I’ve chosen to close Part One of this book with a frontal assault on the juiciest bovine of all: the unassailable belief that salespeople should be paid commissions. And while I’m at it, I’ll take aim at bonuses, targets and other artificial management stimulants.

A litmus test

This discussion is important for two reasons.

First, commissions and their bedfellows will definitely handicap the performance of the reengineered sales environment I’ve gone to great lengths to describe.

Second, this discussion will force us to confront the significant implications of Sales Process Engineering: both locally and organization wide.

If you are brave enough to follow in the footsteps of our quiet revolutionaries it’s critical that you truly appreciate the essence of SPE. It’s not enough to believe that SPE will work; you must also understand – at the most fundamental level – exactly why it will work. (And if you don’t, it almost certainly won’t!)

So, I’m proposing that you use the (emotionally-charged) question of salespeople’s commissions as a kind of litmus test. If, by the end of this chapter, you are comfortable that there is no place for commissions in a reengineered sales environment, it’s safe for you to proceed.

If, however, this conclusion still does not sit comfortably with you, it makes more sense to treat this book as an exercise in creative thinking (and leave your sales function well alone).

When commissions make sense

At its most fundamental level, SPE involves the transitioning of the responsibility for sales from autonomous agents to a centrally-coordinated team.

When sales actually is performed by autonomous agents, it does makes sense to pay these agents on a commission basis (a percentage of the revenue they generate).

So, if we imagine a computer hardware manufacturer that sells desktop and notebook computers to consumers, via big-box retailers; it’s clear that these arms-length retailers should be paid on a commission basis.

And, if we think about this example, we can identify two conditions that accord well with commission-based pay:

1. These retail agents sell from stock – meaning that there is no requirement for them to interact with the hardware manufacturer on a transaction-by-transaction basis (which certainly would not be the case in an engineer-to-order environment)
2. These retail agents are truly autonomous – they march to their own drumbeats (and they own the relationship with the ultimate customer)

But what happens to the case for commission-based pay when these conditions are not in place?

As we discussed in Chapter 2, when we transition from a make-to-stock to an engineer-to-order environment, the case for autonomy becomes weaker. Increasingly, the performance of the organization as a whole becomes more a function of the quality of integration between sales and production.

And, because autonomy and teamwork are polar opposites, as the case for autonomy becomes weaker, we reach a point where we have to make a clean switch from one to the other (there’s simply no such thing as an autonomous team member!).

The wrong question

We now arrive at the critical question. We should not begin this discussion by asking: does commission make sense? Rather, we should ask: should we sell via autonomous agents or via a centrally-coordinated team?

Once we answer this question, our position on commissions becomes obvious.

Commissions: the case against

In order to understand why, let’s briefly revisit the history of manufacturing.

There was a time (before the industrial revolution) when almost all labor was paid on a piece-rate. Piece-rate pay is the manufacturing equivalent of commission. Rather than being paid in units of time, a piece-rate worker is paid in units of output. (A sewer, for example, might receive 20c for each garment processed.)

Today, however, piece-rate pay is almost extinct. (And, I suspect by now, you have a good idea why!)

What happened is that management discovered that, as the complexity of the environment increased, there was a critical threshold beyond which scheduling decisions had to be made centrally.

Of course, beyond this threshold, piece-rate pay had to be eliminated because it drove workers to work as fast as possible and not to subordinate to the schedule. (Remember, because of the combination of dependency and variability you never maximize the output of a system by maximizing the rate-of-work of each system resource.)

Commissions (or any kind of performance pay) are inappropriate in the reengineered sales environments described in this book for exactly the same reason that piece-rate pay is now inappropriate in manufacturing environments.

And this conclusion does not just apply to the sales function in isolation. As we discussed in Chapter 4, in many organizations it is not healthy for sales to be the organizational constraint. So, in these cases, irrespective of the structure of the sales function, the organization as a whole will perform better when sales is not operating at 100% utilization.

I wish this could be my last word on that subject. However, there’s a number of persistent objections to my position that we must first put to bed:

1. Ours is a mixed environment: salespeople are not fully autonomous – meaning that a mix of salary and commission is justified
2. Even if we don’t need the compensation plan to determine salespeople’s rate of work, we still need performance pay to maximize salespeople’s quality of work (in other words, without commissions, what would motivate salespeople to actually sell?)
3. Commissions enable us to mitigate against the uncertain nature of salespeople’s performance and keep costs under control
4. The theory may make sense, but good salespeople will simply not be prepared to work in an environment without commissions

The fallacy of a mixed environment

I’ve heard many executives argue that it’s beneficial for their salespeople to be partly autonomous. But I’ve never heard anyone argue that it’s beneficial for salespeople to be partly team members.

Perhaps it’s because the latter phrasing exposes the folly of this position!

I’ve already stressed that it is impossible for salespeople to be team members and autonomous agents at the same time. However, an astute reader might argue that this is possible in theory (if not in practice).

Your salespeople can be capable team members and operate autonomously if (and only if) the rest of the organization has the capacity to subordinate to individual salespeople.

At first glance, this condition may not appear to be particularly onerous. However, when we consider the enormous variability in salespeople’s output, we recognize that effective subordination would require a huge amount of redundancy in customer service, engineering and production. (Remember, we’re considering true sales here, not repeat transactions.)

The fact that this is commercially unrealistic in most organization tends not to stop management from pursuing a mixed sales environment. And, the consequences are as unpleasant as they are predictable:

1. Management encourages salespeople to operate autonomously
2. Salespeople proceed from the assumption that more sales is always better (the tacit assumption is that the rest of the organization can keep up)
3. On average, the sales team as a whole sells less than the organization has the capacity to produce
4. However, because new accounts are won infrequently (after all, salespeople spend the greater majority of their time processing transactions), the load on the rest of the organization is irregular
5. On the (not infrequent) occasions that customer service, engineering or production does not have the capacity to honor commitments made by salespeople, on-time performance tends to be compromised (although, the commitments that have been made to new accounts are often met, at the expense of existing ones)
6. Periodically, management attempts to improve the financial performance of the organization with additional incentives and special promotions
7. These incentives tend to increase the lumpiness of the deal flow – meaning that, over time, peak sales increase, at the expense of average sales

The bottom-line is that contradictions cannot persist indefinitely. Your salespeople cannot be both autonomous agents and team members. They cannot be responsible only for sales outcomes and simultaneously be expected to attend sales meetings and maintain the organization’s CRM. And customers cannot belong to both salespeople and to your organization.

Commissions and the quality of work

If salespeople don’t have the opportunity to earn commission, then why would they sell?

I wish I had a dollar for every time I’ve been asked this question by an incredulous executive. You would think the onus should be on the defender of performance pay to present an argument.

After all, receptionists answer the phone when it rings, in spite of the fact that they receive no incremental pay. Your financial controller does a good job of paying bills on time, in spite of the fact that they receive no rebate on each check signed. And even senior executives perform important tasks, absent special incentives (I’m assuming that no one is paying you to read this book!).

Why should salespeople differ from almost every other worker on the planet?

The answer to the question four paragraphs above is simple: absent the opportunity to earn a commission, salespeople will still sell because they are salespeople. (Just as receptionists answer the phone because they are receptionists.)

I often wonder if those executives who ask that question are really enquiring into the motivation of their team members or if they are providing an (unsolicited) insight into their own pathology!

In Drive, his excellent best-seller, Daniel Pink presents a powerful case against performance pay. His conclusion – backed-up by many experiments from the social sciences – is that external rewards retard the performance of knowledge workers and have a positive effect only in situations where workers are performing mindless, repetitive tasks.

In other words, if your team members are responsible for activities any more complex than licking stamps, the work itself is their reward.

Interestingly, Pink’s conclusion points to an interesting defense of performance pay in the traditional sales environment. Consider these two points:

1. In most environments the volume of sales appointments has a far greater influence on sales output than the qualitative performance of the salesperson
2. In almost all environments, salespeople generate their own appointments as a result of mindless and repetitive prospecting activities (internet research, cold calling, etc)

With these points in mind, commissions may be defensible in traditional sales environments, not because they motivate salespeople to sell, but because they motivate them to prospect!

Of course, in our case, this argument is moot because we are definitely going to free salespeople of the requirement to generate their own sales meetings.

Commissions as a hedge against non-performance

The obvious problem with the argument that performance pay provides management with a hedge against the costs associated with salespeople’s non-performance is that the same argument could be applied to everyone in the organization.

But, then sales is a special case for a couple of reasons:

1. The performance of salespeople is highly variable
2. It is easy to isolate the contribution that a salesperson makes (this would not be so easy in the case of a line worker)

As we’ll discuss shortly, SPE inverts these two reasons:

1. The output of the sales function ceases to be highly variable
2. While it’s easy to measure the capability of a salesperson, it is difficult (if not impossible) to isolate the contribution that person’s activity make to the organization as a whole

First, however, let’s consider the wider (and more terrifying) implications of performance pay.

Management abdicates

We’ve discussed earlier that you cannot manage an autonomous agent (these two concepts are antagonistic). Performance pay makes this contradiction explicit! In other words, when a significant component of a salesperson’s pay is performance based, management has formally abdicated its responsibility for sales.

In so doing, management has telegraphed to salespeople that selling is optional! It is now up to individual salespeople whether or not they generate sales – and in what quantity.

If a salesperson is capable of selling, the real cost of their non-performance is not their salary, it’s the profits that the organization does not earn when production is sitting idle!

If a salesperson is not capable of selling, the real cost of their non-performance is still not their salary, it’s the sales opportunities that are lost that could have been won if they were attended to by a more capable individual.

Variability diminished

If sales appointments are the primary driver of sales (and it’s rare that they are not), we can significantly reduce the variability of sales by:

1. Fixing the volume of sales appointments (the same number of appointments, week after week)
2. Increasing the volume of appointments (as the appointment volume increases, the variability of the entire sales function reduces)

Of course, our standard model does this by ensuring that salespeople do nothing other than sales appointments and by ensuring that each salesperson performs ten-times the volume of appointments they would perform in a typical sales environment.

Capability

Many of our silent revolutionaries report an increase in salespeople’s capability. There are three contributing factors here:

1. Predictably, when organizations reduce the size of their sales teams, they retain their more capable salespeople
2. When salespeople do nothing other than sell – four appointments a day, five days a week – they get good at it (or they rapidly conclude that sales is not the right career for them)
3. With control over salespeople – and with accurate and current data – sales management finds it easy to institute a process of ongoing improvement

Salespeople’s position on commissions

If there’s one thing I’ve learned in the last 10 years or so, it’s that sales managers are uniformly terrible at predicting their salespeople’s reaction to our standard model.

Almost without exception, sales managers predict outrage from their team members – perhaps even a mass exodus of talent! And the one component of our model sales managers predict will be the most offensive is the elimination of commissions.

In reality, salespeople’s reaction to this proposition tends to be shocking for exactly the opposite reason. It’s shocking how comfortable salespeople are to give up both their autonomy and their variable compensation plan!

The reason salespeople tend to be so compliant is very simple.

Salespeople (contrary to popular opinion) do not live in a parallel universe. They are a part of the same dysfunctional reality that is causing the rest of the organization (including management) so much pain.

Salespeople may have different theories about the source of their particular set of issues – and they may propose different initiatives as a remedy to these issues – but, when presented with the evidence, salespeople recognize (often faster than management) that a significant number of sales problems, production problems and management problems can be tracked back to the same root cause (their autonomous mode of operation).

And make no mistake; salespeople have more than their fair share of complaints:

1. They hate the volume of clerical and customer-service work that prevents them from engaging meaningfully with potential and existing customers
2. They don’t enjoy spending their evenings in hotels entering data in the CRM, generating expense reports and writing proposals
3. The resent the continual conflict over the allocation of commissions (particularly when accounts span multiple territories)
4. They hate having to advise clients that their promises will not be met – and they resent the fact that they have to live with the continuous uncertainty over production performance
5. They don’t enjoy the underlying – and constant – conflict in their relationships with production, customer service engineering, management and even finance

It may be true that salespeople are in love with the notion of the salesperson as a lone crusader, but salespeople are also realists. They quickly recognize that, on balance, the proposed environment will be infinitely more rewarding to work in.

Sure, they sacrifice their autonomy but, so what? They each get a dedicated executive assistant (sales coordinator) who will free them to do nothing but sell.

And sure, they have to transition from commission to a salary but, what of it? Salespeople understand that the dynamics of the environment in which they operate rob them of the financial upside they signed-on for. And, the truth be known, salespeople have never been entirely comfortable with the notion that they are innately lazy: prepared only to do the right thing on the promise of an incremental financial inducement.

The new compensation plan

So, it’s out with commissions and in with a new compensation plan.

But there’s not much to the new plan. The idea is simple: we pay people what they are worth (perhaps a little more).

And that’s it!

In practice, you should pay salespeople enough to ensure that compensation is no longer a regular topic of conversation – and then insist that they perform the activities required for the organization to achieve its objectives.

So here, from management’s perspective, is the fundamental difference between the two compensation plans:

With performance pay, we make optimal performance optional – and then we attempt to exert control through a compensation plan that underlines salespeople’s autonomy with every pay check!

With salaries, we take the discussion of money off the table. Salespeople willingly subordinate to a central schedule. And they perform necessary activities because they are asked to (and, because those activities are congruent with both salespeople’s job descriptions and the reasonable interests of the organization).

This new plan, then, is not even new: it’s exactly the same plan we use to compensate everyone else in the organization!

And when it comes to calculating salespeople’s salaries, there are no surprises here either. As with all employees, there are two considerations:

1. Replacement cost (how much would you have to pay for another person with a comparable set of capabilities?)
2. Asking price (how much will you have to pay the current candidate to ensure that the compensation plan is no longer a regular topic of conversation?)

It should go without saying that it would be foolish to propose that salespeople (or any team members, for that matter) take a cut in pay when you transition to this new model.

Most of our silent revolutionaries shift their salespeople to a salary that is equal to, or slightly greater than, their average total earnings (typically judged over a three-year period).

If you think about it, both parties are getting a terrific deal here.

1. Salespeople are receiving a not-insignificant pay rise. Obviously the potential to earn a figure is worth nowhere as much as the same figure, guaranteed.
2. Management is increasing the volume of effective work performed by each salesperson by ten times. To achieve the same increase in a typical sales environment, management would have to add nine more salespeople for every one they currently employ! In the new model, the cost is limited to an incremental increase in the salesperson’s compensation and the cost of a sales coordinator.

The other artificial management stimulants

This debate about commissions is like Hydra (the many-headed monster). You successfully lop-off one head and another appears.

I fear that, even if I’ve done a reasonable job of convincing you that there’s no place for commissions in the reengineered environment, your very next question might be: but, what about bonuses.

My observation is that bonus plans have a couple of problems:

1. Because the bonus is remote from the positive behaviors that drive the desired outcome, the first installment of a bonus is a pleasant surprise and subsequent installments are viewed as entitlements
2. Bonuses suggest to team members that they are responsible for outcomes when, in fact, managers should own this responsibility – accordingly, they tend to dis-empower managers

It is certainly true that some degree of variability is required where compensation is concerned. However, my position is that standard salaries provide the necessary flexibility. As your team members become more capable, their market value increases, meaning that you are obliged to grant them pay rises when (or ideally before) they request them.

I suggest that there is absolutely nothing wrong with the traditional contract between employers and employees. Employees want to be able to perform rewarding work in a secure environment. If they were really seeking uncertainty and boundless riches they would not have signed-on to be employees in the first place.

The other stimulants (targets and quotas) are problematic for the same reasons as commissions and bonuses. They tend to suggest that team members own outcomes.

In a team environment, the team cannot own the responsibility for anything! There is no collective consciousness – only a group of individuals. It is critical, therefore, that the manager owns the responsibility for the desired outcome and that team members own the responsibility only for the activities assigned to them.

Here, a military example is illuminating. Imagine, rather than allocating discrete responsibilities to each of his units a commander were simply to assemble all his troops and exhort them to take Berlin!

Reinventing management

On the subject of management, it’s important to recognize that the transition to a reengineered sales environment is extremely difficult for sales managers.

As a result of this transition, sales managers find themselves in a position where down is up and up is down. If sales managers were to refer to a list they had compiled before the transition of everything they know for sure about sales, almost every statement on that list will now be false.

Consequently, it is not sufficient to reengineer the general sales environment. You must also rebuild from scratch the sales manager’s method of operation.

* * * *

You now have a sound understanding of the theory that underpins Sales Process Engineering. Part Two of this book will show you how to convert all this theory into practice.

Towards the end of our conversation, he asked if I thought much market intelligence could be gleaned from customer surveys.

I answered (almost instinctively), data, yes; but, intelligence, no.

When pressured for a more coherent answer, I explained that I had never seen customer survey responses that provide any market intelligence. Never. Never. Never!

My position is that, to qualify as intelligence, survey results must be:

1. Unexpected (if you know the answer already, why ask the question?)
2. Actionable (if data doesn’t cause you to do something differently then where’s the benefit?)

Think about the survey results you’ve seen.  How often have you been surprised?  And how often have you been motivated to take some specific action?

Now, of course, I’m not advocating ignorance. Market intelligence is critical. You shouldn’t try to survive without it. It’s just that surveys are a pretty poor way of generating intelligence.

Here’s the thing …

In your business, you bank behavior, not attitudes.

My advice then, is stop measuring attitudes and, instead, measure behavior. Run controlled experiments. Change offers, change headlines, change opportunity-management workflows (not all at once, of course) and measure the impact of changes on, enquiries, conversions and, ultimately, sales.

Now, those who make their living from surveys will argue that attitude is an antecedent to behavior. I’m sure that in most cases it is. And in some, it definitely isn’t (how many smokers genuinely believe that their’s is an intelligent choice?)

But even if this claim is true, this position contains another assumption: that surveys actually measure attitudes. Do they?

Before you answer that question, consider another: which do you think is the more accurate predictor of a client’s future behavior:

1. Their current attitude
2. Their prior behavior

Tell me if you disagree but, to my mind, it’s a no contest!

And behavior is much sexier than attitude for another reason too: it’s inherently measureable (in a much more objective sense than the surveyor’s 1-5 scale).

If you value market intelligence, can the surveys. Objective management is a philosophy, not a once-a-year event!

On some occasions, this dogged pursuit of the improbable is understandable, even admirable. But, more often than not, this conduct amounts to a highly unproductive evasion of reality. occasions when you feel as if you’re attempting to push string uphill, you stop and consider whether your current endeavour is, in fact, an appropriate investment of your (or your team’s) scarce resources. To assist in your evaluation of such situations, I’ve compiled a list of danger signs, some guidance on the diagnostic process and some alternate approaches.

It’s important to note that this list is in no way intended to be exhaustive. I’ve simply attempted to prioritise those problems we come across most frequently in the field. I hasten to add that, as a frequent offender, my advice should be regarded more as counsel from the brink than as a sermon from the mount!

Danger signs:

The universe is conspiring against you For whatever reason, Ballistix is frequently approached by inventors seeking assistance with the commercialisation of their inventions. Because we are not the obvious route to market, more often than not these inventors have approached us as a last resort or a wildcard. In these situations, we’re dealing with people who’ve received knock-backs all over town. In such cases, it’s common to be confronted by a person exhibiting an air of desperation and defiance. This person has reversed the law of cause and effect and become convinced that the universe is conspiring against him! He will often cite other successful inventors’ frequent failures as evidence of his impending triumph. (Edison’s thousands of failed attempts to find a suitable material for his light bulb’s filament would have to be the most oft-quoted example).

Diminishing returns Diminishing returns are a sure sign of danger. Unfortunately, because the onset of problems is initially very gradual, this danger sign is often missed. Diminishing returns occur because every system or process has a constraint. (Without a constraint, a system’s output would be infinite.) The constraint might be the capacity of your manufacturing plant, it might be the size of your market or it might be a policy (internal or external). As the volume of your system approaches the constraint, your return on resources deployed tends to drop away exponentially. If we assume that you were manufacturing a product for a very limited market, you would be likely to discover that the promotional cost of sale would increase with each new sale. By the time that you had just a handful of potential customers remaining, you would discover that it would cost more to make each subsequent sale than the value of the transaction.

Your system is unstable Years ago, I worked as a sales manager in the insurance industry. My three co-managers and I each managed teams of 25 salespeople. We believed our responsibility was to motivate our salespeople. Accordingly, over a few years, we introduced a number of sales initiatives, including:

• Weekly sales meetings in a riverside restaurant, where each team sang its team song and challenged other teams to sales duels (loosing typically meant being lined up and tossed ceremoniously into the Brisbane River!)
• Daily (afternoon) sales meetings, where each team member logged her activity from the night before (appointments, presentations and ¡­ sales) to thunderous applause. Of course, these meetings featured more team songs, on-the-spot prizes and hysterical chanting — all designed to send salespeople off to their evening appointments on an emotional high.
• A stepped incentive scheme (on top of standard commissions), where prizes were awarded for different levels of performance. These prizes ranged from clothing vouchers, to mobile phones (you had to pay for them 15 years ago), and weekends away. It even featured a chocolate wheel to ensure that everybody had an opportunity to win a prize!
• Special major sales promotions (on a couple of occasions, we sent entire winning teams on overseas holidays!) Looking back, I can comfortably say that we pushed traditional sales management practices to their ultimate limit. If we’d tried to infuse our salespeople with any more positive mental attitude, we almost certainly would have all been arrested!

The bad news is that the environment we created didn’t actually result in a significant increase in sales! What it did produce was periodic record months. If you were to inspect a graph of our sales revenues over that period, what you would notice is that, as the highs got higher, they became less frequent. Furthermore, you would notice that the lows got progressively deeper and longer. All we were accomplishing with our management antics was to time-shift the emergence of sales to create occasional record months. These record months then provided us with the justification we needed to push our management initiatives to the next level of lunacy! Of course, this lumpy sales curve was particularly damaging to the rest of the organisation. The infrastructure that was required to cope with record months sat around idle for much of the time.

If your system output resembles a triangle wave, with massive highs and bone-crushing lows, you too may be attempting to push string up hill!

The diagnosis

The following questions should help you to evaluate your situation and determine whether or not you are currently pursuing an appropriate goal.

Does the end justify the means? I’ve heard a number of managers justify their crusade by reassuring those around them that the only cost is their time. They figure that the cost of their time is equivalent to their annual salary divided by the time invested. What they forget is that their time is a scarce resource, with alternate uses. The real cost of their time is the highest return that could be earned if it were invested elsewhere. Of course, this applies to all scarce resources.

What are the odds? Inventors assure me that their inventions could net millions. What they fail to grasp is that the usage of the word could infers probability. Statistically, the value of the bucket of gold should be multiplied by the probability of finding the end of the rainbow. Now, if an inventor has dedicated years of his life to a single invention, probability theory will not offer him much useful counsel. However, if he were to approach his craft as a serious profession, he would maintain at all times a portfolio of inventions, each with a different risk/reward profile (as, of course, did Edison).

Will it scale? If it takes you three years and a team of ten salespeople to consummate your first sale, you would have to question how scalable this enterprise is likely to be. If we assume that you are not selling the world’s first fax machine (or some other product where network effect is likely to be a major factor), a slow start may be a leading indicator of an even slower future. My advice to entrepreneurs is that, if your steed doesn’t come out of the gate fast, seriously consider changing horses.

The remedy

Based on your evaluation of your current situation, I think you have four obvious choices.

Invest your resources elsewhere This option should need little explanation. If, after factoring in probability, you determine that you can earn a better return on your scarce resources elsewhere, that’s exactly what you should do!

Re-evaluate your goal I’m sure you can recall situations where you failed to achieve something that you desperately wanted, only to later realise that this was a blessing in disguise. Now, obviously, I’m not suggesting that there’s any cosmic interference at work here. My point is that sometimes it’s easy to get so caught-up in the chase that you forget to confirm periodically whether or not you still want what your’e pursuing. Speaking from personal experience, at Ballistix, we struggled with our previous business model for too long, before re-inventing ourselves as a management consultancy. I wish we had stopped to re-evaluate our goal years earlier. On that note: remember that the goal of your organisation is to make money, full stop. There’s no law that says your current business model (or that the industry standard business model) is the optimal one.

Re-design your process If your goal’s good, you might want to re-design your process. If you are suffering from diminishing returns or if your process is unstable, these are two sure signs that your process needs a re-design. The key here is to remember that these are both symptoms of a process problem. Process problems are management’s responsibility, not team members’. You should focus on reengineering your process — not on exhorting your team members to work harder (or, worse still, smarter). Of course, you’ll find plenty of articles on process design and management listed under our Sales Process Design index.

Muster more resources If your goal’s good and your process is showing no signs of stress fractures then maybe you just need to push a little harder! Throwing more resources at the realisation of your goal should bring forward its achievement — that’s obvious. But putting all the wood behind the one arrow will also speed the arrival of the positive reinforcement that your team needs to stay enthused — and demonstrate management’s unwavering commitment to the attainment of this goal.

I hear this anxious declaration regularly. Particularly from manufacturers and software vendors. I’ve even heard it from a number of musicians!

Manufacturers want representation from agents or retailers. Software vendors want to establish relationships with resellers. And musicians want representation from a record label.

But in each case, this declaration can indicate a potentially dangerous misunderstanding of the dynamics of the distribution channel. And there’s an important lesson in this for all of us – even those who sell direct!

I usually have two comments for those who are having trouble getting distribution:

1. An inability to get distribution is probably symptomatic of a bigger problem.
2. And, if this is the case, it is better to avoid making a commitment to a reseller (I’ll use this as a generic term) – even if such an opportunity arises.

Before we examine this ‘bigger problem’, let’s take a look at the role that resellers play in the distribution process.

Why resellers typically don’t sell

Let’s imagine a typical retailer for a moment. The kind of retailer you’ll find in any shopping centre. Picture, say, a music retailer.

Now tell me this … what contribution does our music retailer make to the ‘value chain’ that stretches from an artist (with a guitar, a microphone and a bad attitude) through to the fan, (who willingly exchanges $29.95 for the artist’s compact disk – and for the rights to play it, only in the privacy of her home or car)?

It would be fair to say that the music retailer’s contribution to this value chain is the ‘sale’ of the artist’s compact disk, right?

Wrong!

The reality is that this music retailer doesn’t add value by ‘selling’, at least in the true sense of the word. The retailer’s most important contribution is the provision of a distribution point – or a ‘point of presence’.

If you’ve ever spent time in a music store, you’ll know that staff members spend most of their time simply operating the cash registers. Even those more progressive music stores, with listening stations and staff with specialities in particular music genres, still generate more revenues from Britney Spears CDs than they do from the sales of CDs from lessor-known artists.

Now this distinction applies to most resellers. They don’t actually sell: they provide a point of presence. The real selling is done higher up the value chain. Or, to put it another way, they don’t sell because they don’t have to. The customer has already been ‘sold’ when she sets foot in the store.

However, there are some resellers that do sell – and who are good at it. And these – believe it or not – are the resellers of which we should be very wary!

Why you should be glad that most resellers don’t sell

If we stick with retailers for a moment, an example of a reseller that does sell is a hairdresser.

Consider, for a moment … which brand of shampoo do you purchase when you visit your hairdresser?

The one he offers you, of course!

You don’t select your favourite brand from a crowded shelf (as you would in a supermarket), do you? Of course not. Your hairdresser makes that selection for you. And, odds are, he provides you with a ‘premium’ (hairdresser-only) brand, of which you’ve never heard.

So far, I’ve managed (at great length) to explain that some resellers sell – and that some don’t. You might be excused for thinking: so what!

Well, here’s the thing: whoever does the selling in a value chain, owns the customer relationship, and …

Whoever owns the relationship with the ultimate customer sets the terms!

That’s right, the participant in a value chain with the most power is generally the one who does the ‘selling’.

Our manufacturer gains distribution and locks-out his competitors

Now let’s return to our anxious manufacturer, software vendor and musician, and examine the real problem each faces — and the opportunity that this problem provides.

We’ll look at our manufacturer’s situation first.

Assume that our manufacturer has developed a technically superior product (a chainsaw, perhaps). He’s trying to convince hardware stores to stock this tool.

To his dismay, hardware stores appear to have little interest in his product’s technical attributes. Even though they seem to be at a loss for any logical argument as to why they shouldn’t represent his chainsaw, they simply fail to write a purchase order.

While this scenario makes no sense from our manufacturer’s perspective, it’s understandable when we consider what we’ve just learned about typical resellers.

Because a hardware store’s primary role in its value chain is to provide a point of presence, it doesn’t have a lot of sales infrastructure. Without the sales infrastructure required to ‘make a market’ for a new product, this new chainsaw isn’t an attractive proposition – regardless of its technical attributes. It’s far easier for our hardware store to simply promote the best-selling brand.

So what should our manufacturer do?

Well, he has two choices:

1. He can look for a retailer with the ability and the desire to ‘make a market’ for his chainsaw.
2. Or, he can accept responsibility for ‘making the market’ himself.

While the first option may appear initially to be attractive, he should approach it with caution.

You see, if he delegates responsibility for ‘making a market’ to a reseller, the contribution he makes to his value chain is limited to his product’s technical superiority. And more often than not, technical superiority is not a sustainable competitive advantage.

This fact is graphically illustrated in James Dyson’s brilliant autobiography, Against the Odds. James Dyson invented the enormously successful Dyson (bagless) vacuum cleaner. In spite of its groundbreaking technical superiority, Dyson struggled for years to get distribution for his vacuum cleaner. In the process, he was almost bankrupted by a long-running court case with Amway Corporation. He had been attracted to Amway by their market intimacy. However Amway backed-out of negotiations at the last minute, stole his trade secrets and designed a copycat product! (Fortunately, Dyson won his court case and was awarded significant damages – including an ongoing royalty stream.)

Our manufacturer’s second choice is to accept responsibility for ‘making a market’ for his chainsaw.

He would do this by running promotional campaigns designed to drive customers to hardware stores, asking for his brand of chainsaw.

If he can successfully accomplish this, he will enjoy the following benefits:

1. If only one or two customers request his brand of chainsaw, retailers will fall over themselves to stock his product. We’ve already discovered that retailers find it easier to supply the brands that their customers request.
2. Once hardware stores sense that this new product is hot, they will start making it easier for customers to purchase our manufacturer’s product than they do his competitors’. They’ll do this by giving our manufacturers’ product premium shelf (and catalogue) space. (Of course, this is the basis of retail ‘category management’.)
3. If our manufacturer uses appropriate direct marketing techniques (e.g. couponing) to ‘make a market’ for his product, he will probably be able to build a database of existing and potential customers. He will then be able to use this database to drive demand (and distribution) for his future products.

So, by assuming responsibility for ‘making a market’, our manufacturer easily gains distribution and locks-out his competitors.

Software vendor discovers that resellers’ dependence is an asset

Our software vendor’s situation differs in only two subtle ways from that of our manufacturer:

1. His resellers are service providers (rather than product vendors). Accordingly, they tend to have a more intimate relationship with their customers (remember our hairdresser example.)
2. Because of software’s rapid development cycle, his product’s technological advantages are likely to be even more transient than those of our manufacturer.

Both of these factors make our software vendor’s contribution to his value chain more tenuous than our manufacturer’s.

Therefore, he should be even more wary of delegating the role of ‘market maker’ to his reseller network.

It would be tempting for our software vendor to consider bypassing this reseller network altogether and sell direct. However, this approach has three shortcomings:

1. Speed and expense. It will take a lot of time and money for our software vendor to replicate the reseller network’s infrastructure (their points of presence).
2. Market access. Existing relationships between resellers and customers are likely to lock our software vendor out of some segments of the market.
3. It’s not his thing. Our software vendor’s stakeholders are likely to take a dim view of his investing their capital in non-core infrastructure. (For an innovator, research and development and market making are core activities. Logistics isn’t!)

Our software vendor’s distribution strategy should be similar to that of our manufacturer.

As well as working hard to maintain his technology leadership, he should take responsibility for ‘making a market’ for his software. He should do this by building the marketing infrastructure required to provide his reseller network with a steady stream of sales opportunities (qualified leads). (You can review our article on Relationship-centric Marketing for an outline of how to go about building such infrastructure.)

Obviously, if our software vendor is in a position where he can provide a steady stream of sales opportunities, he will have no trouble gaining an audience with resellers.

The reality is that resellers are generally strong when it comes to maintaining existing customer relationships — but weak when it comes to establishing new relationships.

If our software vendor can provide resellers with new relationships (in the form of sales opportunities) he will win the (current and future) business from these relationships, but he will also unlock the value resident in his reseller network’s existing client base.

Unfortunately, this thinking is counter-intuitive for many software vendors — and for many other organisations that utilise a distribution channel comprising service providers.

Just recently, I had a conversation with a software vendor who advised me that he was looking for ‘resellers who could generate their own sales opportunities’.

I advised this vendor that, if I were him, I would be encouraging my reseller network to become dependent upon me for sales opportunities. Long-term, this dependence is an asset, not a liability!

Musician must learn to be a ‘market maker’

Whilst it may seem strange to group musicians with manufacturers and software vendors, there are some important parallels.

Typically, musicians (and authors) are keen to delegate the role of ‘market maker’ to record companies (or publishers).

Of course, this is not necessarily in the best interests of the musician’s bargaining position.

Interestingly, both record companies and publishers give preference to talent with existing followings. While this may weaken their bargaining position, they view it as a risk management tactic.

Unfortunately, musicians fail to recognise the opportunity that this provides for them. They complain that it is ‘impossible to gain a following without a record company — and impossible to get “signed” without such a following’.

This is simply not true.

INXS, which, at one time, was one of the world’s biggest selling rock bands, amassed an enormous following prior to being signed to Polygram. In fact, in the year preceding their signing, they played an incredible 300 live performances!

Do you think they came to the negotiating table with bargaining power? I suspect so.

The same is true of many best selling musicians (and authors).

You sell direct?

Organisations that sell direct can also learn from these examples. Too often, we come across organisations where the responsibility for ‘making a market’ has been delegated, in its entirety, to the sales team.

In such a situation, we typically find the following problems:

• Salespeople are difficult to recruit, almost impossible to manage, and difficult to retain.
• Salespeople own client relationships — meaning that, if salespeople leave, clients often follow.

While salespeople should obviously be responsible for negotiating sales, they shouldn’t be responsible for the generation of sales opportunities.

The moral in all of these stories is that you delegate total responsibility for selling (or, as we like to say ‘making a market’) at your expense.

If you’ve been bemoaning the ability of your distribution channel (or perhaps even your salespeople) to sell, stop and be thankful.

Therein lies an opportunity for you to strengthen your strategic position.

‘Simply a better product at a lower price’

Harry’s success formula was simple. He shared it willingly with colleagues and even the business press. ‘We simply sell a better product at a lower price.’ Harry had discovered that he could undercut other popular dog food brands. After all, he didn’t have the operating expenses that the supermarket brands had. He had no corporate headquarters, no commissioned sales reps and no research and development budget. Before long, Harry had saturated the local dog breeder marketplace. But, because his margins were low, he realised that he would have to expand into the mass market to increase his volume and reach his modest profit targets. Fortunately, his product was embraced by a national chain of independent food stores keen to capitalise on his success story. Harry’s product was now well on its way to becoming a household brand. And that’s when Harry’s problems began. Until then, his major competitor had ignored his growing business. It had little interest in competing within his specialist market niche. But, when Harry started to steal Spot Pet Foods’ shelf space, its reaction was fast and ruthless.

A ruthless Spot

Spot Pet Foods was a national company with a number of popular pet food brands. Until now, Spot’s position of dominance in the dog food market had been virtually uncontested. Spot was unimpressed to see a newcomer undercutting its product and ‘stealing’ marketshare. Spot’s brand management team quickly appraised the situation and devised a three pronged defence strategy. Spot’s sales reps began offering retailers enticing volume-based incentives across its range of brands. These incentives encouraged retailers to be loyal to Spot’s brands. Spot recognised that Harry’s perception as a ‘dog nutrition expert’ was popular with dog owners. However, Harry had never had the marketing budget necessary to take ownership of this positioning in the mass market. Spot had no such budgetary limitation. It quickly recruited a television personality (who hosted a show about family pets) as a representative for its dog food brand. This personality was then featured prominently in a new television advertisement. Spot supported its television advertising with an aggressive couponing campaign. Coupons distributed in newspapers allowed consumers to purchase Spot’s dog food at 20% less than the price of Harry’s competing product! To allow its retailers to maintain their margins, Spot Pet Foods reimbursed retailers for the coupons they collected from customers, at face value. Within days of the Spot campaign launch, Harry’s confidence began to wain. Retailers began to cancel orders for Harry’s product as Spot’s dog food brand reclaimed almost all of its lost marketshare. A major discount chain reneged on a deal it was about to sign when Harry could not match Spot’s volume-based incentives (unlike Spot, Harry was a one-brand company). And, while the independent chain of food stores that was distributing Harry’s product was happy to continue the relationship, it insisted that Harry discount his dog food product to make it more competitive with Spot’s.

An entrepreneur with a headache

This morning, Harry Edgecliffe woke up with a splitting migraine. He wasn’t surprised. It was the same headache he’d been living with now for several weeks. Despite think-tanks with employees, discussions with customers and many sleepless nights, Harry couldn’t see a way out of his current predicament. He’d tried discounting to regain marketshare, but each time he dropped his prices, Spot increased the value of its coupons to negate his price advantage. What’s more, Harry’s falling sales, together with his smaller margins resulted in his overdraft being stretched to the limit. This financial year he will post his first loss ever. He’s not sure how much longer his business will survive.

Harry’s problem diagnosed

Although Harry would undoubtedly disagree, he is not a victim of unfair competitive tactics. Rather, he is suffering under his own lack of understanding of fundamental marketing strategy. When Harry began his business, he miscalculated his ‘sustainable competitive advantage’. He then proceeded to engage in a marketing battle that he had little chance of winning. When Harry thought that he could build his business around the age old adage, ‘a better product at a lower price’, he was sorely mistaken. Sure, in his early days, he did appear to have a cost advantage over Spot Pet Foods. But that was only because he failed to calculate the additional expenses he would have to incur in order to build his business. (These included distribution, and research and development costs). When Harry attempted to compete head-on with Spot Pet Foods, he discovered that he had no competitive advantage. Spot had better distribution, a larger promotional budget and ample resources to survive a discounting war.

If Harry had his time again …

Our friend Harry had a good sustainable competitive advantage all along. He just didn’t recognise it. His true competitive advantage lay in his market intimacy. His product was created specifically for a market niche too small to be catered for by Spot Pet Foods. Harry’s niche market (dog breeders) appreciated the virtues of Harry’s product and respected its link with his personal reputation. If Harry had understood that he was a niche marketer (and not a low cost producer), his approach to growing his business would have been totally different. For a start, Harry would have recognised that what was important to him was not ‘share of market’ but ‘share of customer’. (He was really selling relationships, not dog food.) Accordingly, he would have created an entire range of products for members of his niche market. Perhaps he would even have packaged versions of his range for different sub-sets of his niche. Just imagine, a complete care program for poodle breeders (from Harry the dog-loving veterinarian!). This could have included a complete nutritionally balanced meal program, a set of treatments for poodles’ coats, and a poodle first-aid kit (with medication dosages suited to poodles’ small size and delicate constitutions). Would Harry have tried to sustain a price advantage over Spot Pet Foods’ products? No way. Harry’s customers would have had to pay a premium for his unique ‘value package’. Harry would have priced his products so that his business could make a fair profit on a small volume of sales. Of course, he would also have built an allowance for ongoing research and development into the price of his product. Harry’s promotional activities would certainly not have been directed to the mass market. His message would have been targeted at dog breeders (and perhaps those dog owners who seriously loved their pooches). And, rather than competing with Spot Pet Foods for supermarket shelf space, Harry would have distributed his products through the distribution channels used by other specialist suppliers to his niche. In fact, Harry would probably have developed a strategic alliance with another (non-competing) supplier to share its distribution channels.

Is it really all over for Harry Edgecliffe?

Is Harry in too deep? It’s hard to say. Sure, it will be possible to turn his business around – but it won’t be easy. He’ll need a little cash, and a lot of patience. For a start, he’ll have to force himself to undergo a paradigm shift. He’ll have to realise who his customers really are (and who they aren’t). And he’ll have to grasp and apply a new success formula. Harry will have to raise his prices and rescue his margins immediately. He’ll have to re-focus his attention on his niche market. And he’ll have to find ways to add value to his products in areas that will be appreciated by this market. Harry will just have to hope that he hasn’t trained his market to be too price (rather than value) sensitive. If he has, he might just have to conclude that his brand has developed negative equity! (This is when brand image is out of line with intended positioning.) This turnaround strategy will be a bitter pill for poor Harry to swallow. His higher prices will obviously disenfranchise many of his customers (retailers as well as dog owners). The structure and the culture of his business will have to change to embrace a new value system. And he’ll have to make decisions that appear to fly in the face of conventional wisdom. (Just imagine how excited Harry’s bank manager will be about his decision to increase prices and invest in new product development in the face of plummeting marketshare!)

Marketing lessons for all of us …

There are lessons for all business people here – not just specialist dog food manufacturers. For a start, we should only compete on price if we have a genuine and sustainable cost advantage over any current (or potential) competitors. (Remember, accountants recently lost a big chunk of their compliance work to tax agents because they did not have a cost advantage in this area.) If we don’t have a cost advantage, we can only compete effectively by offering more innovative or more customer intimate products. Of course, regardless of how we compete, we have to build a margin into our prices to allow us to continually hone our competitive advantage. (The market just doesn’t stand still.) And we should be careful only to engage in those battles that we have a real chance of winning. (Just think, this year Microsoft upped its research and development budget from $1.5 to $2 billion to compete with Netscape for its share of the Inter/Intranet market. How would you like to be in Mark Andreessen’s shoes?)

A gentle warning

If your phones are ringing off the hook … if you’re struggling to fulfil orders … and if you’re in the midst of expanding into new markets, the last thing you probably feel like doing right now is stepping back and reflecting on your marketing strategy. How could anything possibly be wrong with your business? Fact is, businesses apply a lot of leverage to entrepreneurs’ seemingly simple decisions. If your marketing strategy is just a few degrees off track, it’s possible that success could kill your thriving business. Just ask Harry.

How clean is clean?

My client explained that his customers would instinctively use totally inappropriate metrics to judge the effectiveness of cleaning contractors. ’Our customers assume that, if their rubbish bins are emptied, then their facilities are clean. ’The thing is that, all reasonably good cleaners will empty rubbish bins. To use volume of rubbish in a bin as a measure of ’quality of clean’ is a little like using plane crashes as a measure of airline safety.’ I suggested to my client that his organisation had already developed a solution to this problem, in the form of its quality management system. All he needed to do was share the key components of this system with existing and potential customers. In short, this quality management system consisted of three steps. Step one was to determine appropriate metrics that could be used to measure the degree of cleanliness of a facility. Step two was to determine the optimum level of cleanliness. (While too dirty is undesirable, too clean is unnecessarily costly.) And step three was to periodically survey facilities, measure variance from this optimum level of cleanliness and provide feedback to cleaners and management. The benefit of providing customers with access to this system was obvious. Our client could work with customers to determine the optimum level of cleanliness for their facilities (and accordingly, the optimum price). And this system could provide customers with an accurate gauge of our client’s performance (rendering the ’bin test’ unnecessary). What appeared less obvious, was the benefit of providing potential customers with access to this quality management system. My argument was that, just as customers had no means of judging the quality of our client’s service, potential customers had no means of judging the quality of our client’s competitors’ services. Therefore, access to our client’s system would enable potential customers to quantify the quality of service they were currently receiving and compare it objectively with our client’s service offering. Furthermore, this service would provide our client with an opportunity to develop a high-level relationship with its potential customers well before their cleaning contracts came up for tender.

A lesson from a monopolist

I explained that there was another exciting benefit in sharing this quality management system with potential customers (and with other market players, for that matter). In sharing its system, our client had the opportunity to establish an industry standard. Now, if you’ve followed the growth of Microsoft over the last ten years, you’ll know that ownership of an industry standard can provide an organisation with an unassailable lead over its competitors. You may have noticed that Microsoft’s growth strategy has been to establish an industry standard (initially MS DOS), to strengthen the standard (by forming close alliances with other software developers and distribution channels) and then to extend that standard (into Windows, and then key applications like Word, Excel and Internet Explorer). While I was not naive enough to suggest that ownership of a commercial cleaning standard would provide my client with the degree of market dominance currently enjoyed by Microsoft, I did suspect that it could provide a strong foundation for its marketing activities.

Can you own your industry standard?

Now, I wonder, could you benefit from the establishment (and ownership) of your industry standard? If your clients are having trouble differentiating between your service and those of your competitors, it might be in your best interests to provide them with the metrics they need to make more objective buying decisions. Of course, while you’re at it, you might publish your own index – and even your own model of ’best practice’. Come to think of it, you might even licence other organisations to provide ’accredited’ services to your market! How aggressively you promote your standard is up to you. But it’s nice to know that there is a way to turn your customers’ perception of service parity into a competitive advantage.

The problem is, in such a firm, there’s precious little for a marketing manager to manage!

Here’s a person with no authority, no direct reports, a tiny budget, and no process to oversee. A person who’s only mandate (to ’get the firm’s name out there’) has no metric with which success can be measured.

Now, I’d like to make it clear that I have no problem with the title of Marketing Manager, nor with the person who holds that title. My problem is with the role that’s generally assigned to that title.

The fact is, if your firm sells services (or a product with an essential service component), the traditional role of a marketing manager is probably redundant.

If so, you should move fast to redefine your marketing manager’s role – to provide him with something of substance to manage, and to provide your firm with an opportunity to recoup its investment in the position.

The word marketing means too much

Unless you’re a consumer goods firm, your marketing manager probably shouldn’t manage marketing! The problem is, the definition of marketing is so far- reaching that the word loses all relevance.

Michael Porter (the patron saint of strategy) defines marketing as the entire organisation, as viewed from the customer’s perspective.

So, is it practical to give your marketing manager responsibility for your whole organisation as viewed from your customer’s perspective? I suspect not.

Even if we view marketing in terms of its core functions, its reach is still very broad.

First-year marketing students are taught about the four Ps of marketing: product, price, place and promotion (place refers to distribution).

My guess is that, in your firm, it’s really the last of the four Ps (promotion) that concerns you the most. (I suspect that your product design, pricing and distribution strategies are not in a constant state of flux!)

Accordingly, it would seem beneficial to restrict your marketing manager’s role to the management of promotion.

But the word promotion means too little!

However, in the context of a service-based firm, promotion should consist of so much more that simply getting your name out there.

Let’s face it, you can’t sell professional services, information technology, mining equipment or construction services with the kind of promotional campaign that a consumer goods firm would use to sell cornflakes.

You need a process – often a complex, protracted process – that starts with the identification of a potential customer, and ends with the acquisition of an enduring and profitable relationship.

This means that, if you want your marketing manager to manage promotion, he should manage your entire sales process (and not just your advertising and public relations activities).

The role of a sales process manager

Okay, the title’s not so sexy! But, remember, what we’re concerned with here is the role behind the title. (You’re welcome to continue to refer to your sales process manager by the arbitrary title of marketing manager.)

The reality is that, while technically you’re restricting the scope of your marketing manager’s role, in practice, you’re likely to provide him with considerably more responsibility.

Your sales process manager should be responsible for the three components of a (relationship-centric) sales process:

• Relationship acquisition. (The acquisition of relationships with a constant stream of potential clients and centres of influence.
• Relationship management. (The ongoing management of these relationships and the generation of sales opportunities.)
• Opportunity management. (The management of the sales pipeline – the process that stretches from the identification of a sales opportunity through to the winning or losing of the sale.)

In practical terms, this means that your sales process manager should be responsible for managing:

• the regular advertising or direct mail campaigns that acquire relationships;
• the automated communications (newsletter, seminars etc) that maintain and develop those relationships;
• and the various steps in your sales pipeline (maintenance of a communications log, dispatch of proposals and scheduling of appointments with sales consultants).

While many firms do not give their marketing managers responsibility for the entire sales process, this is dead wrong. What is the purpose of advertising and public relations activities if it is not ultimately to generate sales?

We frequently come across organisations where marketing managers are busy running ’branding’ campaigns, and salespeople are out in the field ’turning over rocks’ looking for sales opportunities. Go figure!

If your organisation does not have salespeople, your sales process manager should be responsible for the sales-related tasks performed by partners or managers.

Do you really need a sales manager?

Now that your marketing manager is responsible for the entire sales process, do you really need a sales manager?

Well, good sales process design will reduce the complexity of the opportunity management process and, accordingly, the demands on your salespeople.

In a perfect world, your salespeople should do nothing other than conduct meetings with preappointed, pre-qualified prospects, who have indicated a propensity to purchase.

If you have a large enough sales team, you may be able to justify a sales manager. Just be sure that your sales manager spends his time managing salespeople, and not your sales process. (In other words, if your salespeople spend their time in the field, that’s exactly where your sales manager should be.)

’Managing’ doesn’t mean ’doing’

While we’re in the process of reengineering your marketing manager’s role, it’s worth reminding ourselves that ’managing’ doesn’t mean ’doing’.

I often take a walk through our clients’ manufacturing facilities. In the process, I seldom see production managers operating machines.

Why then, do these same organisations have their marketing managers doing data entry, creating advertisements, writing brochure copy, designing PowerPoint presentations, and so on?

The issue is not whether or not your marketing manager is skilled in these areas, but whether or not they can manage your entire sales process if they have their sleeves rolled-up, doing process work.

Tell me, have you ever seen an orchestra where the conductor plays first violin?

A rewarding career

If you compare the role of typical marketing manager with the role of a sales process manager the differences are profound.

The former has little authority and no process to oversee. The latter has authority over the entire sales process – and is in a position to manage this process, from relationship acquisition, through to the conversion of opportunities into sales.

The former has no way of quantifying his effectiveness. The latter can demonstrate a clear return on marketing investment – by relating marketing activities to the sales they produced.

The former makes decisions based on intuition and data of questionable relevance (can anyone really demonstrate a linear relationship between brand equity and sales?). The latter (to quote Alfred Sloane) ’manages with the force of facts’.

I mentioned at the outset that I’d hate to be a marketing manager in a typical service-based firm. Tell me, if you had the choice between being appointed marketing manager or sales process manager in your own organisation, which would you choose?

Me, I’d take the role of sales process manager along with the title of marketing manager. Why would I want to be called a marketing manager? Well marketing managers get invited to more free lunches of course!

The Sales Process Engineering method recognises this assumption as erroneous.

In most all sales processes, opportunity flow (volume) is the primary driver, not conversion.

It’s quite easy to see why.

Imagine a typical salesperson who processes about 10 opportunities a month and assume that this salesperson wins 50% of those opportunities. Now, consider how much potential there is for this person to increase sales by improving conversion.

Perhaps, with significant effort, this person could increase conversion rates by a percentage point or two. Let’s be generous
and assume 10 points. Now, this person is generating 6 sales a month.

Now, consider the potential to increase sales by improving opportunity flow. If this person divests of low-yielding activities
and dedicates their time to business-development appointments they will easily process 10 times the volume of sales opportunities each month (yep, that’s 100).

Let’s assume conversion rates drop by half (to 25%). Obviously, this person is now generating 25 sales a month.

So, opportunity flow should have primacy over conversion. Or, to express the relationship in TOC terms, opportunity flow is the goal and conversion a necessary condition.

But the relationship between conversion and sales is even more complex than this.

The reality is that small increase in conversion is likely to actually come at the expense of a *huge* decrease in opportunity
flow.

The traditional approach to conversion improvement is for the salesperson to assume responsibility for more and more activities. The salesperson schedules and conducts every appointment; prepares every document; designs the solution; walks the client’s job through production; supervises implementation; and even manages the account on an ongoing basis.

Obviously, as the salesperson assumes responsibility for an increasing activity load, more and more of their capacity becomes unavailable for business-development activities.

It’s not just that the activities themselves consume the salesperson’s capacity, the fact that the salesperson has to
synchronise numerous disparate tasks across multiple opportunities adds a significant overhead (one of the evils of multitasking).

So the relationship between conversion and opportunity flow is non-linear. An incremental increase in conversion will result in a geometric decrease in opportunity flow.

All the more reason to shift your focus from maximising conversion to maximising opportunity flow.

But in spite of (or, perhaps, because of) its useful nature, the word brand is functionally bankrupt.

More often than not, its use hides sloppy thinking and, worse still, the wastage of frightening quantities of valuable corporate resources.

Everything and nothing

Over time, marketers have extended the meaning of the word brand to mean so many things that it is now basically meaningless (you may recall that I’ve leveled the same criticism at the word marketing).

The word brand used to refer to the trademark or distinctive name identifying a product (or manufacturer).

This definition makes sense. Its relation to branding’s genesis — involving the use of a hot iron to provide evidence of ownership on the hide of an animal — is obvious.

Today, the word brand refers to the product or organization itself (and not just its mark). It also refers to the goodwill associated with that product.

The word brand is commonly used as a verb. Branding refers both to the application of a name (or mark) to a product, and to every activity that impacts in any way on the development of goodwill (or brand equity, as it’s commonly called).

Answer me this: what do all of the following have in common?

• Designing a logo.
• Running an advertisement.
• Creating a new product.
• Answering the telephone.

That’s right. According to branding experts these are all branding initiatives.

Of course this liberal approach to the definition of the word brand may be in the best interests of branding consultants — at least in the short term. (For the uninitiated, branding consultant is the title assumed today by opportunistic graphic designers.)

But, unfortunately, it has some unintended (negative) consequences for the rest of us.

Are we really this silly?

For a start, it makes marketers look sillier than we really are. In her best-selling, anti-corporate rant, No Logo, Naomi Klein quotes marketing executives, who should know better, saying things like the following:

"The product is nothing but the most important marketing tool.": Nike

"We made the fatal marketing mistake of thinking we were a camera [when] really, we are a social lubricant.": Polaroid

"Products are made in the factory, but brands are made in the mind.": Senior advertising executive

As you’d expect, Klein uses these delusional utterings as evidence in her nonsensical argument that brands are responsible for social ills ranging from the exploitation of children in sweatshops, to the murder of a Nobel Peace Prize winner, and a crime she refers to as ‘brain stealing’!

Unrelated cause and effect

A critical reader of Klein’s book will rapidly draw the conclusion that that she has grossly overestimated the potency of this thing she calls the brand.

The sad thing is that marketers (as evidenced by the comments above) are suffering under exactly the same misapprehension.

The exaltation of the word brand (almost to the point of a religion) is based upon a widely-held premise that brands create sales. This thinking is an example of what is perhaps the most common logical fallacy: the fallacy of causation.

The fallacy of causation (also referred to as unrelated cause and effect) is committed when we either mistake correlation for causation or, more seriously, when we actually assume that the effect of an action is its cause.

The assumption of the marketing executive above is that Nike sells lots of shoes because it has a great brand.

When you consider that the sale of shoes preceded the development of the Nike brand (goodwill), you would have to conclude that a great product is the cause and brand equity is the effect.

The real cost of irrationality

It’s bad enough that this sloppy thinking is used against us by the anti-business activists in our midst.

But what’s worse is the economic cost of the erroneous management decisions underpinned by this lapse of reason.

The basic problem is that the premise that brand equity drives sales gives marketers permission to engage in an expensive and elaborate ritual that is totally quarantined from the objective of the organizations writing the checks: to make money, now and in the future.

The ritual looks something like this:

A marketer runs a promotional campaign with the intent of building a brand.

He detects a resulting increase in brand equity (typically by measuring the change in market awareness of the brand). He concludes that this campaign was a success, and goes to work planning the next. He wonders occasionally why he needs such complex formulas to attempt to model the correlation between brand equity and sales revenues.

If this marketer realized that branding is a by-product of sales (and not an antecedent), he would apply himself to those activities that drive sales — and ignore brand equity altogether. His objective would be a derivative of his company’s objective: to make sales, now and in the future.

He would measure his success by observing the correlation between the money he invests in promotional campaigns and the resulting change in sales revenues.

Accounting for delayed promotional returns

But (I can hear you thinking), what about the fact that a promotional dollar invested today may not produce a return until some point in the future? Isn’t that why we need to measure brand equity?

Well if (and only if) you know for sure that your promotional expenditure does deliver delayed returns, it may make sense to establish a proxy for these future revenues.

The problem with using brand equity as a proxy is that (as I’ll explain in a moment) it’s almost impossible to measure.  Accordingly, you will need to find a metric that does reflect the correlation between promotional expenditure and future revenues. In our experience, the best proxy for future sales is current ones. In other words, the best indicator of the long-term effectiveness of a promotional campaign is its short-term results.

So, is a brand actually worth anything?

If we take the word brand at its original meaning (the trademark or distinctive name identifying a product) it seems fair to assume that brands can acquire some intrinsic value. Let’s see how this assumption holds up to logical scrutiny.

The logical way to measure the value of a brand (brand equity) would be to observe the premium that the market is prepared to pay in order to purchase a product bearing a particular brand, in preference to a competitive product, that is identical in every other way.

Because every product has a brand of some kind, this is only a relative measure. This means that you can only value one brand relative to another. It also means that when products are not identical in every way, brand value is likely to be incalculable.  (If products are not identical in every way, it is impossible to determine what percentage of the premium the market is prepared to pay should be allocated to brand equity — as opposed to product value.)

Let’s imagine what would happen in case of true product parity. If two products were in fact identical in every way, what is the theoretical value of each brand? That’s right, nothing!

In an efficient (fully informed) market, customers will obviously not be prepared to pay a premium for a product when there’s a truly identical alternative.

In other words, if customers are currently paying a premium for a product when there’s an identical alternative, that brand equity is a temporary phenomenon, reflective only of market inefficiency. As share traders know, this kind of arbitrage opportunity tends not to last long.

This line of reasoning illustrates that a brand itself has no long-term intrinsic value.

It also highlights that the premium a customer is prepared to pay for one product over another is (in the long-term) directly proportional to the degree of differentiation of that product.

In summary:

• Brand equity results from the creation (and sale) of a great (differentiated) product.

• Brand equity is proportional to the degree of (meaningful) product differentiation.

• The absence of product differentiation, any residual brand equity will rapidly dissipate.

It’s time us marketers faced up to reality. If we are operating in the best interests of our organizations, we are not building brands, we are making sales.

We also need to recognize that our ability to drive sales amounts to little more than an arbitrage play. In the long run, the most successful products will always be the better products (those that provide customers with the greatest value).

The fact is, business growth has precious little to do with brand equity today. And, if anything, its significance will reduce as time passes and markets become more efficient.

The example most often raised to challenge my position on brands is Coca Cola. ‘Why then,’ the question typically goes, ‘does Coca Cola still outsell Pepsi, even though the two colas are all but identical?’

The answer is quite simple. Coca Cola outsells Pepsi because of its vastly superior distribution. (Statistically the distance between you right now and the nearest Coca Cola, is likely to be significantly less than the distance between you and the nearest Pepsi.)

So, even though the sugared waters are very similar, the products, in their broader context, aren’t. (Availability is certainly a product attribute.)

To observe the effects of an efficient market on brand equity, note the variance in the prices charged for standard unleaded petrol at competing, (neighboring) petrol stations.

Jamie’s point is that, while almost all gyms have been calling themselves ‘fitness centres’ for the last ten years, their customers insist on referring to them as ‘gyms’.

If it quacks like a duck…

Why then do gyms deliberately use terminology that is so obviously irrelevant to their customers?

I suspect it all started about ten years ago when a new style of gym (with aerobic classes and piped video) attempted to disassociate itself from the traditional Californian muscle pit.

Undoubtedly, in branding itself a ‘fitness centre’, this new style of gym wanted to establish a new category in the mind of the market.

Well, time has shown that, while the market has grown to favour this new style of gym — it hasn’t found it deserving of a whole new cognitive category! In other words, it appreciates that the new gym is a better gym — but doesn’t buy into the argument that it’s anything other than a gym.

I suspect that the market applies the ‘duck test’ to determine whether or not a product is deserving of a new category. In other words, if it walks like a duck and quacks like a duck, it’s probably a duck!

So how should the new style of gym have positioned itself?

Well, I believe that, rather than attempting to convince the market that it wasn’t a gym, it should have showed the market that it was a different kind of gym.

The irony is that it is actually easier to differentiate a product within an existing category than it is to create a new category. If you’re differentiating your product within an existing category, you can use the existing market leader as a point of reference for your communications (i.e. ‘our product is smaller, faster, friendlier, cheaper etc’).

In order to create a new category, you have to ‘make a market’ for your product — and making markets is an expensive and risky endeavour.

A lesson for all of us

Now there’s a lesson in this for all of us — not just gym owners!

Only attempt to create a new category for your product if it is materially different from any other product with which the market is already comfortable. (As was the case with Sony’s Walkman.) If there is already an existing category to which the market is likely to deem you belong (remember the duck test?) — then position yourself against the occupants of that category.

A chiropractor with an identity crisis

I was reminded of this issue recently when I was approached after a seminar by the owner of a successful Brisbane Chiropractic clinic.

She explained she was considering re-badging her clinic as a ‘wellness centre’ to reflect the total health solution she provided. Of course, I immediately advised her not to do it!

I suggested to her that people who wake up with bad backs are unlikely to look under ‘w’ for wellness in the Yellow Pages. And it’s not just people with bad backs our chiropractor was about to risk confusing. I can’t think of any ailment that is likely to compel sufferers to go looking for a ‘wellness centre’.

Better, I said, to be a busy chiropractic clinic with a difference, than to be a wellness centre in search of a market.