At worst, these communications run the risk of damaging the very relationships they are supposed to be cultivating.

The problem is, from a marketing department’s perspective; every relationship looks like a sales opportunity.

Accordingly, marketing (and sales) people tend to design communications based upon the assumption that every recipient is in the process of making a purchasing decision.

Few potential clients are sales opportunities

Unfortunately, as the diagram below illustrates, nothing could be further from the truth.

This diagram portrays a marketplace consisting of six potential customers. Each makes a buying decision every 25 days. The duration of each decision-making process is two days.

If a marketing person (‘you’ in the diagram) were to view this marketplace for a total of eight days, only two sales opportunities would come into view.

Of course, if the marketer were to notice these two sales opportunities and assume that they were representative of the market as a whole, he would be sorely mistaken.

In the real world, the odds of a marketing communication striking a potential customer within her decision-making process are nowhere near as generous as those illustrated in this diagram.

If you’re selling a service or a ‘major’ product, your customers’ buying cycle (time between sales opportunities) is likely to be three or more years. The duration of a sales opportunity may be one or two months. And the persistence of your marketing communication (how long it stays top-of-mind) may be less than a week. (In this more realistic scenario, only one out of every 144 recipients of your communication would be in the process of making a purchasing decision.)

The real cost of irrelevant communication

In other words, the odds of your communication striking any given customer at just the right time is comparable to the odds of your being able to spear a particular fish in a pond, while wearing a blindfold!

Marketers traditionally compensate for these lousy odds by broadcasting their sales communications to large numbers of potential customers simultaneously.

Now, this approach is like electrifying the pond. You’ll get your fish, but the pond will sustain a lot of collateral damage in the process!

Obviously, repeated exposure to irrelevant communications (perhaps for a period of many years) is likely to damage your relationships with potential clients. If these communications are delivered by e-mail, many recipients will eventually unsubscribe themselves from your list — cutting-off your future access to them.

You could argue that this collateral damage is likely to be minor, because those individuals for whom your communications are irrelevant are more likely to simply treat them with indifference.

This is a valid argument. However it ignores the opportunity cost of this promotional approach.

What if, instead of deliberately creating and distributing communications that will be treated with indifference by the greater majority of your marketplace, you were to create communications that were relevant to recipients, at any stage of their buying cycles?

If this were possible, each communication would make a positive contribution to a developing relationship with your potential customers.

Well it is possible.

Invest in relationships, not sales opportunities

All you have to do, is identify a basis for communication that transcends your quest for sales opportunities. Our article entitled The importance of getting religion explains that this basis for communication should consist of the intersection between your market’s interests and your expertise (and credibility).

These relationship-building communications may be less effective at inciting action from that small percentage of recipients who are in the midst of their decision-making processes — but that’s okay.

The effectiveness of your communication should not be measured on an individual-to-individual basis; it should be measured across the marketplace as a whole.

Remember, when you broadcast a communication to your marketplace, those potential customers who are ready to buy today are a tiny minority. You’ll enjoy a significantly greater return on investment if you design your communications to be relevant to those individuals who are not currently sales opportunities!

I don’t know about you, but sometimes I feel that managing a traditional ‘bricks and mortar’ business is downright unsexy!

Particularly when stories abound of Web entrepreneurs who have reinvented business as we know it (and become billionaires in the process) – seemingly without being slowed by any of the trials and tribulations of ‘real-world’ business.

The good news is that you don’t need to start an online enterprise to benefit from the power of the Internet. With the right approach, you can use this exciting virtual world to multiply the effectiveness of your real-world marketing activities.

This article will show you how.

Know your model

In the last issue of AdVerb, we introduced you to our Relationship-centric Marketing Model.

We explained that this model is appropriate for those businesses that sell a product with an essential service component – in other words, a product that isn’t a pure commodity. (I’m guessing that’s you!)

You’ll remember we explained that our Relationship-centric Marketing Model consists of two components:

• An automated communications program. A system of pre-programmed communications, designed to nurture relationships with customers, prospects and centres of influence. (Your ideal customers are likely to make a buying decision based on relationship first; price and features second.)

• A relationship-acquisition program. Once you have a system that deftly converts prospects into customers, you need a program that provides you with a constant stream of new prospects.

If you’re comfortable with our Relationship-centric Marketing Model, you should be excited about the Internet. This is because the Internet provides you with both a low cost communication channel and a lucrative source of new relationships.

Furthermore, the Internet provides you with the ability to hand control of your sales process to your customers – conserving your resources and often improving your conversion ratios. (We’ve been encouraging our clients to relinquish control of their sales processes for years!)

A low-cost communications channel

E-mail is already like the fax machine. Yesterday it didn’t exist, but today we can hardly live without it!

E-mail is exciting for the Relationship-centric marketer for three reasons:

1. It is an extremely low-cost communication channel. It costs no more to send ten thousand e-mails than it does to send one.
2. It is immediate. Within minutes of pressing ‘send’ your recipients are clicking ‘yes’ and reading their messages.
3. It is intimate. Think about it: are you most likely to communicate with a close friend by letter, fax or e-mail? E-mail wins because an e-mail is less formal than a fax, and much less formal than a letter.

The Relationship-centric marketer understands that the more frequently he communicates (in a meaningful, value-added way) with his customers, the more intimate a relationship he will build.

The problem is, until now, higher frequency has equalled higher cost. (Even with postal discounts, it’s difficult to mail anything to anyone for less than a dollar.)

E-mail makes frequency affordable. Because it costs virtually nothing to send an e-mail, the only limit to your frequency of communication is your ability to come up with interesting things to say!

How does e-mail fit into your automated communications program?

Once our clients grasp the implications of the low cost of e-mail, many ask if they should replace all of their existing points of contact with e-mail.

The answer’s no. The problem is, e-mail is nowhere near as potent as other (more costly) communication mediums. (In fact, when it comes to communication channels, there seems to be an inverse relationship between potency and cost.)

What you should do is design a communications mix relative to the lifetime value of each of your categories of relationships. (The table below illustrates a possible communications mix.)

You must genuinely add value

Planning to e-mail your customers is one thing. Coming up with something meaningful to say is another! (Remember, each point of contact must genuinely add value to the relationships under your management.)

As I’ve often stressed in the past, the best way to add value to these relationships is to give the gift of information. As well as inspiring the same tendency for reciprocity as any gift, the gift of information is special because it positions the giver as an expert – making future gifts appear all the more valuable!

You can deliver value to your customers via e-mail in two ways:

• You can include the information of value within the e-mail itself (e.g. snippets of industry news).

• Or you can use an e-mail message to point to information of value (usually with hypertext links to content on your Website).

We like to use our monthly ‘eBulletin’ primarily to advise our clients of additions to our Website (i.e. new books we’ve added to our reading list, new marketing tools in our download zone, or the addition of articles from the current edition of AdVerb).

You might be starting to realise that you can get enormous benefit from the Internet, without even building a Website. Such is the power of e-mail.

If you don’t already have your customers’ e-mail addresses, now is the time to start asking for them – and you should ask at every point of contact.

Acquiring new relationships

Most organisations ‘go online’ hoping that their Websites will somehow attract more customers. Sadly, most don’t!

Of course, most Websites don’t ‘work’ for exactly the same reasons that most advertisements don’t. They provide no incentive to visit in the first instance; they deliver little value once you’re there; and they contain no compelling reason to initiate further correspondence.

It should come as no surprise that we suggest that your Website (like your advertisements) should not suffer from these performance impediments.

It all starts with an offer

Before you start work on your Website, you need an offer. This offer will provide your visitors with both a reason to visit and a reason to initiate further correspondence.

Fortunately, because you are a Relationship-centric marketer, you already have such an offer. It’s called your ‘automated communications program’. Think about it. You designed your communications program specifically to add genuine value to your relationships with customers. Doesn’t it make sense that potential customers will jump at an opportunity to ‘subscribe’ to this program?

It does. And they will!

Typically, we recommend that our clients use the offer of either a free 12-month subscription to a newsletter, or a free ticket to a workshop. (Of course, you can also use these offers in your real-world promotional activities.)

Your offer should be featured prominently on your Website (to get your visitors to volunteer their e-mail addresses) and on other people’s Websites (to convince their visitors to click-through to yours).

Fishing for e-mail addresses

We suggest that, in most cases, the primary objective of your Website should be to convince visitors to surrender their e-mail addresses.

This means that your offer should be:

• Prominent. It should be your home page’s most noticeable element.

• Desirable. The benefits of subscribing need to be ‘dimensionalised’ for the visitor.

• Accessible. Ideally, your visitor should be able to enter his e-mail address and click ‘submit’ right there on your home page. (Certainly, the form that captures his e-mail address should be no more than one click away.)

• Affordable. The number of e-mail addresses you collect is inversely proportional to both the cost of your offer and the amount of information you request from your visitors.

This last point is an important one. Many marketers attempt to ‘qualify’ visitors by insisting that they part with either money or information in order to receive the offer. This is counter productive for two reasons:

• If a visitor wasn’t already reasonably well qualified, he probably wouldn’t be on your Website in the first instance. For example, if a property developer ran a banner advertisement featuring the headline: How to use the equity in your home to build a million-dollar property portfolio, it is likely that the visitors to his site will be home owners with an interest in investment property.

• If you are going to deliver your offer by e-mail or via your Website, the incremental cost of acquiring an unqualified name is absolutely nothing. You’re better off making it as easy as possible for your visitors to respond.

Once you have an e-mail address, it’s relatively easy to convince its owner to volunteer additional information. (We acquire the details of close to 90% of our e-mail subscribers by offering an invitation to a forthcoming workshop in return for a name, address and telephone number.)

Site promotion

Once you’ve built your Website, the next step is to convince someone to visit it.

In the early days of the Web (three years ago), it was possible to generate an instant traffic flow by registering your site with the various search engines and online directories. Today, as a result of the exponential growth of the Web, search engine registration has become a science in itself – with no guarantee of immediate results.

While you should obviously register your Website with search engines, there are more immediate ways of driving site traffic:

• Real-world promotion. One low-cost way to generate site traffic is to feature your site address prominently on your corporate stationary and on all of your communications (including the signature on your e-mail messages).

• Reciprocal links. Your next step is to encourage those non-competitive organisations that share your client profile to put links to your site on theirs – in exchange for your doing the same for them. This is a highly effective (and often overlooked) form of site promotion.

• Banner ads. In spite of their regular poor publicity, we have found banner advertisements to be remarkably cost effective. As a rough rule of thumb, we typically find that we can generate a response from a banner advertisement for around 20% of the cost of a response to an advertisement in a metropolitan newspaper.

As mentioned previously, the trick with banner ads is to use them to promote your offer (rather than your Website). Because banner ads are so small, they should consist of little more than a headline. The essential selling copy should appear on the page that the viewer clicks-through to.

Our current banner advertisement provides us with a constant stream of new subscribers to this publication. It reads as follows: Turn your business into a finely-tuned marketing machine … subscribe to AdVerb free … Marketing tips! … Advertising tricks! … And strategies to fast-track the growth of your business! (Because our banner ad is animated, each ellipse denotes a new frame.)

Putting your customers in control

The great thing about a well-designed Website is that, if you let potential customers loose inside it, they tend to sell themselves!

This is nice because it conserves your valuable promotional resources. But it is also significant because your Website can provide an environment that’s less threatening to a potential client – meaning that they tend to stay longer (and explore more) than they would if they visited your real-world business.

An introduction to a well-designed Website

While Web design could easily be the subject of another AdVerb feature, here are three tips to get you started:

• Make your site’s content readily accessible. Try and minimise the clicks required to travel from one area of your site to another. If your site attracts non-technical, as well as technical, visitors, be sure to provide a secondary jargon-free navigation bar.

• Provide resources of value to your visitors. Such resources could include articles from past editions of your newsletter, transcripts of lectures, a self-analysis questionnaire, software-based tools and a reading list. Perhaps some of these resources can be provided by your suppliers and business partners.

• Remember, this is a marketing, not a technical exercise. Your Website should be designed to communicate, to educate and to transact – not to show off!

If the media hype surrounding the ‘dot coms’ had you convinced that the Internet and traditional ‘bricks and mortar’ business were mutually exclusive, I hope I’ve changed your mind. The fact is, clicks and mortar can coexist quite happily!

[Listen to a seminar on this subject!]

If your organisation sells expensive (or complex) products and services, odds are, you get most of your new clients by ‘word of mouth’ or referral.

If you’ve tried your hand at lead generation advertising, you’ve probably discovered that, even if an advertisement does make the phone ring, it’s a pyrrhic victory. (Isn’t it true that traditional advertisements tend to attract a calibre of clients better suited to your competitor’s business than yours?)

The problem with ‘word of mouth’ as a primary promotional medium is that, because it’s passive in nature, it’s difficult to scale. In other words, ‘word of mouth’ is limiting your business to incremental (rather than exponential) growth.

So why is it that traditional marketing wisdom breaks down when products are expensive or complex – or, worse still, when products aren’t real products at all, but intangible ‘services’? And is it possible for an organisation that sells such products to develop a more proactive approach to business marketing than a reliance on ‘word of mouth’ business?

The answer to both of these questions lies in the discovery that there are actually two types of customer in this world!

Two types of customer

We like to say that there are two types of customer in the world.

One type of customer ‘buys’ a product. (She focuses primarily on product attributes and price.)

And the other type of customer ‘buys’ a relationship. (She is less focused on the transaction, and more interested in a longer-term relationship.)

A customer tends to be ‘product-focused’ when she’s purchasing a commodity. If she’s choosing between Qantas and Ansett, between Dell and Compaq or between Holden and Ford, she’s likely to make that decision based primarily upon product features and price.

However, if this same customer were choosing a new accounting firm, looking for a financial planner, or organising an African safari, she is more likely to be shopping for a relationship than for the very lowest price.

Now this observation is more than just a curiosity. The choice between product- and relationship-focused customers affects the very design of a business. The fact is, a business designed to serve product-focused customers will drive the relationship-focused variety away in droves! (And vise versa.)

A ‘product-centric’ business promotes features and price – where a ‘relationship-centric’ business promotes a total solution.

A product-centric business exploits the value in a transaction, where a relationship-centric business profits from the value in a relationship (lifetime value).

And a product-centric business grows primarily by expanding its share of market (more customers) – where a relationship-centric business grows primarily by expanding its share of customer (more services for each customer).

A natural advantage for small businesses

While small businesses do not generally have the scale required to compete on the basis of features and price, they do have a natural advantage when it comes to delivering ‘customer intimacy’ – a key requirement of relationship-focused customers.

Furthermore, relationship-focused customers are prepared to pay a premium for these relationships – insulating smaller businesses from the inevitable ‘margin shrinkage’ that efficient markets (read: their larger competitors) inflict upon them.

Smaller businesses tend to recognise this. But few have any idea how to attract, to service, or to profit from relationship-focused customers.

The solution is to turn traditional marketing methodology on its ear and build a relationship- rather than a product-centric marketing program.

Selling a relationship

If you’ve decided you’d rather be in the business of selling relationships than (keenly priced) products, here’s a three-step introduction to our ‘relationship-centric’ marketing model:

1. Take your focus off sales. If your customers aren’t transaction-focused – you certainly shouldn’t be.
2. Create an automated communications program. Because a key ingredient in any relationship is communication, this system should provide your customers with regular (and meaningful) points of contact with you. Your automated communications program should be designed to exploit the value resident in the relationships under your management. However, rather than designing this program to optimise the value of individual transactions, you should design it to maximise customers’ ‘lifetime value’. ‘Lifetime value’ is a measure of the gross profit earned over the life of a typical customer relationship.
3. Identify potential customers and introduce them to your automated communications program. Rather than establishing a relationship with people after they make their first purchase (as is normally the case) you should establish a relationship in advance.

If your potential customers are those who will buy on the basis of a relationship, doesn’t it make sense to deliver this relationship in advance? (You’ll discover, in a moment, just how inexpensive it can be to introduce potential customers to your automated communications program.)

Building an automated communications program

Once you’ve decided to become relationship- rather than product-focused, your first step is to create an automated communications program.

Begin by building a central database, containing the details of existing customers, prospects (potential customers) and centres of influence. (If your database is a little cumbersome, it might be worth considering an off-the-shelf contact management application like Maximizer, Act or Goldmine.)

Your next step is to design a program of communications that will build and nurture relationships with the people on your database.

We suggest that a newsletter should be the backbone of your communications program. This is because a good newsletter is both effective and scalable. (It takes little more effort to send a newsletter to 20,000 subscribers than it does to mail 2,000.) A newsletter can either be a magazine-quality publication or, if your budget won’t stretch that far, it can be a simple two- or three-page letter, laser printed on your corporate stationery.

Either way, your newsletter should be designed to dispense valuable information to your subscribers (not to boast about your organisation). The best newsletters have a do-it-yourself feel. The great thing about sharing your knowledge with your subscribers is that it positions you as an expert in your field – and empowers them to work with you.

If you publish your newsletter quarterly – and this is our suggested frequency – it’s worth supplementing your newsletter with a monthly e-mail bulletin. While e-mail communication doesn’t have the same impact as print, its cost effectiveness makes it invaluable. For this reason, it is essential to capture e-mail addresses at every point of contact with subscribers.

Acquiring new relationships

The best-kept secret when it comes to relationship-focused customers is that you don’t have to wait for them to buy from you before you build a relationship with them. In fact, if you build a relationship with relationship-focused prospects before they need to transact, you are almost guaranteed their future business.

But how do you acquire these new relationships?

Well, if you sell to businesses, it could be easier than you think. You might just find that the names and contact details of your prospects are available from a list broker. For example, if your target prospect is a ‘human resources manager working in a company with 100 or more employees’, this list is available from all good list brokers. Simply buy the list and add the records to your database.

If your prospects need to be better targeted than this, it might be worth commissioning some telephone research to filter these records. For example, if you want to identify those human resources managers who operate a particular software application, it’s still cheaper to have someone ring and ask, than it is to try and build the same list using advertising!

If you cannot purchase (or otherwise acquire) a list of suitably targeted prospects, you may have to resort to less direct forms of ‘lead-generation’.

Now, because you’re looking for relationship-focused prospects, the trick with lead-generation is to promote a relationship – rather than your product or service. The obvious way to do this is to offer prospects a free 12-month subscription to your newsletter. Remembering that your newsletter has been designed to be truly valuable to prospects – this is an offer that’s likely to be eagerly accepted. (About 100 people a month request free 12-month subscriptions to AdVerb via our Website.)

We recommend the following promotional mediums for your relationship-acquisition campaign (listed in typical order of effectiveness):

• Strategic alliances. Your prospects are already other businesses’ clients. Identify businesses that serve your prospects, and convince them to offer a free 12-month subscription to your newsletter to their clients.
• Direct mail. If the lists that you can obtain from your list broker are not qualified enough to warrant the cost of telephone research, you can identify qualified prospects by offering a newsletter subscription to this list. Respondents are likely to have both an interest in your services, and a bias towards relationships.
• Advertising. A successful lead generation advertisement is little more than a good direct mail letter, reformatted for the media in which you’re advertising. Of course, your offer is still a free 12-month subscription to your newsletter.

A recipe for growth

The turning point in the development of any business is the creation of a turn-key marketing program. If you sell expensive (or complex) products and services, our Relationship-centric Marketing Model is such a program.

Once you have recognised that your ideal customers are those who are in the market for relationships (rather than low-margin commodities), the battle is half won.

Now you can take your focus off transactions and apply it to building and nurturing relationships with a growing army of customers who are prepared to pay a premium to work exclusively with you.

It’s easy, once you recognise that there are actually two types of customer in the world!

Over lunch, a CEO recently admitted to me that his financial controller was using his organisation’s profits to build quite a substantial commercial property portfolio.

When I asked if this was best use of his organisation’s free cashflow, he smiled, "How did I know you’d ask that question?

"The fact is," he continued, "the availability of capital is not currently a constraint on our growth."

"It might not be a constraint on your organic growth," I argued, "but I still think that money could be better invested in new client acquisition."

We spent the rest of that lunch scribbling on napkins. Together, we discovered that a dollar invested in promotional expenditure was actually providing this CEO’s organisation with a better-than 900% return on investment!

By the time coffee was served, we’d agreed that his organisation’s sales process could provide a much more favourable return on capital than even the bluest of blue-chip commercial property investments.

In our experience, this holds true for most organisations. Unfortunately, most are reluctant to invest in their sales processes because (unlike other business processes) it’s impossible to calculate a return on investment.

Science versus art

If you’re a follower of our Relationship-centric Marketing methodology, you’ll know that a sales process has inputs and outputs — just like any other business process.

You’ll know that a sales process (as the word process implies) consists of a sequence of simple, interrelated steps — just like any other business process.

And you’ll know, at least in theory, that each step in a sales process can be measured, managed and optimised — just like any other business process.

This article explains the science (and more importantly, the mathematics) behind sales process management. It will show you how to take control of your sales process and use it to fast-track the growth of your organisation.

If you didn’t pay much attention to mathematics at school, you may find this article tough-going at times. But please be sure to persevere.

I’m sure you’ll discover that your sales process is harbouring significant growth potential!

Management by numbers

If you think about it, the word management presupposes measurement. The fact is, if you can’t measure it, you simply can’t manage it.

So, to manage a sales process (or any process for that matter), we need to know what to measure. Generally speaking, we will measure inputs, outputs and time. Specifically, we’ll measure:

• Throughput (output/time)
• Productivity (output/inputs)

We’ll measure these key performance indicators (KPIs) for the process as a whole, and then we’ll break the sales process into its key components (sub-processes) and devise a set of KPIs for each component.

It’s worth remembering that your sales process is actually a component of a much larger system: your entire business. In the context of your business as a whole, revenue is a measure of throughput, and gross profit is a measure of productivity. The problem with these indicators is that they are trailing indicators: that is, they tell you more about what you have done in the past than they do about what you should do in the future.

Because your sales process is the first step in your entire organisational process, the information you collect from monitoring these performance indicators can be used to enable real-time process optimisation.

As we dissect and analyse the sales process, we’ll make references to a fictitious company we’ll call Correlex. Correlex is an engineering firm that consults to property developers. Correlex’s clients all pay a retainer of $450 a month to access its consulting services. References to Correlex will appear in indented sections, with a green sidebar, just like this one.

Measuring the process as a whole

The objective of your sales process is obviously to generate sales.

This process must be designed and managed to ensure that it delivers a sufficient volume of sales in exchange for a commercially realistic investment.

For simplicity’s sake, we’ll assume that the objective of our sales process is to acquire new clients. But don’t worry, we will be sure to take follow-on sales (and even referrals) into account.

Accordingly, the two global indicators in which we’re most interested are:

• Client acquisition rate (new clients per month).
• Client acquisition cost (cost per new client).

When we’re measuring client acquisition cost, we’re dividing the amount we invested in the acquisition of relationships by the number of clients acquired as a result of that expenditure.

When we calculate this figure, we only take into account the variable costs associated with the promotional campaign that acquired each particular client relationship. With a promotional campaign, variable costs are typically media costs. We do not factor in the fixed costs associated with that promotional campaign (the cost of creating the campaign). Nor do we include the fixed costs associated with the rest of the sales process (e.g. the cost of managing the relationship with the potential client).

We ignore fixed costs because these are the cost of operating your sales process, rather than process inputs.

Our client acquisition cost is most useful for monitoring the performance of our relationship acquisition campaigns. It’s important to remember that, unless you have a very short sales cycle, client acquisition cost tends to be longer-term performance indicator. (The term sales cycle refers to the average time span between the acquisition of a relationship and the consummation of a sale.) We’ll uncover a short-term indicator when we examine the relationship acquisition step of the sales process.

When the CEO of Correlex reviews his organisation’s sales process, he discovers that, averaged over the last 12 months, Correlex acquired two new clients each month.

To determine his average client acquisition cost, he divides his total variable promotional costs by the number of clients he acquired over this period.

In the last 12 months, Correlex had advertised in the Financial Review, and in a number of specialist publications. It had also run 4 direct mail campaigns. Accordingly, its variable promotional costs consisted of the cost of media for the advertising campaigns, and the cost of mail processing for the direct mail campaigns.

In total, Correlex invested $9,600 in order to acquire 24 new clients: an average client acquisition cost of $400.

$9,600 / 24 = $400

Optimisation

It’s obviously important to know how many sales your organisation is making. It’s also nice to know how much each sale is costing you in promotional expenditure.

But, in isolation, this information is not particularly useful.

What you need to be able to do, is compare your actual performance with your optimal performance.

A common mistake in process management is to establish absolutes as targets. For example, it would be tempting to assume that the objective of your sales process is to generate as many sales as possible, for the lowest possible promotional expenditure.

The reality is that sales and promotional expenditure are interrelated. (You can’t have one without the other.) A singular focus on either maximising sales or minimising promotional costs is likely to sub-optimise the performance of your sales process. The key is to determine the optimal relationship between promotional expenditure and sales.

Accordingly, you now need to determine the optimal figures for each of your global KPIs.

Client acquisition rate is easy. Obviously, your optimal figure is determined by the capacity of your production and distribution processes. (There’s little point generating sales that can’t possibly be fulfilled.)

However, your client acquisition cost requires a little more thought.

As the graph below illustrates, as your promotional expenditure increases, the number of clients you acquire should also increase. However, with the increased promotional expenditure, the profitability of each client relationship suffers.

In theory, your optimal client acquisition cost is the point where these two lines intersect.

In practice, it will take some experimentation (and careful measurement) to calculate your optimal acquisition cost.

The starting point for this calculation is the determination of the lifetime value of a client. (Your optimal client acquisition cost will be a percentage of this figure.)

It is difficult to overemphasise the importance of performing this calculation. Without an understanding of the dollar value of a client, it is simply impossible to effectively manage your sales process.

In our experience, because most organisations have no way to value a client relationship, most grossly underestimate the amount that they are prepared to invest in client acquisition.

This under-investment in client acquisition seriously retards the growth of many organisations.

The publishing industry is one industry that does understand the concept of lifetime value. Typically publishers of magazines and other periodicals are prepared to invest at least 100% of the first year’s subscription revenue in order to acquire a new subscriber!

Valuing a client relationship

In financial terms, a client relationship is simply an annuity income stream.

It follows that you can value a client relationship, just as you can value any other kind of annuity (income-producing investment).

You value an annuity using a net present value calculation. (Net present value is the sum of a series of future payments, discounted for the cost of capital.)

To calculate the lifetime value of a client, determine the gross profit you earn in an average year from an average client, then multiply this by the figure in the annuity table below that corresponds to the number of years you retain this average client.

This table shows how much a series of $1 payments, to be paid at the end of each year for a specified number of years into the future, is currently worth, with interest at different rates, compounded annually. In other words, the table shows what you should be willing to pay, today, in order to receive a certain series of future payments of $1 each.

As you already know, Correlex sells a consulting service for $450 a month.

To calculate the lifetime value of an average client, it must multiply the gross profit in a transaction by the number of times Correlex transacts with an average client over the lifetime of the client relationship.

On average, Correlex retains a client for three years. Its gross profit is 70% (or $315).

It chooses to account for cost of capital at its overdraft rate, 9%.

Correlex calculates the net present value of a client relationship by first calculating its annual gross profit, and then multiplying this figure by the appropriate multiplier from the table above:

Average annual gross profit: $450 x 12 x 70% = $3,780

Net present value: $3,780 x $2.53 = $9,563

The CEO of Correlex is surprised to see just how valuable a client relationship is.

Prior to performing this calculation, he was considering reducing his promotional expenditure ($400 per client seemed like a lot — especially for an engineering firm).

Now, however, he suspects that he has been underspending on client acquisition!

Accordingly, he decides to set his optimal client acquisition cost at a (conservative) $900. He also resolves to watch his KPIs carefully and review this figure in six months’ time.

As explained, your optimal client acquisition cost will be a percentage of the lifetime value of a client. The actual percentage will depend on the fixed costs associated with your sales process (and your sales volume). It will almost certainly be more than 10%. It may even be as high as 50%.

(While the idea of investing 50% of the lifetime value of a client in client acquisition may seem ludicrous, it’s important to remember that, once an organisation has passed its break-even point, it’s effectively enjoying a 100% return on this promotional expenditure. Try earning that in the bank!)

Before he can finalise his global performance indicators, the CEO of Correlex must determine his optimal client acquisition rate. A quick call to his operations manager confirms that Correlex is capable handling four new clients a month.

These indicators provide Correlex’s CEO with an overview of the relationship between his sales process’s inputs and outputs.

His suspicion that he is underspending on promotion is supported by the fact that Correlex is growing at 50% of its optimal rate.

Because your global KPIs are longer-term indicators, they do not enable you to manage your sales process on a day-to-day basis.

To do this, we need to divide your sales process into its key components, and then devise a set of performance indicators for each.

You’ll remember that a sales process consists of three components:

• Relationship acquisition
• Relationship management
• Opportunity management

Let’s start with the final component of the sales process and work backwards.

Opportunity management

The objective of your opportunity management process is to convert sales opportunities into sales (remember, we’re assuming that a sale is a new client). This process will generally involve salespeople, operating either in the field, or from a call centre (or both).

A sales opportunity is typically an expression of interest in a specific product or service, generated as a result of your opportunity management process. (Sales opportunities are often called leads.)

As with your sales process as a whole, we are primarily interested in the throughput and the productivity of your opportunity management process.

Accordingly, we will begin by measuring:

• Client acquisition rate (clients per month)
• Opportunity conversion rate (sales/opportunities x 100)

Of course, the throughput of the opportunity management process (client acquisition rate) will be identical to the throughput of your sales process as a whole.

Your conversion rate is the percentage of sales opportunities that convert into sales.

The CEO of Correlex already knows his client acquisition rate.

What he doesn’t know, is how many sales opportunities his consultants require in order to make each sale.

A survey of his consultants’ sales figures indicates that, on average, his consultants convert one in every 2.9 sales opportunities into sales. (Accordingly, his conversion rate is 35%.)

But these sales figures also reveal an interesting phenomenon. Correlex’s CEO observes that conversion rates vary considerably from consultant to consultant. He also notices that there seems to be an inverse relationship between acquisition rate and conversion rate for individual consultants.

In other words, the consultants who acquire the most new clients tend not to have the highest conversion rates, and visa versa.

He wonders why …

Optimising conversion rates

Contrary to popular belief, the primary influencer of conversion rate is not the skill of salespeople.

Rather, it is the design of the opportunity management process.

In our experience, opportunity management processes are best designed with a view to minimising the time between the emergence of a sales opportunity and closure of that opportunity (a sales opportunity is closed when it is won, lost or abandoned).

Increasing the throughput of a sales process may result in lower conversion rates, but this is not necessarily a bad thing!

Sales managers typically manage their salespeople as if a conversion rate of 100% is achievable.

In reality, 100% is rarely an optimal conversion rate. The reason is that, as conversion rates go up, throughput goes down.

Ask yourself, which would you prefer: a salesperson who conducts 5 appointments a day, with a 40% conversion rate; or a salesperson who conducts 3 (highly qualified) appointments a week, with a 95% conversion rate? (Hint: salesperson A generates 10 sales a week, where salesperson B generates less than 3.)

You can take the following steps to increase the throughput of your sales process:

• Break the opportunity management process into a number of logical steps.
• Ensure all sales opportunities follow the same process.
• At each step in the opportunity management process, be sure to up-sell to the next step.
• Actively manage open opportunities.

You can manage individual (open) opportunities with a simple tabular report, like the one below. Normally, a sales team will work through this report in its weekly sales meeting. The key indicators to watch are the number of open opportunities and average days open. (If you sell a number of products with different price points, you may prefer to monitor the dollar value of opportunities).

Most CRM systems produce such a report; alternatively, you can create your own in Excel.

You can also use the weighted value and target close data from this report to produce sales forecasts.

Correlex’s CEO reviews his consultants’ differing opportunity management processes. He identifies the consultant with the most efficient process and resolves to benchmark this process and make it the organisational standard.

This new benchmark calls for a conversion rate of 25% and an average days open of 45 days.

From these figures, he calculates that, at any one point in time, his organisation should have one and a half months’ worth of open opportunities:

Optimal monthly sales: 4

Opportunities required to make 10 sales: 4 / 25% = 16

Average days open: 45 (5 months)

Optimal open opportunities: 16 x 5 = 24

Relationship management

The objective of your relationship management process is to generate a steady stream of sales opportunities from your relationships under management.

We do this by creating an automated communication program. This is a sequence of ongoing communications, where each communication is designed to add value to these relationships.

A typical communication program will consist of a monthly e-mail newsletter and bimonthly seminars or workshops.

We tend to take an indirect (longer-term) approach to the generation of sales opportunities. Our experience is that, if you can design the relationship management process to position your organisation as the leader in its particular field, sales opportunities will be forthcoming.

Events and other activities can be used to stimulate the flow of activities, but on many occasions, these activities will simply time-shift the emergence of opportunities — rather than creating opportunities you wouldn’t otherwise have received.

You need to balance your need for sales opportunities against the requirement to add value to the relationships under your custodianship. There is a danger that, if you design your communications specifically to maximise the flow of sales opportunities, you may compromise the integrity of these relationships.

As with our other processes, we are primarily interested in monitoring throughput and productivity. Accordingly, our KPIs are as follows:

• Opportunities per month.
• Opportunity realisation rate (monthly opportunities/relationships).

Opportunity realisation rate advises you of the correlation between the number of relationships you have under management (the size of your database) and the number of sales opportunities these relationships produce each month.

Correlex has 1,500 contacts on its database. Because all of these contacts are recipients of Correlex’s monthly e-mail newsletter, it referrs to them as subscribers.

On average, Correlex receives 12 sales opportunities a month from its subscriber database.

These 12 opportunities represent an opportunity realisation rate of 0.8%:

12 / 1,500 x 100 = 0.8%

In order to increase the flow of sales opportunities to the 16 per month required, Correlex’s CEO realises he must acquire an additional 500 subscribers:

16 / 0.8% = 2,000

Relationship acquisition

The objective of your relationship acquisition process is to acquire a steady stream of relationships with potential clients and centres of influence.

The input into this process is the investment in your relationship-acquisition campaigns (remember, we’re only tracking variable costs). The output is obviously the relationships (or subscribers) you add to your database.

The precise management of this process is critical for two reasons:

• The flow of inbound opportunities is the key determinate of the throughput of the process as a whole.
• In the absence of an objective performance measure, there is a high probability that you will either under- or over-spend on promotion.

Our performance indicators for this process are:

• Relationship acquisition rate (relationships per month).
• Relationship acquisition cost (cost per relationship).

Relationship acquisition cost is calculated by dividing the variable cost of promotional campaigns by the number of new relationships acquired by those campaigns.

As with our global KPIs, these indicators don’t mean much until we can compare actual and optimal figures.

Optimising your relationship acquisition process

The calculation of your optimal relationship acquisition rate is easy. This figure is determined by:

• Your target database size.
• Your availability of promotional funds.
• The capacity of your relationship acquisition process.

The calculation of your optimal relationship acquisition cost requires a little more thought.

The amount that you are prepared to spend in order to acquire a new relationship must obviously relate to the value of such a relationship.

But how can you value one more name on your database?

The solution is to value relationships using exactly the same methodology we used to value clients.

Your database of subscribers provides you with a flow of sales opportunities.

You can value a sales opportunity by discounting your optimal client acquisition cost for your conversion rate. (In other words, if your conversion rate is 10%, a sales opportunity is worth 10% of your optimal client acquisition cost.)

Accordingly, to value one new subscriber, all you have to do is calculate the odds of that subscriber becoming a client over the life of their relationship with you.

While you can easily calculate the life of a client relationship, it’s a little harder to calculate the life of a subscriber. In our experience, it’s rare for subscribers to unsubscribe from our automated communications program.

For this reason, we arbitrarily choose to value subscribers over the same lifespan as clients. Accordingly, if the life of an average client is three years, we value subscribers over this same period.

The CEO of Correlex is prepared to invest $900 to acquire a new client.

Because his optimal conversion rate is 25%, a sales opportunity is worth $225.

$900 x 25% = $225

He knows that his automated communication program provides him with an opportunity realisation rate of 0.8% per month. Or, to put it another way, for each subscriber on his database, he will receive 0.8% of a new sales opportunity each month.

Because he arbitrarily decides to value subscribers over a three-year period (36 months), Correlex’s CEO can calculate that there is a 28.8% likelihood of a new subscriber turning into a client over this period.

0.8% x 36 = 28.8%

If 28.8% of subscribers become clients, it follows that a new subscriber is worth $64.80:

$225 x 28.8% = $64.80

Therefore, this $64.80 is Correlex’s optimal relationship acquisition cost.

Correlex’s CEO decides to set his optimal relationships acquisition rate at 85 per month. This will allow him to easily hit his target of 2,000 subscribers within 12 months. (Even accounting for a particularly conservative unsubscribe rate of 42 a month.)

[Presented at: TOCICO Conference, Miami 2004]

Introduction

The traditional sales process is hard to manage and all but impossible to scale.

This paper introduces a radical new approach to sales process design, resourcing and management.

The result of this approach is a process where:

1. Salespeople consistently perform five appointments a day, five days a week.
2. Appointments are programmed into salespeople’s diaries in descending order of probable contribution.
3. A buffer of sales opportunities is generated and maintained, without requiring any involvement of salespeople.
4. Budgets, targets, bonuses and commissions are eliminated and all activities are synchronised (in real-time) with the goal* of the organisation.

The problem with the sales process

Most sales processes are not processes in any useful sense of the word.

In a production context, the word process conjures up images of a production line — a series of tightly-coordinated activities that deftly converts raw materials into finished goods.

A typical sales process hardly fits this description.

A typical sales process consists of a number of individuals, each of whom is responsible for the entire sales function (and for a number of non-sales activities). Rather than following any formal procedure, these individuals engage in a broad range of ad hoc activities — using intuition to make resource allocation decisions.

A typical sales process is not dissimilar to a manufacturing process prior to the industrial revolution:

1. All tasks are performed by skilled technicians.
2. There is minimal automation.
3. Each technician operates in parallel with others — rather than in series. Accordingly, each worker is responsible for his own end-to-end process.
4. There is enormous variation in output.
5. Because there are no economies of scale, the system is difficult to scale.
6. Technicians receive performance pay, meaning that they are inclined to behave like sub-contractors
7. There are no disincentives for technicians to set up their own competitive businesses.

(Technically, it makes sense to apply the word ‘process’ only to the latter configuration in the diagram above.)

Fortunately, if we are looking to increase the productivity of the sales process, modern manufacturing provides us with clear guidance.

Applying TOC to the sales process

TOC’s five focusing steps* advise us to begin by identifying the constraint.

Because the salesperson is the traditional sales process’s only resource, it’s obvious that the salesperson is the capacity constrained resource (CCR).

To determine how to exploit the CCR, we’ll perform a simple time and motion study.

A review of a typical salesperson’s time and activities is likely to reveal the following breakdown of activities:

As illustrated, a typical salesperson conducts just two business-development appointments a week.

The balance of his time is allocated to:

1. Project management: managing the delivery of prior sales
2. Customer service: receiving and processing repeat transactions
3. Opportunity management and clerical tasks: activity programming, diary management, data entry and literature fulfilment
4. Social activities: appointments with no formal business objective, as well as a range of overtly non-commercial activities (often involving sport)
5. Prospecting: identifying sales opportunities

The following table ranks these activities by time allocated (descending order) and by the contribution each activity makes to Throughput*.

Where the contribution to Throughput is concerned, project management, customer service and social activities are marketed as not applicable. This is because it simply does not make sense to treat these activities as part of the sales process*.

While the exclusion of social activities from the sales process is contentious, we do so for two reasons:

1. We consistently find that we can get a better return on scarce resources from commercial activities than we can from social activities.
2. Even if social relationships are an antecedent of commercial relationships (which is debatable**), such relationships should be regarded by management as a contingent liability.

Of the three remaining activities, business-development appointments obviously make the greatest contribution to Throughput.

These appointments are a higher-probability activity than prospecting. While opportunity management and clerical tasks are necessary, they do not make a direct contribution to Throughput.

Because the conduct of business-development appointments is the salesperson’s most productive activity, we will establish the appointment slot as our unit of constraint. In our experience, a salesperson’s maximum sustainable capacity is likely to be five appointments a day.*

For this reason, the pie chart on the preceding page, displays time allocated to activities in terms of appointment slots consumed.

It should now be obvious that:

1. Our sales process will be at its most productive when we have maximised Throughput per appointment slot available (T/ASA).
2. The measure of the contribution of our salesperson to the process as a whole will be Throughput per appointment slot consumed (T/ASC).

Accordingly, our focus should now be on:

1. Ensuring that our salesperson is fully utilised (all his available appointment slots are consumed).
2. Programming activities into our salesperson’s diary so as to maximise T/ASC.

A word on programming

In our experience, neither salespeople nor management are ever likely to have considered a formal approach to the programming of sales activities.

Consequently, salespeople’s time tends to be programmed by salespeople themselves — with intuition as the prevailing method.

Unfortunately, as is illustrated by the popularity of casinos, the human brain does not excel at performing estimates where probability is involved. The result is that low-probability activities are likely to be given priority over higher-probability activities. (Salespeople over-estimate the value of the unknown.)

This has a deleterious effect on both process throughput and conversion rates.*

The sales coordinator

In order to maximise both the utilisation and the productivity of the CCR (the salesperson), we focus the salesperson exclusively on business-development appointments and add an upstream resource called a sales coordinator.

The sales coordinator is responsible for ensuring that the salesperson is fully utilised at all times (five business-development appointments a day, five days a week).

Consequently, the sales coordinator takes total control of the salesperson’s diary (just as a personal assistant would take control of an executive’s diary).

In order to maximise the salesperson’s productivity (T/ASC) the sales coordinator allocates appointments in the descending order of their probable contribution. Because the sales coordinator’s intuition is no more capable of estimating this contribution than the salesperson’s, these critical programming decisions are made using a formula provided by management.

Feeding the constraint

As suggested previously, we are only interested in the salesperson performing business-development appointments.

These are appointments with a commercial agenda that has been approved in advance by the potential client.

At some stage, the sales coordinator is likely to find it difficult to schedule appointments that comply with this precondition.

This is because, prior to agreeing to such an appointment, the potential client (prospect) must acknowledge a requirement for the product or service that the salesperson is representing.

While, for most organisations, there is no shortage of prospects, there is a shortage of prospects with a current acknowledged need (this is what we call a sales opportunity).

At this point, we are in danger of the constraint shifting from the salesperson to the sales coordinator.

In order to prevent this from happening, we must:

1. Identify the source of — and a method to generate — sales opportunities.
2. Build a buffer of these opportunities (an opportunity buffer) upstream from the sales coordinator.

The source of sales opportunities: four theories

We find that most organisations have designed their sales process based upon one of four theories concerning the (primary) source of sales opportunities:

1. That sales opportunities are a raw material (and, therefore, abundant)
2. That salespeople create sales opportunities (as a result of their prospecting activities)
3. That promotional campaigns generate sales opportunities
4. That existing clients are the source of sales opportunities (either directly, or via referrals)

While there is a set of circumstances in which each of these theories is appropriate, few organisations find themselves complying with those circumstances.

The result, for most organisations, is a chronic shortage of sales opportunities. This persistent scarcity of sales opportunities, in turn, encourages organisations to design their sales processes to maximise conversion rates, at the expense of process volume.

The theory that sales opportunities are a raw material is appropriate only for those organisations with a production — rather than a sales process — constraint.

The theory that salespeople are the primary source of sales opportunities is applicable only in situations where salespeople can prospect and sell concurrently (e.g. door-to-door sales). In other situations, prospecting is such a resource-intensive activity that it consumes the greater majority of a salesperson’s available time.

The theory that promotional campaigns are the primary source of sales opportunities is applicable only to organisations that change their products regularly (entertainment promoters, infomercial marketers, property developers etc). This is because promotional campaigns that directly generate sales opportunities tend to suffer from rapidly-diminishing returns.

The theory that existing clients are the primary source of sales opportunities is appropriate only for organisations with an enormous, under-exploited client base (telecoms, utilities etc). For other organisations, this theory results in a sales process that is a self-contained (self-limiting) system.

Relationships as a source of sales opportunities

Curiously, for most organisations, it is true that clients are the primary source of sales opportunities. That said, if the objective is to increase process output at anything other than an incremental rate, it doesn’t make sense to look to existing clients to drive this growth.

Our solution is to recognise relationships as the primary source of sales opportunities.

Our interest, then, is not just in customer relationships, but in relationships with the organisation’s marketplace as a whole, where this marketplace consists of:

1. Customers
2. Potential customers
3. Centers of influence

We have observed that, in most instances, there is a predictable, linear correlation (suggesting cause and effect) between the number of relationships an organisation has under management and the volume of inbound, unsolicited sales opportunities.

This phenomenon is dependent upon:

1. A base of relationships that is large enough to be representative of the marketplace
2. Some kind of periodic and relevant communication with these relationships

Of course, this observation supports marketers’ concept of brand equity. However the marketing community’s pseudo-scientific treatment of this concept renders it all but useless.

Considering the significance of this observation, a more systematic approach is appropriate.

Accordingly, if relationships under management are a scalable source of sales opportunities, it makes sense to:

1. Build a database that is as representative as possible of the wider marketplace.
2. Communicate periodically with individuals on this database, with communications designed to stimulate the emergence of sales opportunities.

The Relationship-centric Sales Process

This approach results in the following sales process.

In summary, this process functions as follows.*

1. Promotional dollars are invested in the acquisition of relationships — rather than in the direct acquisition of sales opportunities. Relationships are acquired by giving away packaged information (generally a book, white paper, or similar), in exchange for contact information. Because of the relative size of most organisations’ marketplaces, and the attractiveness of the offer, these campaigns are less prone to diminishing returns.
2. Respondents are added to a database, subscribed to a periodical and invited to regular events. (Events are, by far, the most effective method for the stimulation of inbound sales opportunities.)
3. Inbound sales opportunities are managed by the sales coordinator — where opportunity management consists simply of programming opportunities into the salesperson’s diary, in line with an appropriate strategy. (A strategy is the sequence of steps used to convert sales opportunities into sales.)

The promotional coordinator

Now that we understand the nature of the activities required to generate sales opportunities, we can complete the resourcing of our sales process.

Upstream from the opportunity buffer we add a resource we call a promotional coordinator.

The promotional coordinator is responsible for maintaining the opportunity buffer at its optimal size.

In order to achieve this requirement, the promotional coordinator manages a portfolio of relationship-acquisition and -management campaigns.

We now can be confident that the salesperson is both fully and productively utilised — and, consequently, that he will remain the capacity constrained resource.

Managing the sales process

Conceptually, there is little difference between the management of a production process and the management of the sales process pictured on the previous page.

What differences there are, stem from the uncertainty associated with Throughput and intangible nature of both relationships and opportunities.

Throughput

Obviously, where a sales process is concerned, we are dealing with probable, rather than actual Throughput.

Accordingly, Throughput must be discounted for probability (or risk).

We must also acknowledge that the whole-of-life value of one sales transaction may be greater than the value of the initial transaction.

For this reason, Opportunity Throughput (TO) is equal to the risk-adjusted, net present value of the sales opportunity.

Probability

Traditionally, probability is estimated (subjectively) by salespeople. If the opportunity management process consists of one or more standardised strategies this is no longer necessary. All we have to do is select process milestones (stages) and determine the historical probability for opportunities at each stage.

The table below shows a typical set of stages with associated probabilities.

Buffer size

The opportunity buffer consists of all sales opportunities — where these opportunities are at various stages of the opportunity management process.

You could visualise the opportunity buffer as an inventory of pending appointments. If, however, multiple appointments are required to close each appointment, you would have to remember that each appointment is likely to be connected to one or more others.

We can estimate the minimum number of opportunities that are required to keep the salesperson fully utilised by multiplying his daily capacity by the average opportunity cycle time, and then dividing the result by the average number of appointments consumed by each opportunity (some opportunities will never progress to first appointment, while others will consume multiple appointments).

Because Murphy will strike from time to time, this buffer needs to contain protective capacity. Experimentation has lead us to the conclusion that protective capacity should be an additional 50% of the minimum capacity.

The following example relates to the five-stage opportunity management process referenced previously. (It should provide some indication of the volume of concurrent opportunities that can be processed by a single salesperson.)

Programming appointments

You’ll recall that we wish to replace intuition with a more objective method for programming appointments.

We can do this by:

1. Estimating the contribution that each sales opportunity will make if it is allocated to an appointment slot.
2. Indexing the opportunity buffer, based upon this probable contribution.

We start by revisiting our stages and adding the following:

Appointments pending: This is an estimate of the number of additional appointments that will be required to win the opportunity (this number cannot be less than one).

Maximum days: Because opportunities atrophy over time, this figure determines the point at which we will apply an additional discount. (These numbers are cumulative.)

We estimate the relative value of each opportunity using the following formula:

Overdue days is calculated by subtracting the max days value that is associated with the current stage from actual days (the number of days the opportunity has been open thus far.) The result must be a whole number*.

The following table is an example of three opportunities indexed using this method.

Assuming the same geographic region, the sales coordinator will program these opportunities into the salesperson’s diary in the order dictated by the index.

Performance indicators

We discussed earlier that the performance indicator for the sales process as a whole is Throughput per appointment slot available (T/ASA).

If we reflect on the contribution each team member must make to maximise T/ASA, it is easy to derive an objective and a performance indicator for each.

Each of these performance indicators should then be plotted on a run chart — providing each team member with a real-time, objective view of the contribution his activities are making to the goal of the system as a whole.*

This objective approach allows us to dispense with targets, budgets, bonuses and commissions, performance reviews and management exhortations.

The sales process is now easy to manage and, consequently, easy to scale.

The result

The application of TOC to the sales process results in radical changes to process design, resourcing and management:

1. Responsibility for all tasks other than the conduct of appointments is institutionalised.
2. Non-constrained resources are applied to the acquisition and management of relationships and, accordingly, to the generation of sales opportunities.
3. The opportunity-management process is standardised — and optimised, so as to maximise the return on the unit of constraint (appointment slots).
4. Sales process cycle-time is reduced — often resulting in an increase in conversion rates.
5. Salespeople require only product knowledge and communication skills (consequently, they are easier to recruit and retain).
6. Commissions and bonuses cease to be necessary and the staffing mix shifts in favour of (lower-paid) sales support staff.
7. Significant increases in Throughput can be expected for similar Operating Expenses and Investment.

Today, however, he is particularly animated.

He’s relating the story of how, with the assistance of Justin Roff-Marsh Advertising (now Ballistix), he has shifted his business’s growth into overdrive.

"Consider this," he says – in an effort to justify his excitement – "it took me 22 years to build my business. Come June 2000, it will have taken Justin Roff-Marsh Advertising just 12 months to double it in size."

As Gavin’s story unfolds, it’s easy to understand his enthusiasm. The last six months have seen Gavin replace an unsuccessful advertising campaign with one that generates more new clients than he can possibly handle. He’s replaced an unstructured, labour-intensive sales process with one that operates virtually on autopilot. And he’s replaced a comfortably uncluttered diary with one that’s booked solid – two full months in advance!

An unconventional investment methodology

Gavin Ross is a portfolio manager.

His clients are high net-worth individuals (they must have a minimum of $500,000 to invest) who wish to enjoy the higher returns of direct share investment, without having to make buying and selling decisions themselves.

Gavin provides these clients with an alternative to a managed fund. Unlike a managed fund, Gavin manages the shares in his clients’ private accounts. His clients benefit from lower fees, as well as from a more personalised management service.

Gavin’s clients also benefit from his unconventional management methodology. Gavin classifies himself as a ‘value investor’. Value investing is a method that has been popularised by America’s hugely successful Warren Buffet (the world’s second-wealthiest man).

While many traditional fund managers would like to be regarded as value investors, the quarter-to-quarter reporting requirements (and, in many cases, the sheer size) of their funds makes this longer-term and (more selective) method of investment management impractical.

After a long history in the financial planning industry (he was one of the original founders of the Australian chapter of the International Association for Financial Planning), Gavin launched his portfolio management service 22 years ago.

His business grew steadily, fuelled by a steady stream of referrals from satisfied clients – as well as by regular media exposure. As his clientele grew, Gavin increased his minimum initial investment from $50,000 to its current level of $500,000.

Reluctant advertiser

When Gavin asked Justin Roff-Marsh Advertising to take a look at his newspaper advertisements, he had just about given up on advertising. "I was like most business people," Gavin explains, "I figured that advertising was something you did in expectation of some immeasurable longer-term benefit. I ran ads reluctantly, but I had never known an advertisement to generate more than one or two telephone calls.

"I spoke to Justin Roff-Marsh Advertising because I was intrigued by their editorial-style ads. I had no idea whether or not they worked – I just knew I liked reading them!

"What surprised me about Justin Roff-Marsh Advertising was that, unlike other advertising agencies I’d spoken with, they didn’t seem to place much importance in ads. Their attitude seemed to be ‘sure we’ll fix your ad, now let’s talk about your sales process’.

"I’ve got to admit, their seeming disinterest in advertising unnerved me at first. I couldn’t see much sense working on my sales process when I was coping quite comfortably with my current referral business. I simply had no idea of the level of activity their advertising was about to unleash."

A success story waiting to happen

Justin Roff-Marsh, from Justin Roff-Marsh Advertising, explains that Gavin Ross & Co. was a marketer’s dream come true.

"When we met Gavin, we met a man with a remarkable story to tell. He had an invaluable brand in Melbourne. (He had received regular media attention for years – including once being featured on the cover of Personal Investment magazine.)

"His unconventional investment methodology was exciting. (America has a number of popular value investors, including Warren Buffet and Peter Lynch – but no one has taken ownership of that category in Australia.)

"And his enthusiasm for share investment was infectious. (Invariably, when Gavin visits our office, our entire team gathers in the boardroom to ask his opinion on shares, and to marvel at his down-to-earth explanations of otherwise unfathomable economic principles.)

"Gavin was a success story waiting to happen. He’d already done all the hard work – all we had to do was press the ‘start’ button!

A whole new sales process

The Justin Roff-Marsh Advertising team proposed a three-step sales process. First, advertise to generate responses from qualified potential investors. Second, send respondents a comprehensive information pack to pre-sell Gavin’s service – and invite them to invest. And third, plug respondents into an ongoing communications program – to continue to nurture a relationship with those who don’t invest immediately.

Justin Roff-Marsh Advertising designed Gavin’s lead-generation advertisement to appeal to those Melbournians who already knew Gavin from his regular media exposure. The advertisement mentions his $500,000 minimum initial investment, to avoid generating information pack requests from those who cannot afford his services.

Click to enlarge

Justin Roff-Marsh Advertising then created a high-quality, eight-page booklet to replace Gavin’s existing ‘corporate’ brochure. Justin explains why. "Gavin’s existing brochure wasn’t a bad looking document. The problem was, its four pages of unemotive bullet points really undersold Gavin’s unique service offering. We wanted to sell Gavin by empowering the reader with a rudimentary understanding of his unconventional investment methodology.

"Furthermore, we wanted to make Gavin’s sales process less labour-intensive by ‘institutionalising’ much of the information he was disseminating to potential clients in face-to-face meetings."

The resulting document explains the shortcomings of traditional managed funds, and then teaches the reader Gavin’s ‘five laws of value investing’. It details Gavin’s investment management service and helps the reader to determine whether or not Gavin’s service will be appropriate for his or her situation. The document also contains a detailed biography of Gavin Ross.

To facilitate ongoing communication with those respondents who don’t invest immediately, Justin Roff-Marsh Advertising converted Gavin’s existing quarterly report into an ‘open letter to high-net worth investors’. Like his new brochure, this open letter adds value to Gavin’s relationship with potential clients by continuing to teach them about his investment methodology.

The results

At time of writing, Gavin’s new sales process has been operating for around five months.

But Gavin is still having trouble coming to grips with the results it is generating.

He winces a little as he relates the numbers – almost as if he suspects he’s dreaming, and he’s terrified this introspection will jolt him awake!

"The first time the ad appeared in the Melbourne Age, it generated 186 information pack requests. I just couldn’t believe it. I’ve never seen the phone ring like that before!

"When I sent respondents their information packages, I was confident that we would get one or two new clients – just one new client would have more than paid for the ad.

"Nothing happened for about a week, and then the phone started ringing again – with people requesting appointments. In total, I got five new clients from that first advertisement. Between them, these new clients placed just over $3 million dollars under my management.

"The amazing thing is that subsequent advertisements have yielded similar – if not better results."

Gavin currently has a queue of potential clients, waiting up to two months to meet with him. He’s employed additional staff and had his computer network rebuilt – but, for the moment, he just can’t grow any faster.

Gavin concludes, "The future looks exciting. By June next year, I will have easily doubled my funds under management. Once I’ve done that, I’m going to close-off my service to new clients, so I can concentrate on looking after my existing clients – and my new project, of course."

Gavin is reluctant to reveal details of his new project just yet, although he admits it will be in the financial services industry. And, like his portfolio management service, he claims he will be pioneering an investment concept never before seen in Australia.

He is less reserved, however, in his praise of Justin Roff-Marsh Advertising. "You guys took a good business and you transformed it into an absolutely outstanding one. I just can’t thank you enough."

America Online (AOL) is the Internet service provider that recently acquired Time Warner – the world’s biggest media company – in a $US165 billion deal.

And Body Express is a boutique gymnasium, in Sydney’s Bondi Beach.

Look behind the scenes, however, and you’ll discover that these businesses share one common feature – their promotional strategy!

In 1993, AOL embarked on a promotional strategy that was to see its subscriber base grow from 300,000 to the 24 million subscribers it has today.

This promotional strategy was deceptively simple. AOL gave away free computer disks containing start-up software and free time on the AOL service. (Our own OzEmail has subsequently emulated this strategy.)

Initially, these start-up disks were given to readers of computer magazines, but the response was so favourable that AOL began distributing them in all kinds of magazines, and even inserting them in cereal boxes and frozen steaks. Between 1993 and today, AOL ‘carpet-bombed’ the United States with a total of 250 million start-up disks!

Our own Justin Roff-Marsh had just returned from a US trip when he met with Jamie Hayes to discuss the promotion of his gym. As the two talked, it dawned on Justin that there were similarities between Body Express and AOL.

Gyms had, in recent years, become a commodity item – as had Internet service provision. Body Express was selling an 18-month membership, with fees debited monthly to members’ credit cards – as was AOL. And Body Express was in a position to provide valuable added services to lock-in members once they utilised them – as does AOL. (AOL uses services such as e-mail and it’s instant messaging and calendar services to provide member lock-in.)

Considering the similarities, it made sense for Justin to suggest that we borrow AOL’s promotional strategy.

A free 30-day membership

Fortunately for us, Jamie Hayes is a contrarian. He hadn’t survived 22 years and seven gym start-ups by playing by the rules! Accordingly, when Justin suggested that we might promote his gym by ‘carpet bombing’ Bondi Beach (the suburb, not the strip of sand) with offers of free 30-day memberships, he just managed to retain his composure.

We proposed a classic sampling campaign, with a twist. While we would give away free 30-day memberships, we would ask respondents to join as permanent members – and register for Body Express’s monthly billing program ($49 a month for a minimum of 18 months). However, we would not charge them for their first month’s membership – and we would allow them to opt-out of their membership at any stage during that month without penalty. (This is exactly how the AOL offer is structured.)

Jamie quickly got excited about this strategy. He could see that the offer of 30-days’ free membership was an irresistible one. But he could also see that the offer was structured in such a way that it would attract only those people who were prepared to at least seriously consider Body Express membership.

He also quickly realised that, if he could compel new members to visit regularly over their first month of membership, they would be highly likely to stay on as members. And, while those new members who didn’t make use of the gym were unlikely to stay on, they would incur minimal service costs during the 30-day trial period.

Gym visits: about as enjoyable as body piercing!

Gyms have been trying to make sampling campaigns work for years. In fact, prospective gym members expect to be given a handful of free visit vouchers prior to joining.

Unfortunately, as Jamie had already discovered, traditional sampling campaigns do a very poor job of signing-up those members who haven’t already made up their minds to join!

The reason why is deceptively simple. A sampling campaign will fail if the people who trial the product on offer have an unsatisfying experience.

The nature of the gym industry is that one visit (or even a handful of visits) to a gym seldom constitutes a ‘satisfying experience’ for anyone other than a committed exercise buff.

The fact is that a first-time gym goer will tend to notice results only after two or three weeks’ worth of gym visits. And, until these positive results become noticeable, gym visits are about as enjoyable as body piercing.

Gyms have developed two techniques for coping with the problem of ‘delayed gratification’. Some gyms ignore the less committed, and focus on serving only hard-core exercisers (body builders). Others provide distractions to ease the short-term pain (cafes, audio-visual entertainment, child-minding services and a calendar full of social events).

Each of these techniques has its own shortcomings. The body builder niche is a very small market. And, non-core services tend to distract gym goers from the activities that will ultimately yield results – which further delays the positive reinforcement that these health results provide.

Adding (relevant) value – and creating lock-in

Jamie had already developed his own theory on the best way to handle the problem of ‘delayed gratification’.

We suggested that our sampling campaign might be an acid test for this theory.

Jamie explained that, in the main, people join gyms to lose weight. (Not to pack-on muscle or expand their social networks.) "Exercise is an essential component of an ongoing weight-loss program, but it’s easier to get quick results from dietary modification."

"Unfortunately, most gyms don’t bother to give their members dietary advice. In fact, most gyms simply don’t recognise that they are in the weight-loss business."

Jamie’s suggestion was to provide new members with a personal coach during those all-important first 30 days of membership. This coach would have two areas of responsibility. The first would be to provide new members with dietary assistance. And the second would be to provide the training and the motivation required to ensure that new members commit to regular exercise regimes.

We agreed that the combination of the 30-day trial period and the personal coaching program would provide the lock-in that this sampling campaign needed.

We also acknowledged that personal coaching sessions and a free eating program would make Jamie’s offer all the more compelling!

Spreading the news

Justin suggested that we promote the Body Express sampling campaign with a simple three-fold, envelope-size brochure.

He insisted that this brochure should feature a punch-out membership card. He explains, "A free 30-day membership is one hell of an offer. I felt that a punch-out membership card would provide believability and a sense of immediacy."

And, to our delight, Jamie asked if we could emulate the bright, high-energy feel of the AOL campaign.

As well as a punch-out membership card and a lime and orange colour scheme, the resulting brochure featured a detailed description of Body Express’s five-step weight-loss program and clear explanation of the conditions of the offer. (We wanted to be sure that prospective members understood that they would need to provide their credit card details to qualify for their free month’s membership.)

The results

In April 1999, 10,000 of these brochures were distributed into Bondi Beach letterboxes.

Jamie remembers, "We had eleven new members join that very day. Within seven days, your campaign had provided us with exactly 68 new [trial] members!"

"Of those, half survived that critical 30-day period – providing us with exactly 34 paying members."

He explains that this result was remarkable for a number of reasons. "For a start, I’ve done a lot of letterbox drops – some more successful than others – but I’ve never experienced a response like this before. I doubt many gym owners would believe that it is remotely possible for any kind of campaign to provide an established club with 68 [trial] members in one week. Furthermore, to have 50% of trial memberships convert into paid members is just incomprehensible!"

A glimpse at the numbers behind Jamie’s campaign provides an insight into his happiness. It cost Jamie $1,694 to print and distribute 10,000 of these brochures. If we amortise 25% of our creative costs on this first distribution, that provides us with a campaign cost of $2,432.

Because this investment yielded 34 new members, Jamie’s cost per new member was $72. Each new member committed to a minimum of 18 months’ membership at $49 a month (debited to his or her credit card). This means that each member provides Body Express with a minimum of $882 revenue. (This does not include income from personal training, drinks and accessories, or future membership renewal fees.)

Dissecting success

Jamie makes it clear that there was a lot more to the success of this campaign than simply distributing 10,000 brochures and waiting for the new members. "I worked closely with the JRMA team throughout the creative process. In fact, when Monique provided me with a mock-up of the finished brochure, I took a trip to the local shopping centre – clipboard in hand – and asked shoppers for their feedback.

"I also resolved to treat new trial members as we would all other members. We exchanged their temporary membership cards for real ones on their first visit, and we even banned the use of the ‘T’ [trial] word!"

The future

Jamie is committed to rolling out his new campaign as fast as his internal systems (and his cashflow) will allow. Our next step will be to test his offer in other media –starting with newspapers and broadcast fax.

He’s also committed to his relationship with JRMA. In addition to regular strategy sessions with Justin, he’s already had Monique Lewis redesign his corporate identity.

Jamie now keeps a close eye on America Online’s promotional activities. After his success with their subscriber-acquisition program, he’s keen to see what clever ideas they come up with next!

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.

‘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.

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!