What s Your Growth Capacity?

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1 What s Growth Capacity? Mark Donnolo Many companies become introspective in a challenging economy and look for new ways to grow. In an effort to improve margins, some companies have cut selling power through sales organization layoffs, rather than strengthening growth capability. This has left them at a competitive disadvantage compared to companies that have continued to re-tool and strengthen their sales and marketing organizations over time. Market leaders consistently build growth capability, regardless of economic conditions. Improving your organization s market targeting, sales strategy and performance management can help you become a market leader. Decisions around sales strategy and sales tactics affect how rapidly, or slowly, your organization can add profitable revenue during the year. Decisions in key areas such as market targeting, positioning and offering to target markets, sales strategy, winnable potential and revenue retention determine your growth capability. The good news is you don t have to add sales people to boost your growth capacity. Most companies can do a lot more with the resources they already use. Make Sales Strategy Actionable Many organizations experience a gap between marketing strategy, developed at a high-level, and sales strategy, which must be successfully executed by the sales organization to actually produce revenue. As the organization grows and prospers, sales and marketing typically become independent groups with distinct objectives and perspectives. The marketing strategy and sales strategy become disjointed and the company loses its ability to plan and execute in a coordinated fashion. Make sure the marketing strategy converts to a strategy for the sales organization that includes addressable target segments, clear priorities, and a plan that connects marketing direction with sales execution. To identify big opportunities gather input directly from your target customers and prospects. If you focus internally when developing your product or service offerings, you ll find that they often do not meet target customer needs. Test your total offering with customers and identify your gaps and your competitors gaps. Build your offering to create the desired customer experience and stake your claim based on underaddressed opportunities and your relative market strength. Make sure your positioning is clearly communicated to your target market through corporate, marketing and sales communications. In each of their markets, sales people should have adequate, and relatively balanced, potential. The market must support at minimum the call volume required to touch a total number of prospects equal to anticipated closed customers times the average close rate. or example, if a rep is expected to close $5MM in new business (beyond the current base), each new account produces an average of $200,000 in annual revenue, and the rep has an average close rate of 10 prospects for each closed customer, the market must have a minimum opportunity of 250 prospects annually. To allow time for prospects to refresh each year, the actual number may be at least three times that minimum. 1

2 ocus Sales Organization Sales organizations spend only about half of their time actually selling. So they get only a fraction of what they should for their investment in sales resources. Typically, 20 percent to 25 percent of total time is spent on operations and administrative activities, 10 percent on non-account specific marketing, and 15 percent on travel. Most organizations have a great opportunity to re-capture valuable selling time by eliminating non-sales activities or shifting them to the appropriate people. or example, in an organization that, on average, spends half of its time selling, recapturing 10 percent new sales time is like adding two new sales people for every 10 currently employed. One key to improving productivity is understanding that true productivity isn t just average revenue times number of reps. By analyzing sales workload, sales process length and workload-adjusted close rates, the organization can reduce low-quality opportunities and focus valuable resources on closable opportunities, thus increasing sales productivity. Retain Best Customers Rather Than Depending on New Ones Companies lose about fifteen percent of their customer revenue each year. That means that to grow at an incremental fifteen percent annual rate, the company must actually grow at 35 percent. And, that assumes the new revenue is the quality of the old. While no one aims for profit churn, not all customer revenue and profit loss is obvious. While revenue retention from year to year may appear reasonable, companies often lose profitable revenue and gain less profitable revenue as a result of brand erosion, shifts in pricing plans or movement to less profitable products. Driven by heavy churn, companies often spend valuable time and resources acquiring revenue from new customers to replace lost revenue from current customers. This replacement selling not only pulls resources away from incremental growth, it is also costly. Typically, the cost of selling new customer revenue is three to five times the cost of retaining current customer revenue. Sales and marketing resources can be better used to gain true incremental growth if focused on retaining the right customers. Enable Performance with the Right Sales Incentives The sales compensation plan is a powerful tool that connects front line sellers to the company s goals. Without effective quotas and pay plans, sellers typically pursue their own objectives, which usually don t add up to the company plan. At its worst, the incentive plan can create conflict and confusion within the organization. At its best, the incentive plan communicates a clear, simple message in a motivational way that drives sellers toward attainable objectives. Use only measures that directly link to the most important goals each sales position can affect. Companies often add too much to the plan in an effort to control all sales behaviors and meet the needs of internal constituents. Including too many plan components creates confusion and dilutes the focus of the sales organization. Set quotas with a combination top-down/bottom-up process that uses input from the sales organization. Link quotas to pay plans that include competitive target and upside pay levels, appropriate pay mix, effective measures, precise mechanics and a clear strategic message. As you start down the path of boosting your sales capability, install a dashboard of leading indicators to know whether you re on track with your plan and how to adjust. The best measures combine three groups: revenue, profitability and productivity. These may include metrics such as incremental revenue growth, new customer growth, current customer development, customer retention, revenue forecast, gross profit, price targeting, expense ratios, productivity per rep, average deal size and sales close rate. top-level dashboard should include only the most important metrics to track your growth progress within strategic parameters. Continuing to build selling strength is one of the most important actions you can take to grow profitable revenue in good economic times or bad. 2

3 Report Card your organization s growth capacity. Identify your areas for greatest growth capacity improvement. Involve your management team by having them evaluate individually and then compare your results and develop a common plan to address your highest impact opportunities. 1. Actionable Sales Strategy 2. Needs-Based Segmentation Our marketing strategy is developed with input from field sales resources and customers. It is an action plan that is clearly understood by the company and is executed by the channels and sales organization. Marketing, sales, and service resources work to the sales strategy and provide feedback from the field to improve its effectiveness. We have defined the target segments that are most valuable to us, align with customer needs, and are the best fit with our company. These segments are clearly translated to our sales channels and sales force which allows them to target these groups. Our marketing strategy is strong from a marketing standpoint and supported by the organization as a whole. However, the sales channels and sales organization struggle to convert it to a plan that they can execute. As a result, they give it their best efforts and often fall back on mass market selling or developing their own strategies. We have defined the target segments that are most valuable to us and that are the best fit with our company. However, we have not effectively translated them to our sales resources, which may cause sellers to implement their own plans. Our marketing strategy is seen as an ivory tower exercise. It s developed by people that don t understand our customers and is not used by the sales resources. The sales organization develops its own strategies and may not benefit from the information available from marketing. The marketing and sales interface may be hostile or passive-aggressive due to a lack of integration effectiveness. We have defined segments but they are based on general characteristics (industry, revenue) that may not represent the needs and value of these groups. Our sales resources have developed their own plans, which are different from our corporate or marketing plans. Local sales management develops its own plans, which are inconsistently executed across the organization. The company clearly does not take advantage of success stories from other regions or districts. Overall, the company performs worse than if it could replicate some of the good practices from the field. We do no central strategic market planning. The sales organization operates as independent groups, inconsistently following their own targeting plans. Our sales strategy is don t show your face in the office get on the street and sell. Individual sellers develop their own plans and receive no intelligence or support from management. As a result, we are street fighting with competitors and ourselves. We do no central strategic market planning. The sales organization operates as independent groups, with no evident market targeting. This has created conflict about direction and adversely affected our capability to grow. 3

4 3. Balanced Opportunity Our sales organization has adequate and balanced sales opportunity in its assigned territories. We use sales potential estimation methods to determine annual potential for prospects and customers by segment. We know if we have underpenetrated a given account or market and can act upon it. We also understand unique market characteristics that affect our ability to meet the growth plan. Our sales organization has clearly defined territories or markets. However, these were developed based on account relationships, existing revenue, and major geographic boundaries rather than growth potential. We may not know the true opportunity by market or account type. As a result, we may be underpenetrating some markets and other markets may not have adequate growth potential. We have assigned territories but there is a common perception that reps and channels lack the growth potential they need in their markets. There may also be a perception of favoritism in how markets are assigned. This has resulted in territory or account poaching, when reps or channels pursue opportunities in markets assigned to others. We have no territories or assigned markets but sellers are so spread out that they rarely fight for the business. We have no information on the actual potential in these markets. Our market selection was not based on growth potential or alignment with target segments. As a result, we may be mis-covering or under-covering our markets. We have no territories or assigned markets. It s a free-for-all and sellers have to compete to survive. As a result, success and pay levels are sporadic and we have higher than average turnover for our industry. 4

5 4. Customer Responsive Offerings 5. Organization and Offer Positioning We have defined our offering based on the needs of our target customer segments. Our offering is comprised of and defined as the product, services, customer experience, and value we add as an organization. We understand the positioning of our direct and indirect competitors and have established our position based on unmet opportunities and our competencies relative to competitors. We communicate our positioning clearly to our target market through our corporate, marketing, and sales channels. We have an offering that, in general, meets the needs of our target customer segments. We have not consistently created the desired customer experience and have not effectively packaged the value we add as an organization. We understand the positioning of our direct and indirect competitors and have established our position. However, we have not effectively differentiated ourselves versus more than two competitors in our market. We communicate our positioning clearly to our target market but still struggle with using a high-impact value proposition. We have an offering that once met the needs of our target customer segments. However, we have not kept pace with changing needs or competitive offerings. We may charge a price that our target market will not bear. We understand the positioning of most competitors but have not firmly established our position. The sales organization communicates an inconsistent value proposition or positioning to customers and is often reduced to competing on price alone. We have a standard product, which was developed based on our internal desires. We are not concerned about matching our offering to customer needs. We know some of our competitors, but what they do is not important. We move product and compete on price. Our competitors effectively differentiate themselves, beyond price, with a similar product. We, however, see little possibility to improve our positioning. We have a product, developed based on our internal desires. We believe that we know what is best for the customer and will not change. We may also have quality issues with our product. We have seen repeated cases where this has caused us to lose business. We are not aware of and do not care about what our competitors do. We move product and compete on price. Since we do not attempt to differentiate ourselves beyond price, our margins are thinner than the industry average, and our capability to control the outcome of the sale is limited. 5

6 6. Revenue Retention Our revenue retention is at least 95%. We have isolated the controllable and uncontrollable causes of revenue churn, segments affected by churn, and have implemented action plans to retain this revenue and increase our growth rate. We have identified and have minimized shifting of revenue from more profitable to less profitable products and pricing plans. Our revenue retention is at least 85%, which means that to net 15% growth, we must grow at 35%. We may look at only customer loss rather than revenue churn. We generally understand where we lose our revenue each year. However, we have not isolated causes to determine how to improve retention. We know if we re losing more profitable revenue than we re gaining in aggregate but have not pinpointed the causes. Our current customer revenue retention is at least 80%, which means that to net 15% growth, we must grow at 44%. We are aware of the issue but have not determined where we lose this revenue each year and have not developed a plan to improve retention. We do not know the relative profitability mix of revenue retained versus revenue churned. Our current customer revenue retention is at least 75%, which means that to net 15% growth, we must grow at 53%. We are not aware of the retention component of our annual growth and therefore have not focused on how this could dramatically improve our growth. We do not know the relative profitability mix of revenue retained versus revenue churned. We do not know our current customer revenue retention. We focus on new selling and have paid little attention to revenue retention. 6

7 7. Channel and Sales orce Alignment We have designed our sales channels and sales organization to cover our target market segments based on how customers buy. We ve selected a combination of sales channels that optimizes our reach, sales effectiveness, and sales costs. We have implemented rules of engagement that minimize channel conflict. We provide our channels with adequate support in the form of training, tools, and incentives. 8. Sales ocus Our sales organization focuses at least 60% of its time on pure selling activities. We have decontaminated our sales resources to maximize their sales focus. We know the focus of this time in terms of target customer segments and strategic products. We understand the organization s true sales capability. We use a mix of sales channels and sales resources to cover our target market segments. They were selected to match the status quo in the market They may not optimally match our target markets or support our positioning. We may provide our channels with support in the form of training, tools, and incentives. Our sales organization focuses at least 50% of its time on selling activities. We do not have a method to know where these resources are focused. We understand the organization s sales capability on average based on total sales and total sellers. We have information on close rates, sales effort, and sales cycle duration but don t use this to improve growth performance. We use a mix of sales channels and sales resources to cover our market. They were selected to match the status quo in the market. They may not optimally match our target markets or support our positioning. We may have channel conflict that causes customer confusion, channel price competition, and a degradation of our offering. Channels may complain of inadequate support, poor programs, or biased treatment. Our sales organization, in aggregate, focuses at least 40% of its time on selling activities. We don t have a method to know where resources are focused. We understand the organization s sales capability on average. We have only anecdotal information on close rates, sales effort, and sales cycle which is not used to improve growth performance. We use sales channels or resources that have not been proactively selected. They may be legacy channels that have not evolved over the years. They may also conflict or undercover the market. Competitors may have attained greater share or profitability in the same market using a more effective combination of channels and resources. This approach has clearly caused the company to perform below the industry average. We have limited and inconsistent information on how the sales organization focuses it time and effort. It is possible that sales resources focus a large percentage of time on non-sales activities. The company provides some assistance to sales resources to help them improve their availability or focus. We use a single sales channel which, in practice, has not met customer buying requirements. No other channels have been considered to access the target market. Competitors may have attained greater share or profitability in the same market using a more effective combination of channels and resources. This approach has clearly caused the company to perform below the industry average. We have no information on how the sales organization focuses it time or effort. Sales resources probably focus a large percentage of time on non-sales activities or non-company activities. The company provides no assistance to sales resources to help them improve their availability or focus. 7

8 9. Goal Alignment Our sales resources goals align with company goals for strategy, target markets, and offerings. Quotas for all resources sum to between 100% and 105% of company goal. Quotas are set with a top-down/bottom-up process with input from the sales organization. We have industrycompetitive pay plans that clearly communicate objectives and link to attainment of quotas. Our sales resources goals generally align with company goals. Sales quotas may sum to company forecast. Quotas are set with a topdown process that considers market factors and some input from the sales organization. We have industrycompetitive pay plans that link to attainment of most quotas or strategic objectives. Our sales resources goals may not align with company goals. Quotas may not sum to the company s sales forecast or we may not use quotas for the sales organization. Quotas are allocated to the sales organization but don t consider differences in territory or market potential. We have pay plans to pay for performance but pay plan goals may not align with company goals. Company objectives are established but are not allocated to the sales organization. Rather, sellers focus on selfdetermined objectives that do not total to the company s sales forecast. Our pay plan does not link to company goals and may confuse sellers about correct direction. Company growth objectives are unclear. Sellers focus on selfdetermined objectives that do not total to the company s sales forecast. Our pay plan does not link to company goals and may create conflicting behaviors. 8

9 10. Dashboarding We proactively monitor the organization s progress on the business plan through a dashboard of leading indicators and breakdowns of our growth by components, segments, and products. We track on a regular basis to make course corrections that enable us to reach our growth goals. We monitor the organization s progress on the business plan through indicators that are collected manually. We track this information on a regular basis and use it to make course corrections to enable us to reach our growth goals. We monitor the organization s progress on the business plan primarily with sales forecasts collected from sales resources. We have no consistent leading indicators that allow us to predict performance based on empirical data. We focus solely on revenue or profit results. We receive limited forecast information from sales resources. We do not have methods to track productivity, opportunities, or growth components. This has resulted in missed forecasts, without adequate time to coursecorrect. The only metric we use is revenue. We receive no forecast information from the sales resources. We have little information to calculate profitability. This has resulted in missed revenue forecasts. Total Points Average (Divide Total Points by 10) Total your points to determine your final grade. Combine your Growth Capability Report Card score with your actual growth capability versus sales plan to determine which areas can be most readily improved to increase your growth rate. or more information, visit TheSalesLeadershiporum.org, SalesGlobe.com, or call (770)