Customers usually decide to introduce a new product or replace an existing solution if they can achieve an additional value or cost savings of at least 20 to 30% (better 50%). The price that customers are willing to pay for a product is typically between 10 and 50% of the perceived customer value (remember, if your customer value is additional revenue, the price-relevant value in that case is the margin that the revenue provides). With these thumb rules in mind your product needs to provide an additional value or cost savings of at least 60% compared to alternative solutions. The following picture illustrates the interrelationships:

60% is not a low number and it implies that your solution must be quite innovative. If you provide additional value or if your cost savings do not directly translate into cash savings (for example if they provide time savings), you need to take another important thing into account: your customer’s budget. The value of your product can be very high and your price can be comparably very attractive, if it exceeds the typical budget of your target customer segment, you will not make any sales.

Finally you need to double-check with your business plan: Is the price attractive enough so you can make enough revenue (which obviously is the combination of your price per unit and the corresponding number customers buying them) and enough profit to create a sustainable business out of it. This should be a very obvious task but you will be amazed how many start-ups neglect this part and wonder at a later stage why they struggle so much to make enough profit (if at all).

It always takes some time to establish new prices in the market. Once you have introduced the prices in the market, you need to monitor your customer’s reaction carefully and be quite flexible with your prices. Try to verify as much as possible if the price is accepted and if customers perceive the value that you believe your product has. Explain the value thoroughly and with good arguments and validate them with your customers. Adapt prices quickly to reality if you have to.

© Stephan Hesslich

I differentiate between three main funnel development shapes: Cone, Bottle, and Tube. These idealized shapes characterize the funnel development and can be used to compare with your actual funnel development shape.

The Cone shape is considered to be the ideal shape. Such a shape means that there is a more or less linear screening out of some opportunities in each sales process stage. Therefore, the funnel contains a bit less prospects at each funnel transition point with the relative amount of lost opportunities becoming less and less (This is expected from a normal sales process, the further the prospects move along, the higher should be the probability that they reach the next milestone and eventually become won customers).

The Bottle shape means a usually high screen out of opportunities when they reach point C2 or point C1. This can indicate that you do not address the right audience with your marketing and pre-sales activities. Or that you might have product-related issues that lead to disappointing product test results for the prospect after initial interest has been created. It can also mean that the price might not be right since general pricing is usually introduced in stages pre C2.

The Tube shape means very high transition rates but a generally flat and fragile funnel. The number of closed deals pretty much relates to the number of incoming new leads. Such a funnel development can indicate a very effective sales process with almost no loss of opportunities along the process. But it can also indicate that no new leads are coming into the funnel and that only very loyal existing customers generate opportunities. The number of new opportunities should therefore be increased dramatically.

Analyzing your funnel like that can provide very valuable insights into your sales process and funnel state. While it might not in all cases be required to aim for the ideal funnel shape, the development of your opportunities across the funnel (and therefore sales process) should be well understood.

© Stephan Hesslich

Chance or accident we usually call something for which we don’t know the probability of outcome. However, events with assessable probabilities we can forecast. If the outcome of an event has a certain probability, e.g. 30% it means that, statistically speaking, 30 out of a 100 events have such an outcome.

(On a side note, “luck” and “bad luck” are terms only related to outcomes with low probabilities and either positive or negative events. We call something lucky if it relates to a positive outcome of an event that had a low probability. For example, if you believe closing a particular deal only has a chance of 10% and you still win it, you will think that was lucky. Vice versa we call an event bad luck if it relates to a negative event to which we assigned a low probability.)

Another important rule from probability calculus is that using probabilities only makes sense if your data sample is quite homogeneous (meaning pretty much of the same customer segment) and if it is large enough. Probabilities should always be applied to the total sample, not only to an individual event. If you look at one particular lost deal, it doesn’t matter if the likelihood of losing it was 80% or just 10% – you lost it. However, if you have a sales funnel with hundreds or thousands of prospects, it is valid to forecast bookings based on the closing probabilities for this funnel.

So, how can you derive these closing probabilities? You need two things:

1. A process that shows your different sales stages, for example the sales process that I introduced in my previous post.
2. The average number of opportunities that historically transited to each respective stage in your sales process. The time period for the sales history to be considered should be 10-20 times of your average sales cycle, therefore at least 5 years if your average sales cycle is 6 months.

Now, for each sales process stage you can count the opportunities that made it to the next stage and derive the probabilities. Most CRM systems store the respective previous sales stage when you set an opportunity to “lost” or “won”. Or you can define a field in which you can specify at what sales stage the opportunity was lost. So, by running some reports from your CRM system you should be able to quickly get a look at your historical sales performance.

For example, if you take a sample of 100 opportunities and the milestones C1- C4 in my sales process, the result could be:

70 out of the 100 opportunities reach C1

50 out of the remaining 70 reach C2

35 out of the 50 reach C3

25 out of the 35 reach C4 and become won opportunities

Therefore, the probability of closing a prospect that is currently in stage prior C1 is 25/100 = 25%. Once they have passed C1, the probability to reach C2 is 50/70 = ~70%, the probability to win it is 25/70 = 35%. For all opportunities the chance to reach C2 is obviously 50% (50/100). Opportunities beyond C2 reach milestone C3 with a probability of also 70% (35/50) and are closed won with a probability of 50% (25/50) and so on. If you draw your historical funnel on these numbers, it looks like this:

This is what I call a Statistical Forecast™. Doing sales forecasting based on your past experience is the most effective – if not the only serious – way. It can provide a robust and reliable forecast. Use these probabilities to create a valid forecast. Do not use the generic closing probabilities preset in your CRM system and certainly do not use verbal statements from your account managers or sales persons how likely they think it is to close their deals. (Such an approach might only make sense if you need a qualitative forecast or “gut feeling” for a small funnel with large projects and if you have very experienced sales people). But, also be aware that your probabilities can change, so keep monitoring your funnel development and watch out for changes.

What the shape of your historical funnel can tell you, you will see in my next post…

© Stephan Hesslich

Let’s first look at the typical sales process in high-tech sales in the IT and telecommunications industry. There are probably more books on the topic than actual sales people out there, but in my experience the following process has been proven to be valid:

Now, if you look at the process you can see that the prospect goes through various stages along the process. At any stage they can decide against your solution and therefore abandon the process. The further the prospect moves along the process, the higher the respective sales stage and the higher the likelihood of closing the deal. So, in each sales stage there are certain sales aspects that are more important and the tasks for the responsible sales person are different. While in early stages the focus is on understanding the buying center and the decision influences, the focus then shifts to convincing the people involved and creating a consensus on the deal. In the later stages the focus is on creating a sense of urgency and driving the process towards closure.

Now, does it make sense to refer to the prospect with different names, depending on their current sales stage? Well, certainly not (unless you are a CRM system vendor or in the consulting industry or an academic) and that is for the following reason:

1. Any prospect is an opportunity to do business, no matter what sales stage they are in. There are no “unqualified” leads unless they are not interested in your solution, in which case you should not spend any sales resources on them at all.

2. Prospects should be taken care of by the same person or team from the beginning to the end. Handing over a prospect to the next department because they are now “qualified” for it, can lead to frustration of the potential customer (many will feel at least irritated) and creates information gaps in your sales process.

So, you can call a potential customer “lead”, “opportunity” or “prospect”, whichever you prefer. But a distinction between them and applying those names to individual sales stages will not help your sales team, it might only be a funny, new way of reporting. If you want to use names to indicate the sales stage of the prospect in a simple way so your sales manager immediately knows their status, this could actually justify different names per sales stage. But if you do that, then do it consistently and also for the later sales stages 3 and 4.

(Such an exercise would surely provide some potential for your next party and/or sales team meeting, when prospects become “evaluation completer”, “prelim-decider”, finish liner” and so on…)

If you feel the prospects are not qualified enough when they first come to you or if you think your sales persons spend too much of their time explaining the basics, then you might want to try to improve the lead generation:

1. Improve your positioning in the market in order to better address the right audience.

2. Explain your offering more beforehand, market it as a complete product, and offer additional information, which is easy to access.

3. Provide more or better training on your offering to your resellers and channel partners.

© Stephan Hesslich

Building a strong brand requires two key elements, a credible brand promise and consistently delivering on that promise. These two things seem easy to implement but are rarely done right.

1. Develop a credible brand promise. A brand promise summarizes what your brand should stand for. The brand promise must be credible (for the branding experts among you: that also includes “relevant”). If a food retail company claims “we love food”, that is credible. If a telecommunications service provider claims to be excellent in helpdesk support, it is certainly not credible at first sight. Helpdesk support and general customer assistance have been a weak point for service providers (see for example Figure 12 in Accenture 2009 Global Consumer Satisfaction Report). It is hard to see how that can be changed all of a sudden. Have they really improved all their related processes in provisioning, billing, and restoration? Have they replaced their entire helpdesk and service personnel? Have they conducted special trainings for hundreds or thousands of their service and helpdesk staff?

2. Consistently deliver on your brand promise. That means, your complete offering must reflect what the brand promise stands for. Customers need to experience that their expectations raised by the brand promise are actually met. If you go into a supermarket and shop assistants appear not competent and knowledgeable as suggested by the brand communication, the promise doesn’t hold. If the service provider’s help-desk support seems unchanged, they do not deliver on their promise and customers get disappointed.

When building a brand, focus on your strengths. Do not focus on criteria that you know are critical for the purchase decision or customer retention (as in fact is for example helpdesk support with service providers), but that can never be your strengths. As a carrier or service provider, emphasize your comparative advantage. That can be your wide product portfolio, your network reliability or your high bandwidth in the access network. If you don’t brand your strengths, you will diminish your brand. Branding does not mean to build a competitive advantage for you (beside the brand itself), it means to communicate your advantage effectively.

References: Accenture 2009 Global Consumer Satisfaction Report, Accenture 2009

© Stephan Hesslich

1. You as an ISV don’t start at 0 revenues at the beginning of the fiscal year anymore. You already have a revenue base from the customer contracts of the previous years. That has a great advantage for your sales forecast – it makes it a bit robust. The risk of closing new deals only applies to the new revenues on top. However, there is also a flipside to it:

Since revenues from new customer projects are no bulk revenues anymore, but usually monthly revenues stretched over the contract term, your forecast for the year is now more sensitive to deal delays. Perpetual license revenue you can usually book the same month you ship the software (which is mostly the same month the order gets in). So theoretically, you could get all your orders in December and still make your annual plan. With SaaS revenues, if you did the same thing, you would end up with less than 20% of your initial forecast (continuous revenue streams assumed).

2. Another uncertainty to your sales plan comes from the fact that your revenue now depends on the growth of your customers (meaning how well they market your product). Therefore, Sales in software companies has to focus much more on customer retention and not only on customer acquisition anymore. Strongly focusing on winning new customers used to be the most effective way to grow for start-ups, now with SaaS it is not anymore. Enabling and continuously supporting your customers with selling your product to their customers is a pre-requisite to ensure revenue growth. Therefore, mere sales skills are not sufficient anymore, also channel management know-how as well as marketing and business development capabilities are now required (which really are quite hard to find in one person).

So, what about “hunters” and “farmers” in ISV’s sales teams? Well, that distinction is probably not valid anymore. With SaaS each “hunter” also needs to be a “farmer” in order to ensure future revenues and customer retention. I used to consider myself a strong hunter but I also learned to build up and to maintain a long-term relationship with customers. Customer relationship management has become much more important, losing a customer does not mean to lose 10-20% maintenance revenue as in the old times, it now means to lose the customer’s entire license revenue and the corresponding upside potential!

3. So, in order to capture the SaaS effect, software vendors need to focus on revenues and not new bookings anymore. New bookings (=order income) are not that relevant anymore because they can either be much lower than the revenue if there is no or only a small revenue base level agreed. Or they can be much higher than the revenue if, as usual in SaaS contracts, a multi-year contract with a revenue base level is agreed.

Managing a start-up company by revenue instead of bookings is a big challenge that comes with SaaS. Finance and accounting can be quite complex, even in the early stage of a start-up. Sales incentives and commission plans should be based on annual revenues (or quarterly if you are public and/or US-based) and not new bookings or revenues from new orders. And, strong marketing support for your customers and partners is necessary from the beginning, which – due to lack of your own market experience with your new product – requires quite some anticipation.

© Stephan Hesslich

As most readers of this blog probably know, SaaS, often also referred to (in my opinion somewhat misleading) as Cloud Computing, means to provide a software application as an online service. Such services are accessed through the Internet (e.g. for groupware or email exchange) or sometimes through dedicated networks (e.g. for hosted PBX). SaaS services are usually billed on a monthly basis.

This concept of delivering software has been around for quite some time (we all remember the ASP model in the nineties) but with new sharing and virtualization technology developments in the past years, it has now reached a status, where it can be done efficiently and cost-effectively. SaaS is therefore on the way to become the dominant software business model. As the tremendous success of SaaS pioneer salesforce.com shows, this model provides some compelling advantages for end customers. It is highly flexible (you usually only pay seats that you really need) and very easy to set up (you basically sign up for the service, maybe do some configuration, and start using it). End customers do not need to worry anymore, about software installation, updates and upgrades or data backup and restoration. As any serious TCO (Total Cost of Ownership) study reveals, the highest costs for on-premises software result from operations and maintenance.

And that is where the value proposition and the business case for service providers come in. With VoIP, Hosted PBX and others, traditional carrier services and Internet services have merged (which is also why web hosting companies increasingly offer voice products). Therefore, SaaS products should be the new core products for carriers and service providers (and even utilities) unless they want to end up as mere infrastructure providers (which utilities already are). SaaS services perfectly fit to the service provider’s brands and can be well combined with “traditional network products”. By not offering SaaS products you would not only give up quite a substantial portion of market share and margin, you would also miss leveraging valuable, existing intellectual capital. I believe, SaaS is a great opportunity for all service providers to compensate for declining revenues from commodity products like DSL and VoIP (or energy), and to generate new revenues at attractive margins.

But what service provider offer to their customers, they also expect from their vendors (or at least their suppliers should offer it to them). So with SaaS, the business model for software vendors has changed as well. We all still remember the great times of large perpetual license deals and now it should be all pay-as-you-go on a monthly basis? Well, yes, but SaaS has some great advantages for ISVs too. Customer relationships become more intense (usually in a positive way), product release cycles have become shorter (which mostly means, products improve faster) and you as an ISV know much sooner how well (and if at all) your software is used by your customers. The greatest advantage however, is that you can build up a base level of already secured revenues for your budget year and that you can grow with your customers. But that has a couple of implications… (for more, please read next post)

© Stephan Hesslich