Eliminating Waste in Business: Run Lean, Boost Profitability (2014)
Chapter 4. Sales
Waste by Not Treating Sales as a Science
Nobody counts the number of ads you run; they just remember the impression you make.
—William Bernbach
There are many misconceptions about the entire sales field and sales department being an enormous source of waste. When we think of sales, many of us think of the guy in the business suit, sitting on the plane, having a drink on the way home after making maintenance calls to several customers. Perhaps the biggest misconception is that all you need to do to be a salesperson is have great people skills—that somehow this image we just portrayed is who a salesperson should be, that guy flying around the country, wooing his customers.
For decades, salespeople have been the folks who are extremely charismatic, those who can play a game of golf, and those who can wine and dine clients. No one really assumed that you needed a college degree to sell. And as for sales managers, they were typically selected from the sales ranks, with the best sales reps being offered a promotion into management. Other than adapting to new sales force automation, there was really no need for salespeople to update their skill sets or use statistics during the sales process. All of these practices are outdated and wrong.
Perhaps the greatest cause of waste in sales is treating sales like it has always been treated. By that, we mean falling into these myths just described, by hiring those “veteran reps” who have a book of contacts and who are good “people” people. As we have said so many times before, there is a very real need for analytics in every department. Sales, especially, has been undergoing a Gestalt shift in recent years. When it’s done right, it is incredibly scientific and analytical. When it’s done poorly, it becomes a game of throwing as much stuff against the wall in hopes that something sticks.
Prime Areas of Waste
One of the biggest sources of waste in sales occurs from not treating sales like manufacturing. Just as in manufacturing, you have to understand and calculate sales-force productivity. This concept is so misunderstood that even in academic literature, the concepts of sales performance andsales productivity are incorrectly used interchangeably. Productivity and performance are impacted by different things and create different results. That is why we provide a description of sales productivity—to help you avoid waste associated with it. Through this analysis, you can learn whether you are overstaffed or understaffed and whether you need to hire more salespeople. There are many misconceptions about hiring in sales, proliferated by hiring agencies that want to make a lot of money doing things like personality testing. We talk about why this is typically a wasteful process and how to hire using more scientific approaches.
Another effect of not treating sales like a science is the lack of value-stream mapping in sales. Once again, just like in manufacturing, you should understand how these processes occur and how you can make them work better. In addition to this, we also cover sales expenses. Such an enormous part of a company’s budget is devoted to sales expenses that it is critical to limit the expenses to avoid waste. Sometimes things like trade shows or travel are necessary, but many times they just create waste. We cover these topics later in this chapter.
Sales Productivity
Sales jobs make up almost 11 percent of all occupations in the United States.1 When you factor out all the non-business related jobs that the U.S. Bureau of Labor Statistics tracks, such as manufacturing, mining, construction, food service, law enforcement, and others, sales accounts for well over 50 percent of business occupations. In fact, as a college professor, I tell my students the interesting statistic that 50 percent of all college graduates, no matter the major, go into some kind of sales.2
Why is this the case? Is sales that important? Does it take that many salespeople to sell products and services? As we show in this chapter, sales is that important. But it certainly doesn’t need that many human resources! It ends up needing an excessive amount of resources because it’s so poorly managed. Take academic research as an example. (This isn’t a perfect example, because many times academics are busy researching topics that are of absolutely no interest or relevance to managers, but the point is still a good one.) There is absolutely not one single study of academic research that has ever looked at what “sales productivity” is. With all the volumes of research in the manufacturing realm related to productivity, you would think that it would be a no-brainer to say, “If 11 percent of the total U.S. workforce is in sales, does it matter how productive they are?” But, it hasn’t been done. Many people, academics and practitioners alike, assume that productivity should be measured in much the same way manufacturing productivity is measured. By that, you look at the output per hour (or other time period) of a worker. The worker who makes ten widgets per hour must be more productive than the worker who makes five widgets per hour. Note that quality is a different metric.
Based upon that rationale, does that mean that the salesperson who sells $2 million in product in one year is more productive than the salesperson who sells $1 million in product the same year? Absolutely not. The sales rep who sold $2 million might have worked 80 hours a week, while the rep who sold $1 million may have worked only 30 hours. Also, this does not take into account different territories, customers, and buying or selling processes.
Unfortunately, an even worse metric that is perhaps more commonly used is the amount of time the salesperson spent with the customer. Any quick search of Google will show a multitude of articles on this subject and how to get sales reps to be in front of the customer more. Is the sales repwho spends 35 percent of her time every week with customers more productive than the sales rep who spends 25 percent of his time every week with customers?
Note As much as 87 percent of your sales budget could be complete waste, likely because you don’t have an accurate measure of sales productivity.
In manufacturing, it is easy to say these two workers are on the exact same machine, making the exact same widget, and therefore productivity statistics translate rather easily. You cannot really do this in sales because there are way too many other intervening variables. For example, differences exist among customers, territories, and the products that each sales rep sells. Moreover, note the exception that was made about manufacturing. Productivity is not the same thing as quality. Obviously, in manufacturing, you want to increase productivity while at least maintaining the same quality level or even improving quality. How does this work in sales? These days, the sales rep does not have to be “in front of the customer” to make a sale. The customer could see a sales presentation and the order might be sent in days or weeks later. With good customer service and follow up, orders can continue at increasing rates with no direct effort from the salesperson. Sales today is much more about strategy and analytics than in days past. The most productive salesperson is the one who spends more time analyzing accounts, and less time courting them.
It is these types of analyses and questions that companies rarely consider when they’re trying to reduce waste in sales. In this day and age of downsizing and concerns over efficiency and productivity, it is simply astounding that sales productivity is not more carefully considered.
The best measure of sales productivity is sales per hour. How can one rep sell $1 million in 40 hours, while the other rep sells only $500,000? Or, why can two reps sell $1 million, but one works 40 hours while the other needs to work 70 to accomplish the same sales? The Organisation for Economic Co-operation and Development (OECD) defines workforce productivity as “the ratio of a volume measure of output to a volume measure of input.”3 Thus, worker productivity is typically measured as:
Therefore, in sales:
There is still a great room for potential variability in interpreting this simple equation. Sales could be in units or dollars; it could incorporate paid orders, canceled orders, and other factors. Therefore, many units must be measured. Then, hours worked must include a broad enough time measurement to be meaningful. It is easy to know how much a factory worker in front of a machine produces in one hour. However, because sales have seasonal, weekly, and even daily fluctuations, those should be taken into account. Also, productivity will likely be drastically different based upon the strength of the territory. There are many other factors, like those discussed previously. The sales rep’s time must be measured while she’s doing all daily activities that could lead to a sale. This way, sales per exact activity can be traced.
In the sales productivity studies that I have done, the best measure has typical been:
This formula typically accounts for the tremendous differences across sales territories by looking at sales as a percentage of total market potential and then separating by number of reps in the territory. Once the figure is calculated for each rep, a sales manager can have a better sense of who is the most efficient rep and then how to better hire, fire, promote, and motivate. These are all discussed in later sections.
However, it is these types of analyses and questions that we do not think are analyzed enough in sales. As mentioned, the typical approach is to hire the veterans with industry experience and throw them out there. It is no wonder that it takes 11 percent of the U.S. workforce to produce mediocre results. In a recent survey of 1,500 companies, sales managers listed their top three priorities to improve in the next year: (1) increase revenue, (2) capture new accounts, and (3) increase sales effectiveness.4 We assert that if number three happens, numbers one and two will follow. Therefore, sales managers and company managers have to become more analytical about their sales departments. Once each sales rep’s productivity is understood, the sales manager can begin to think about the subsequent decisions.
Bad Hiring and Firing
Thirteen percent of a company’s sales force brings in 80 percent of the revenue.5 Does that mean that approximately 87 percent of your sales budget and resources is waste? Not exactly, but it is very clear that many companies have an extremely high number of ineffective, unproductive salespeople. In terms of sales management, the average tenure of a VP of Sales is 24 to 32 months.6 We typically don’t see turnover like that in other areas. Why is there so much waste, ineffectiveness, and turnover in sales and sales management? First is the matter of simply not measuring and assessing sales force productivity, as discussed. Second is the issue of bad hiring and firing.
As we discuss at more length in Chapter 5, the hiring process is difficult for employees in any position within the company. But it is especially difficult in sales for a few reasons. There is an enormous shortage of the number of highly skilled professional sellers. By this, we emphasize the word “skilled.” So many people are smooth talkers and are great with people. But, most of these veterans do not understand the analytical side to sales, both in terms of the analytics required to assess each account and the requirements of the sales process today. You would never hire an engineer to do brain surgery, nor would you hire an accountant to design a building. It is so unbelievably difficult to break free of the mindset that sales is a science, not an art. Since we literally have over 100 years of hiring unqualified salespeople, many of whom have succeeded, it is very difficult to recognize that there is a better way to go about sales. These outdated, inefficient, and extremely wasteful approaches must die.
Consider the cost of a bad hire in sales. The investment to hire and train a new salesperson ranges from $75,000 for a tele-salesperson to more than $300,000 for a more senior sales position.7 Think about how much money is lost because of an ineffective or bad sales rep in the field. They are losing accounts and perhaps causing some customers to leave. Then, after they leave the job, the waste rises even more as a new salesperson needs to be trained.
Most companies will admit that they do not fully understand how to hire sales reps. Figure 4-1 demonstrates that only 5.7 percent of companies think their hiring practices exceed their expectations, while 40 percent say they meet their expectations.8 Almost half know how poor their practices are.
Figure 4-1. Satisfaction with Hiring Practices
Let’s take a look at some of the wasteful hiring practices that occur specifically in sales.
Wasteful Hiring Practice #1: Building a Personality Typology of the Star Salesperson
Given how most companies don’t understand how to hire sales reps, of course everyone is concerned with more effective recruiting. However, more attention to the process does not necessarily correlate with more success. Most companies look for candidates who share common traits with their superstar sellers. (Many of the companies that I have done consulting for have done this very thing.) They have the top 5–10 percent of their sales force take extensive personality assessments. Then, they create a new assessment tool based upon these traits of the top performers. Finally, the company hires only candidates who possess these same traits.
This method is so wasteful. First, you have to consider the enormous amount of money given to the testing service to develop the new test and perform the testing. In fact, it was the companies who sell their personality testing services that created this bad idea in the beginning. Second, consider the errors within this method. For a number of reasons, it is very difficult to identify the unique characteristics of top salespeople. Unfortunately, the superstars are anomalies and the traits they share might not produce success in other candidates. There are so many other issues—just think about a few. Do those top candidates have the best territories? Do those candidates produce consistent, long-term success? Do those candidates mesh well with their managers and might fail with a different manager? It is for these reasons, among many others, that this hiring method is extremely wasteful.
Wasteful Hiring Practice #2: Having No Strategy
We will be brief here because this practice is highlighted in Chapter 5. Many companies hire poorly because they do not understand the strategic hiring process. Just like with other business decisions, hiring decisions are often based on “gut instincts” instead of on analytical procedures and techniques. These decisions are frequently made utilizing the outdated tools of the past, as discussed in the next section.
Wasteful Hiring Practice #3: Using Traditional Hiring Techniques
Like strategy, this problem is also covered in Chapter 5. Suffice it to say that research has shown that the methods most commonly used to screen and hire candidates are actually less predictive of success than the flip of a coin.9 Interviews, job shadows, looking at education and experience, checking references, and other mainstay recruiting tasks are not valid. In fact, as can be seen in the data in Figure 4-2, every selection tool commonly used, except personality testing, is less accurate than flipping a coin, which provides a 50/50 accuracy rate. (Please note that this is not personality testing as described previously.) Hiring is one of the most wasteful processes in businesses, yet businesses keep using the same approach because, “this is the way we have always done it.” How many of you have stepped back and thought about reengineering your hiring process?
Figure 4-2. Hiring Methods and their Accuracy Rates. (Source: Hunter, J & Hunter, R. “Validity and Utility of Alternative Predictors of Job Performance,” Psychological Bulletin, 1984, 96 (1). p. 72–98.)
Wasteful Hiring Practice #4: Recruiting/Promoting from Within or from the Same Industry
One common approach is to promote from within. We are not saying this is bad, but it doesn’t always work in sales. Companies look at their best sales reps and try to promote them into sales manager roles. This is probably the single biggest reason that the average sales manager tenure is 24-32 months. While salespeople need to be analytical, that role does not require the analytical and statistical abilities that a sales manager needs. To be effective, a sales manager has to understand enough statistics to be able to create sales forecasts and has to be analytical enough to develop quotas, compensation plans, and sales territories. Likewise, sales managers need to be able to calculate more sophisticated equations and models, such as Customer Lifetime Value (CLV) calculations. Typically, what happens in the hiring process is that the best salesperson gets the promotion, but does not understand these statistics. He “wings it” for a while and then quits or gets replaced when results are poor.
Another extremely common hiring tactic in sales is to search for a candidate who has “3-5 years of industry experience.” Likely because this is the way things have always been done. An interesting study was performed by Gallup, in which they actually found a negative correlation between same industry experience and success.10 In fact, in my personal consulting experiences with companies, I almost always find a negative correlation between years of experience and sales performance and productivity. Perhaps this is because having same industry experience typically makes someone “set in their ways” and less able to think in new, creative ways. Further, the longer someone has been in an industry, the less coachable they become. They are also more likely to be burned out.
Note In sales especially, having same industry experience creates waste!
No/Weak Training
After the right candidates are selected, regardless of the skills that they walk in the door with, new sales employees should be trained. Then, training should be continued throughout their career as customers, products, technologies, and sales processes change.
Many times this training is thought of as waste. Companies try to minimize it. If a sales rep is in training, not in the field, they are not making money. However, most organizations realize an average ROI for the typical training program within six months. The real waste is in not providing any sort of training at all, not doing enough training, or utilizing unqualified trainers.
But as we said, sales training is often considered a waste. And in fact, research shows that within 60 days of a typical training event, 87 percent of the skills gained have been lost by the sales force.11 Even more concerning than the “stickiness” of sales training is the question of how applicable the training is to the needs of a particular sales force. A fundamental reason why sales training increasingly fails to deliver its expected results is that it is simply the wrong training from the start.
Frankly, sales training programs are often viewed as generic one-size-fits-all cures to every selling malady. Not enough consideration is usually given to the specific business needs of the sales force and their specific selling challenges. Much sales training is done by sales training firms. They generally provide generic, canned programs that focus on very basic skills, like questioning and objections handling. Although these are important skills, given the changes in the sales environment, salespeople should be more focused on the roles of the market analyst and planner, selling team coordinator, customer service provider, information gatherer, sales forecaster, and market cost analyzer. These skills are rarely covered in these generic programs.
Furthermore, the single biggest difference between top performers and poor performers is listening skills. Eighty percent of the selling process should be devoted to understanding customers’ needs; studies show an average 50 percent error rate in terms of salespeople understanding their customer’s expected performance levels.12 In fact, 47 percent of salespeople admit to having no clue about their customer’s biggest concerns. In order to completely understand customer needs, salespeople must have analytical skills. They must be able to research customers to identify needs. They must utilize their Customer Relationship Management (CRM) software to collect this data, both pre- and post-sales. Then, they must use this information to determine the right questions to ask and listen intently while questioning the customer. This skill set is beyond what is typically taught to salespeople.
Only an average of 10 percent of sales training is devoted to questioning and listening skills, whereas 40 percent of sales training is designed to increase product knowledge. And while 81.5 percent of firms provide product knowledge, only 51.5 percent provide communication skills training. Salespeople are also not currently being trained on how to listen to the needs of today’s very diverse buyers, such as production engineers, quality assurance personnel, design engineers, and other technical staff that makes up the buying center. Thus, any sales-training program must devote lots of time to listening and analytical skills.
Note Training should focus on analytical skills aimed at researching and understanding the customer.
Any good sales training program is going to cost a lot of money, and many managers think of this as a waste. Continually developing and updating the skills of the sales force is one of the most critically important elements of the future revenue of a company. Even though it sounds like sales training can be a waste, and many times it is, not performing the training is a much larger source of waste. Having sales reps in the field who are unqualified wastes the company’s money in terms of sales expenses and labor, and wastes tons of future money in lost revenue. The sales rep is the front line/face of the company. Above all others, those who interact with the customer must be thoroughly knowledgeable.
We discuss training in Chapter 5. The issues here are the same. Any good training program first begins with a needs and gap analysis. Then, the training should be built to fill those gaps. Many times, sales managers will say, “sales are down, I must need training.” Then they will call a sales trainer and set up a program. This skips the critical step of finding out what is truly going on. Data must be gathered and analyzed. Why are sales down? What is really going on? Is it a volume issue, pricing issue, or a customer-satisfaction issue? Are salespeople making too many phone calls and not spending enough time researching? None of these questions can be answered without data. This data is necessary to find out what the training should cover, who should be included in the training, and how the training should be conducted.
Training is an inherently perishable good. As soon as salespeople leave training sessions, their new knowledge and skills begin to deteriorate. The only defense against the rapid and constant evaporation of the training investment is to further invest in reinforcing new skills. Whether the training is supplemented with follow-up sessions or reinforced through management coaching, most people need repeated exposure to new information in order to retain it.
Further, the more content packed into a training session, the more reinforcement is subsequently required. To address this fact, organizations should move away from large training sessions (like annual sales meetings or new hire orientations), where a year’s worth of knowledge is dumped onto salespeople. Instead, just-in-time training should be implemented, whereby very specific skills are taught only as they are needed by the sales force. Sales managers can know when this information is needed only if they are continually gathering data on their sales force.
By providing the training in close proximity to the time the salespeople actually need the skills, an organization can improve the likelihood that the learning will stick. Additionally, you should provide training in smaller, more digestible chunks, so the salespeople can concentrate on mastering one or two skills before moving on to others. Ideally, companies should train in two-day sessions every quarter. By providing timely and more focused training, based on actual, hard data, top sales forces are achieving better training outcomes and dramatically increasing their salespeople’s capabilities.
Finally, to ensure that sales training is not wasteful, the sales manager should measure the sales force on many dimensions before the training, immediately after the training, and 6 and 12 months post-training. In sales, at a minimum, we suggest gathering the following information about every sales rep at each of these time intervals:
· Total sales volume by unit
· Total sales volume by dollars
· Percentage of market potential
· Sales expenses/costs
· Number of orders
· Average size ($) of orders
· Batting average (orders/calls)
· Number of canceled orders
· Number of new accounts
· Customer conversion from lead to first-time buyer
· Customer conversion from first-time buyer to repeat buyer
· Number of lost accounts
· Percentage of time meeting quota
· Customer satisfaction
While it is impossible to calculate the waste from not training, using these data points, you can calculate ROI for sales training and ensure that the training you are doing is not wasteful.
No Sales Process/Value-Stream Mapping
We’ve said it many times, but one of the largest areas of waste in the sales department is failing to use science and analytics. Just as processes are set up, measured, and improved in manufacturing, sales should have processes as well. Both the sales-management function and sales force should have their own distinct processes. Formal sales processes provide the sales force direction in terms of “how to sell,” provide sales management with a framework from which to manage, and enable measurement and continuous improvement of the sales force’s performance.
The idea behind value-stream mapping is that you map out every step that adds value in the eyes of the customer. Two main objectives are then accomplished. First, all ancillary steps that do not add value can be identified and eliminated. Activities such as maintenance calls with no measureable goals and paperwork with no purpose can be cut. Second, processes can be analyzed in order to speed them up or find and eliminate bottlenecks.
Note Failing to treat sales management and sales processes analytically creates waste.
CSO Insights routinely conducts studies of organizations, and in their recent study on sales processes, the following results were found for companies that have sales processes in place (refer to Figure 4-3). It is important to note that only 25.7 percent of the companies surveyed actually had “formal” sales processes in place, whereas 42.2 percent had informal processes in place. The data is still very telling; clearly, sales processes make an impact on a company’s bottom line.
Figure 4-3. Sales Processes Impact on Sales Performance. (Source: CSO Insights, “Sales Processes,” 2013, http://www.csoinsights.com/Publications/Shop/Sales-Performance-Optimization.)
When looking at this data, 82 percent of CSOs believe that sales processes improve performance. It is very likely that the other 18 percent either don’t understand how to set up and implement sales processes correctly or do not have the resources to do so. If this is true, then why do 75 percent of businesses not even have sales processes? Again, because it is so easy to look at the way things have always been done. Sales has always been a group of “people people” who just aggressively schmooze customers. This outdated thinking is incredibly wasteful.
Steps to Create Sales Processes
There are several necessary steps a company must take to establish and implement formal sales processes. First, companies can begin by analyzing best sales practices in other companies. As we discuss throughout this book, benchmarking can produce bad results if it’s done incorrectly. This is because every company’s processes should be designed around the very specific ways a customer buys products. Customers in different industries rarely buy in the same way. However, seeing how other companies do things can help jump-start the decision-making process. In other words, you would never want to photocopy another company’s sales process map, but it can be a source of ideas to get your processes going.
Next, the sales manager should conduct value-stream mapping, or sales “blueprinting,” in order to understand how the sales process flows through the entire sales pipeline. Part of this is to define the parts of the sales processes and understand how they fit together. Likewise, when examining the processes, you should work to ensure that sales planning also includes information about a multitude of variables, such as materials, labor, equipment, logistics, and anything else that affects the process.
Some things that should be formalized are prospecting, customer analysis, and presentations. Every single task should have a metric associated with it so that you can measure the sales processes as if they were production processes. You will have waste, especially if you do not track the productivity of each step with each rep. Then, you should focus on continuous improvement principles, stressing important outcome variables such as customer satisfaction or customer retention. Remember from Chapter 2 that Y=f(X), so you need to have a true understanding of what sales activities drive the outcomes that you want. With these steps, you can begin to develop sales processes that help the organization become efficient and effective, with much less waste.
Figure 4-4 demonstrates an example of a value-stream map for the request for proposal (RFP) quoting process in a fictitious company. This is an example of an extremely inefficient map. But, from this, you can begin to see where your weak areas are. By examining your map and then outlining the processes and their associated times, you can quantify the inefficiencies. As you can see, there are many bottlenecks to the process. The sales rep might be waiting as long as 1,440 minutes for a response to a quote. If this organization is one in which RFPs were standardized, much of this time could be eliminated. Figure 4-5 shows the same company with a new value-stream map, after the inefficient processes are eliminated.
Figure 4-4. Sales Value-Stream Map with Inefficiencies
Figure 4-5. Sales Value-Stream Map with Inefficiencies Eliminated
Many times when the map is created, the manager can see processes that are a complete waste. Current research shows that sales reps try to spend more time with customers, when in fact that doesn’t add value. We think everyone just assumes that the rep who spends the most time with the customer has the highest sales. In fact, if you search online, there are studies everywhere about where sales reps spend their time. Do your sales reps spend ten percent of their time in front of a customer? How about 30 percent? Does that equate to higher sales?
When you think about sales like you would manufacturing with distinct processes, think about how crazy it is to worry about time with the customer. As described, if a worker can manufacture 100 widgets an hour, we assume that he is more productive than the worker who can make 50 widgets an hour. We would never say that the worker who spends seven hours a day in front of a machine is more productive than the worker who spends five hours a day in front of a machine. So, why have sales managers and sales academics alike become so obsessed with the idea of time in front of the customer?
To some extent, it does make sense. Obviously, if you take an extremely inefficient salesperson who cannot get their paperwork done in a reasonable time and doesn’t plan travel well, they will likely have limited time with the customer and low sales. But, on the other hand, think of the two categories of biggest waste that sales reps have with the customers: the maintenance call and entertaining.
We now know how wasteful entertaining in sales is. Wining-and-dining, golf, cold-calling, and other wasteful processes should go. Now it’s all about strategy! The sales rep who is the most productive spends the most time researching the account. Through this, they add value. They add value by not calling on unqualified accounts. They add value by researching answers to questions ahead of time and not wasting precious time with the client asking questions that can be found on Google. As described, every process must add value. This benefits the company and the customer. The value-stream map helps achieve these benefits.
Through the map, you should be able to identify the value-add and ROI for every process. This will take a lot of time when you do it for the first time. You may even need to hire someone who is a sales efficiency expert the first time. Once the map has been created, you can begin to eliminate waste in sales, and as a consequence will likely start making your customer happier with increased service levels.
Note Map every sales process. Eliminate or reduce steps that do not add value. Continually revise your map as your processes become more efficient.
Not Treating Every Marketing Activity Like the Sales Process
Here the waste is not in sales, but in forgetting how important sales is. Most everyone involved in sales has referred to some form of sales process like the one shown in Figure 4-6.
Figure 4-6. Sales Process
We encourage you to treat every single marketing activity like a sales process. Imagine running your typical advertisement. You think you want to build brand awareness. Then, you look at your budget to determine media vehicles and frequency. Hopefully, you do some thinking about what media your audience watches/reads. Then, you run the ad and probably do some rudimentary tracking. However, we suggest that much of the waste created in marketing, as discussed in the last chapter, would be avoided if every marketing process was treated like the sales process.
In order to this, you need to start your advertising campaign by prospecting and qualifying—qualifying being the keyword. As we have said numerous times, you do not want to use the “throw the spaghetti against the wall and see what sticks” philosophy. In sales, you should not simply buy a lead list and cold call like crazy. Cold calling doesn’t work. Instead, you want to do as much research as possible. Here, just think about not allowing yourself to move forward in the process until you have qualified every account. This is where sales reps spend most of their time. Do you spend almost all your marketing time doing research? Then, do you prepare a needs identification analysis prior to running that campaign? Again, the idea is to understand why your customers buy and what benefits you should stress in the ad. Then, there should be follow-up to close the sale and follow-up to keep customers brand-loyal. These processes are all just normal parts of the process in sales. It is really scary that they are not in all marketing activities.
As I was driving to work a few weeks ago, I saw an ad for my university’s basketball team on the back of a metro bus. It was as dirty as could be, barely viewable, covered in a gray sheet of road salt. Who attends my university? Do they attend because of the basketball team? Do they typically see metro bus ads? Do they equate a university education with the dirtiness of roads and cars during a Northern Ohio winter? The answers to these questions are quite obvious. Again, we went through the entire process of advertising waste in Chapter 3, but please think about the sales process in all your activities.
Note You should establish sales processes not just for sales, but for all marketing activities.
Sales Expenses
Executives spend almost three times more on sales and expenses than they do on advertising expenses.13 The average company spends 10 percent, and some industries spend as much as 40 percent of their total sales revenues on sales expenses.14 Just as we discussed in regard to sales force productivity, it seems odd that so many resources, in terms of both people and money, are needed to support the sales function. The biggest sales expenses are labor costs, travel, and entertaining. There are other costs that can be very large, such as technology and supplies, but we address those in later chapters. Here we focus on the three big expenses: sales travel, entertaining, and trade shows.
Sales Travel and Entertaining
If you look at the raw numbers on sales travel, you will see that companies that spend more on travel have marginally higher sales. These studies are generally poorly conceived. Is the travel creating the higher sales, or do companies with higher sales tend to expand their travel budgets and therefore travel more? Some studies show that travel went way down during the recession of 2008 and 2009, and therefore, sales went down. Was it the travel or the recession that caused sales to go down? Also, we don’t know of any published studies that have looked at the ROI difference between travel and electronic contact mechanisms.
I currently have a very large study underway that looks at all the variables that impact sales productivity and performance.15 I have yet to find any data that shows that travel increases sales. As mentioned, the most important variables for boosting productivity and performance are analytical skills and time spent researching and analyzing accounts. Obviously, you do want to spend time with your reps. You cannot ignore your customers and have high sales.
However, in order to make sure travel budgets are most effectively used, you need to make sure reps visit with customers only when there is a specific, measureable goal associated with that contact. Customers will be more satisfied and respect you more if you respect their time. They will see you and/or your reps more as the solution-providers you should be than if you are there simply to sell products and services when they need them. Additionally, most people appreciate documents being sent via e-mail and demonstrations being made through presentation software online, rather than taking their whole day to escort a visiting sales rep.
While the principle of reciprocity is real (the more time you spend with someone, the more they feel obliged to give you time or something else back), in this day and age, you will not be successful for long because of your ability to bribe clients with golf and steaks. This is especially true now, for example, given the enormous fall in people who play golf. Now, only about 8 percent of Americans play golf in any capacity. Only around 1.2 percent of Americans consider themselves active golfers.16 The bulk of these players are in their late 40s and 50s. Workers, especially of generation X and Y, are just simply too busy to engage in recreational activities, especially during work hours. As a sales rep, you might actually offend someone by suggesting an entertainment activity. They could be thinking, “it must be nice to have such an easy job where you have so much free time.” There is a small percentage of workers that still appreciates and even expects to be wined and dined. This number is very small and shrinking every day.
Save travel for the most important events. This is typically the initial needs discovery and presentation portions of a sale. Send only those reps and employees who play a critical role in the sale. As you’ll read in Chapter 7, your reps can fly coach and stay at reasonably cheap motels. Get out of the mindset that you travel in sales because it is what you have always done. It doubtfully boosts sales.
Note Travel does not increase sales. Only travel when it’s absolutely critical to the bottom line, when you have a specific measureable objective, and when other forms of technology cannot be substituted.
Trade Shows
Trade shows can be a tremendously profitable venture or a black hole of expense. (Unfortunately, from what we have seen, they are typically the latter.) The Center for Exhibition Industry Research (http://www.ceir.org/) provides valuable research data about the impact of trade shows. Some of these facts are shown here:
· The average company allocates 21-32 percent of its total marketing budget to events and exhibiting (more than any other marketing category).
· More than $24 billion is spent annually by U.S. exhibitors for trade shows.
· Seven out of ten trade show attendees plan to buy at least one product.
· Seventy-six percent of attendees asked for quotes and 26 percent signed purchase orders at trade shows.
· Seventy-two percent of show visitors say the show influenced their buying decision.
· Sixty-four percent of attendees tell at least six other people about the trade show.
· It costs 22 percent less to contact a potential buyer at a show than it does using traditional field sales calls.
· Yet 98 percent of the marketing people in charge of their company’s trade show budget haven’t received even one hour of formal exhibit education.
If trade shows take up so much of a company’s budget, and can be so important to sales, why is so little effort in the way of training devoted to them? I work closely with a VP at a local trade show display and service company. During sales calls, he asks customers why they go to trade shows. The most common answer he hears is, “so people know we are still in business.” If this is your reason for investing in trade shows, you are creating massive waste!
As you can see in the statistics, trade shows can be quite beneficial. In fact, they provide a way to get face-to-face contact and time with buyers and are often cheaper than having to travel all over the country to individual customer facilities throughout the year. Trade shows can help organizations build brand awareness, get leads for new business, network with others, build partnerships, see current clients, see many buyers at the same time, write new orders, or launch or demonstrate a product.
No matter what the goal, you need to with one in mind—a measurable goal. Measurable means quantifiable. An example would be to obtain 300 qualified leads or close sales of $10 for every $1 spent at the trade show. Based on this goal, you should have a better sense of which shows to attend, where, and how often. This should also help you build a budget. There are free calculators available online to help calculate your trade show ROI. One is by The Center for Exhibition Industry Research (http://roitoolkit.exhibitsurveys.net/Home/Welcome.aspx). No matter what approach you use, you absolutely must have a goal, must produce measurable targets, and must then calculate the ROI (estimated before and measured afterward). There are very sophisticated computer programs available that aid with trade show lead and sales tracking. Without measurable goals in mind, trade shows will likely be very wasteful.
Note Trade shows are frequently very wasteful because there are no measurable goals, no training, outdated and boring equipment and displays, and no ROI. Make sure you do your homework first. When you do, trade shows can be very helpful.
Weak Statistical and Analytical Capabilities
Statistical and analytical skills are needed in many areas of sales, even beyond creating processes and analyzing expenses. Every sales and operating decision should filter down from the sales forecast. (In Chapter 7, we discuss forecasting.) Without an accurate sales forecast, you cannot know how to distribute sales territories. Without this knowledge, you could have too many or too few reps in a territory. This leads either to wasted reps or lost sales. All resources must be devoted based upon this forecast. Do not “wing” forecasts. Do not rely on last year’s figure, plus a gain. Do not rely solely on a survey of buyer’s intentions. These actions are all dangerous and wasteful. Utilize advanced statistical techniques to calculate an accurate forecast.
Note No decisions should be made until you have an accurate forecast. Use numerous statistical methods so that you can improve accuracy.
Weak Territory Management
Having better territory alignment can create a five percent boost in profitability.17 In a study of 4,800 territories in different industries, 25 percent had too much work for the sales force to handle effectively, and 31 percent had too little work to keep the salesperson busy.18 That very loosely translates into almost 50 percent of territories being ineffectively designed. Territories should be organized in order to obtain thorough market coverage, establish a salesperson’s responsibilities, evaluate performance, improve customer relations (give the right customers the right treatment), reduce sales expenses by reducing travel, and allow better matching of salesperson to customer. This way, excess waste is not being created simply because of a lack of prior analytical skills and planning. So that territories are not wasteful, you should follow the process outlined in Figure 4-7. This process is described in more detail in the following sections.
Figure 4-7. Territory Design Steps
Note Almost half of territories are inefficient and wasteful due to poor design. Use a strategic and analytical process to define territories, and revise it often.
Organize Customers and Markets
The first step in territory design is to organize customers based on their “value” to the company. To begin this process, information is taken from the past purchasing information and information deemed from the sales forecast. This is a critical step because, honestly, not all customers are created equal. Some customers need more service than others, some provide the company more money, and some have different needs that can be handled only by certain types of sales reps. If sales reps do not spend their time with the right accounts, they simply cannot sell to their full potential. A sales manager has to know who their key accounts are before they can successfully place salespeople in the proper territories.
There are numerous ways you likely already divide your accounts. The simplest and most frequently used way is the “single factor method.” In this, a single factor is used to divide accounts, typically into A-, B-, and C-level accounts. This is a decent method and is better than nothing. It allows you to determine where reps should spend their time, typically 80 percent with their best accounts. It also allows you to determine which accounts are small enough to be better served by a customer service rep instead of a full time, high-paid salesperson. This method, while being the most simple, is also prone to the most errors, and therefore can be wasteful. There are much more complex methods available. Many are now automatically calculated through a company’s Customer Relationship Management (CRM) software.
No matter how the customer segmentation is performed, there are other factors that you must include during account segmentation. First, a simple break-even analysis should be performed on each account to find out if an account is even worth having. To conduct this analysis, you should calculate the total cost per call and the total number of calls to close business, and determine the total net selling days, average calls per day, and other total direct expenses to arrive at a breakeven point. Other things that you need to consider are account growth, volume potential, competition’s share (including the competitors and the likelihood of displacing them), financial well-being, industry leadership, willingness to experiment, and the customer’s price sensitivity.
While outside the discussion of this book, in a real situation, the sales manager should go much beyond a simple account division and use some method to look further into each account. The Miller Heiman (1998) method is a common one, but there are several other methods as well. More or less, each individual account needs to be assessed in great detail to really understand what its true potential is, how it should be serviced, and which reps should handle which accounts. After some time, sales reps can begin to develop an “ideal customer profile.” Using basic demographics and psychographics, they can predict a pattern of likely sales. This will enhance efficiency and decrease waste, by not calling on unqualified accounts.
Know the Sales Processes
We have already discussed the concept of creating a value-stream map. Once you’ve created one, you’ll understand better which processes are required to service each account. Now that you just segmented your accounts, you can look at each account, especially your better ones, and determine what you need to do to service each customer appropriately.
Analyze the Workload
Once a thorough assessment has been made with regard to how to organize customers and how to prioritize accounts, salespeople need to be placed on accounts and in territories. This should be done using a workload analysis. However, before a workload analysis is preformed, there are a few additional considerations a sales manager needs to think about. First, sales force productivity, or the ratio of sales generated to selling effort used, needs to be assessed. In the early stages, the addition of salespeople increases sales considerably more than the selling costs. As salespeople continue to be added, sales increase at a decreasing rate until a point is reached when the costs to add a salesperson are more than the revenues that salesperson can generate. Then, over the course of a salesperson’s career, some salespeople are simply more productive than others. CRMsystems can track a sales rep’s activities and run some basic calculations so that managers can calculate productivity and examine any issues of difficulty. Also, sales managers must take sales force turnover into account. It is very costly, should be anticipated, and dramatically affects productivity.
Once a manager has the information about productivity, he can begin to develop a salesperson-workload analysis, as shown in Figure 4-8. This analysis shows a manager how many total reps he needs for adequate market coverage. As a manager you might find out, for example, that you have five reps in one territory, but really need only three, whereas in another geographic region, you have three reps but should employ five. These analyses are vital for achieving high levels of sales productivity and for maximizing territory coverage in order to maximize revenue. You cannot calculate the results until you track the sales reps’ productivity on an hourly basis for several weeks, either by using productivity journals or by using CRM program entries.
Figure 4-8. Workload Example
Assign Territories
One of the large areas of waste is when companies fail to continually revise territories. Customers grow and leave, territories grow or shrink. You should continually monitor the efficiency of your accounts. By combining the forecast, the customer analysis, the sales value-stream map, and the workload analysis, sales managers can develop territories in a non-wasteful manner. Obviously, travel time and each sale rep’s abilities need to be taken into account. When assigning sales personnel to territories, managers should rank the sales force using these criteria: relative ability, product and industry knowledge, energy level, persuasiveness, and verbal ability. There are now sophisticated territory-mapping and territorial-routing software programs that can do much of the work described here.
One final issue that sales managers must consider is whether sales activities will be performed in-house or outsourced to independent contractors. Whether you are considering a manufacturer’s rep, selling agent, or telemarketing firm, you should always complete an ROI. More importantly, you should think about how your customers will be served. If there is loss of customer satisfaction possible, you should probably keep the duties in-house. Few things are more important than how customers view you and your firm. Once your image is tarnished, it’s hard to get it back.
No Productivity Tracking and Weak Evaluation Processes
Do you really know who your best reps are? Or do you just know who sells the most volume? I have worked with many companies in consulting capacities and have rarely seen a company who really knows who their best sales reps are. As discussed in the productivity section, there are many ways to measure both performance and productivity. Are you going to measure gross units or dollars or are you going to measure net profits after sales expenses? Are you going to abandon performance and look at productivity? Are you not going to care about outputs at all and just look at inputs? You could track total strategizing time, calls, presentations, or something similar. Maybe you have team sales and you need to figure out a way to adequately divide sales across the team.
Note Do not rely on one evaluation measure. Use many, including input measures.
No matter which method you choose, you will produce waste if you do not use multiple measures to evaluate performance and productivity. Without the right data, you will be basing your decisions on the wrong data. All the data points must be based on the processes that you established when you created your value-stream map. This ensures that the process is efficient. In short, you must measure everything that’s relevant, based on your goals and objectives, and then revise your goals and objectives and plans based upon the data on an ongoing basis.
Likewise, do not count on reviewing your reps only once a year. If you wait until then, it may be too late, as problems may be insurmountable. With regular targets and tracking, it is easier to make sure reps are working to their full potential.
Automated Dialers and Telemarketing Firms
A big trend in sales now is to use automated dialers or telemarketing firms to help with prospecting, appointment setting, and low-level C accounts. Earlier, we talked about sending these C-level accounts to customer service. It can be quite wasteful to have high-paid sales reps servicing accounts that buy a very minimal amount of product every year. Although this approach is okay, we have seen outside firms produce more waste in lost customers than any savings that are produced.
First off, don’t use automated dialers! Ever. Just about everyone alive today knows what’s coming when you see an 800-, 877-, unknown, or something similar number. We know the pause after we say hello and we can almost see through the phone at the poor rep who just got handed the call and is struggling to read the name that just popped up on their screen. I have frequently informally surveyed my classes about this subject. We never answer our phones when we do not recognize the number. I haven’t found more than one or two students who will answer the phone to an unknown number. Using these systems is impersonal and ineffective. Any savings you have in sales reps salaries will be lost due to customers leaving or not buying.
Another trend is the use of outside firms to make prospecting and appointment calls. Be extremely cautious with telemarketing firms! Do not do this! We do not even like having administrative assistants call to set appointments. I work closely with a CEO of a large Fortune 500 company who once came to me complaining about these new techniques. His words summarize everything wrong with this method. He said, “If I’m so important, why can’t you take the time to call me yourself!”
Note Avoid automated dialers and appointment-setting firms at all costs!!!
A very rudimentary ROI analysis will show huge savings by outsourcing these functions. Sales reps are expensive, whereas telemarketing callers are often paid minimum wage. Any ROI analysis should include more complex variables, such as customer satisfaction, short-term and long-term outcomes, lost current and potential sales, lost chance of up-selling and cross-selling, and any other damage that might be created by not servicing your customers in the correct manner. Even with the C-level accounts, no one’s account segmentation is perfect. You may have a C-level account that’s a local sole proprietorship. They are set to expand 1,000 percent over the next ten years. Obviously, within a few years, they will go from a C to a B, to likely an A. A third-party firm will not likely pick up on these nuances. They rarely continually document data and calculate future customer lifetime values. It is okay to let C-level accounts be handled by customer service departments, but we suggest these be in-house departments. You are better off having well-trained, in-house college interns than an outside company.
Sales Metrics
One study showed that only 25 percent of sales executives are using analytics to look at their business and processes.19 That is so sad. All executives should use analytics. If we do nothing else in this book than help you understand the importance of analytics, then that will be a huge improvement. Just the mere act of making smart decisions will dramatically cut your waste. We outline some of the most important sales analytics in the following sections.
Customer Lifetime Value
Everyone making customer decisions should understand customer lifetime value (CLV) for each customer. In its simplest form, CLV represents the present value of benefits, less the burdens from customers. The assessment of CLV is a complicated task; however, with the rapid growth of database mining, the vast availability of data on customers, and the abundance of models available, the task of assessing CLV is easier than ever. CLV-based segmentation can aid sales reps and marketers in determining what segments they should (or should not) try to create a more profitable relationship with and how to achieve that relationship. An extremely basic CLV calculation worksheet is provided in Figure 4-9. Note that the time value of money is not included in the spreadsheet. Any projection of future earnings should factor that into account. A dollar today is worth more than a dollar in five years. Once you complete this worksheet, you can add it to the information used to classify accounts.
Figure 4-9. CLV Caluculations
CLV calculations can be laborious and require advanced statistics, but are perhaps one of the most important metrics you’ll use. You cannot create an accurate forecast and therefore cannot make any of the other decisions we recommend without accurate CLV numbers. Even though the chart looks simple on the surface, each of the individual variables can be difficult to estimate.
Estimating total purchases over a lifetime can be quite tricky. Using the data you have, which may be in your CRM system, you want to look at three variables: how recent the sales were, the frequency of sales, and the number of sales. Meaning, how recently did the customer purchase, how often did they purchase, and how much did they purchase. When looking at these numbers, you can start to gauge if a customer is purchasing more and more often, or if the purchases are slacking off. As part of this, you want to look at your churn rate. The churn rate is the number of customers who stopped purchasing your product or service during a given time period. The formula follows:
You also need to calculate customer acquisition costs (CAC) and other expenses required to service a customer. The formula for customer acquisition follows. When calculating it, you want to be very careful to include only those costs associated with each customer. Also, don’t forget to include every cost associated with a customer. Expenses like samples and visual aids are easy to forget. If your CAC increases, your sales and marketing might be becoming more inefficient.
Another metric is the time to payback. This looks at how quickly you are making your money back on your CAC costs.
As you will notice in the CLV spreadsheet, referrals is an extremely important measure. The more referrals you get, the more valuable each customer becomes. Likewise, studies have shown that new customers who buy because of word-of-mouth or referral are twice as valuable as customers who buy because of short-term advertising campaigns.20 For every customer, find out how they came to you (through referral, Internet search, etc.). Based on these numbers, you should be able to calculate a CLV.
Pipeline Analysis
Every sales rep and sale manager should have an idea of the pipeline conversion rates. These tell you how wasteful or productive your sales reps are. Figure 4-10 shows a simplified pipeline analysis. In this, you can see that sales reps are being rather wasteful in their lead selection. You actually want fewer leads going in because you want to make sure your reps are qualifying the accounts. You want them to work smart, not hard. The actual appointment-to-sales rates, however, are quite good. This indicates that when the sales reps are in front of the customer, they are doing their job. In this instance, waste could likely be reduced by having the reps take some prospecting training.
Figure 4-10. Pipeline Analysis
Trade Show Metrics
If you’re attending trade shows, you need to keep good ROI measures of your success. So many people attend trade shows just because it is what they think they should do. As described, trade shows can be quite profitable and a good source of well qualified prospects. However, they can be extremely wasteful too. You must understand what goes into a trade show and what comes back out to know if you should be attending trade shows. Some of the more important measures are in the following.
Industry average for costs for visitors reach ranges from $116 – $195.
Make sure, when examining these metrics, that you incorporate all expenses. Trade show venues will charge you for every little thing they can, from space to electricity to ice and cups. And don’t forget your sales rep’s travel expenses and some figure for the lack of ability to service other accounts while traveling.
Conclusion
Like every area of business, the sales function has various areas of waste that you need to address. The bulk of the waste in sales is created by not treating it like the analytical process it is. Business leaders tend to think of sales as a function of charisma instead of a real skill. Sales research and practice, however, show that following structured processes can yield more consistent sales results. Because you might be used to the waste from sales as being the way that you have always done it, you need to analyze your processes. Improvements need to start with the way that you are measuring sales activities. Every activity should have an associated metrics so that you can identify and eliminate waste.
The data that you get from the sales processes should lead you to better hiring, training, and managing of your sales employees. You can then focus your limited resources on activities that provide a ROI because you understand what truly affects sales. By learning to see the sales processes as a kind of manufacturing process, you can identify and improve upon them.
Waste Checklist
1 Bureau of Labor Statistics, U.S. Department of Labor, Occupational Employment and Wages, March 27, 2012, http://www.bls.gov/news.release/archives/ocwage_03272012.pdf.
2 Sales Education Foundation, SEF Annual Report, 2011, http://saleseducationfoundation.org/pdfs/sef_annual_2011.pdf.
3 OECD, 2001, http://www.oecd.org/std/productivity-stats/2352458.pdf.
4 CSO Insights, “Sales Performance Optimizations: 2012 Key Trends Analysis,” 2012, http://news.citrixonline.com/wp-content/uploads/2012/02/2012-Sales-Performance-Optimization-Study-.pdf.
5 Bosworth, M. and J. Holland, Customer Centric Selling (New York, NY: McGraw Hill, 2004). p. 8.
6 Baldwin, H. “The Strange Case of the Vanishing Sales VP,” Selling Power Magazine, 2010, p. 34–37.
7 The HR Chally Group. “The Route to the Summit,” The Chally World Class Sales Excellence Research Report, 2007.
8 CSO Insights, 2010, retrieved from http://www.csoinsights.com/Topics/Hiring-and-Retention.
9 Hunter, J & Hunter, R. “Validity and Utility of Alternative Predictors of Job Performance,” Psychological Bulletin, 1984, 96 (1). p. 72–98.
10 Phelps, G. “Creating Paths to Success,” Gallup Management Journal, 2010, retrieved from http://gmj.gallup.com/content/286/creating-paths-success.aspx.
11 The HR Chally Group. “The Route to the Summit,” The Chally World Class Sales Excellence Research Report, 2007.
12 The HR Chally Group, “The Chally World Class Sales Excellence Research Report,” 2007. HR Chally Press.
13 Zoltners, A. A., P. Sinha and S. E. Lorimer, “Sales Force Effectiveness: A Framework for Researchers and Practitioners,” Journal of Personal Selling and Sales Management, 2008, 28(2), p. 115–131. (Special issue on enhancing sales force productivity.) 14 Ibid.
15 Orr, Linda, “Sales Force Productivity: Definition, Measurement, and Determinants,” working paper, 2014.
16 Fitzpatrick, Michael, “Golf’s Decline in America: Work/Life Balance Is the True Culprit,” The Bleacher Report, March 29, 2011, http://bleacherreport.com/articles/648286-decline-of-golf-in-america-worklife-balance-is-the-true-culprit.
17 Baldwin, H., “The Strange Case of the Vanishing Sales VP,” Selling Power Magazine, 2010, p. 34–37.
18 Ibid.
19Accenture, “Connecting the Dots on Sales Performance: Leveraging the 2012 Sales Performance Optimization Study to Inform Sales Effectiveness Initiatives,” 2013, http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-Connecting-Dots-Sales-Performance.pdf.
20 Villanueva, Julian, Shijin Yoo and Dominique M. Hanssens, “The Impact of Marketing-Induced vs. Word-of-Mouth Customer Acquisition on Customer Equity Growth,” Journal of Marketing Research, 2008, 45 (1), p. 48–59.