THE RULE OF THIRDS. by John Schnitzler. Changing the way the world markets and sells

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1 by John Schnitzler Changing the way the world markets and sells

2 Executive Summary Over the course of the last fifty years, most industries have undergone revolutionary change. The process by which building products are sold, however, has changed very little. Aside from the introduction of the cell phone, the basic field sales methodology and coverage model is still the same. This means that building products distribution continues to rely heavily on their field sales teams as their primary (and sometimes sole) communication channel to customers, a costly proposition with diminishing returns as more customers demand their time and attention. The marketplace is changing. The reality of this new market is that economic rules must dictate the behavior of the field sales representative. In our thirty years of experience in the building materials industry, we have found that most field sales representatives are tasked with managing an average of 100 customers. With only a fixed number of hours in a day, every rep must strive to get maximum value out of their assigned accounts while exerting the least amount of time or effort. This often results in different levels of customer focus throughout their portfolio, and that s really good for individual efficiency but can have significant impact on portfolio sales performance. After examining the sales data of several hundred companies in building products distribution, MMC has found quantitative proof of what we now refer to as the Rule of Thirds. This rule, simply stated, is that regardless of portfolio size, the top third of accounts always outperforms the middle third of accounts. Likewise, the middle third of accounts always outperform the bottom third of accounts. This economic performance identically follows where reps have bandwidth and spend their time. The marketplace is changing. The reality of this new market is that economic rules must dictate the behavior of the field sales representative. By finding other ways to support field sales teams and better manage customer relationships, distributors have tremendous opportunity to increase loyalty and bottom line sales growth and market share within customers. Background In the building materials industry, distributors and wholesalers typically rely on their field sales organizations as the main conduit of outbound sales. These reps must cover the needs of all current customers while responding to new and potential customers. Cost effectively utilizing traditional sales forces across all customer accounts can be very difficult because of a phenomenon known as the 80/20 principle. On average, for any given company within the building product industry, roughly 80% of revenue comes from only the top 20% of customers. The bottom 80% of accounts that only produce 20% of the revenue, however, are often left uncovered or underserved, as they simply do not produce enough volume to justify coverage by field sales. These accounts can experience massive churn and sales attrition, often in the double digits each year. 2

3 On the other hand, the top 20% of customers have higher average sales volumes and are the most strategic accounts, justifying a higher cost of sale. These accounts are generally assigned to field reps to receive personal attention and management with the intention of retaining and growing the account. However, due to increasing pressure to do more with less, it is not uncommon for a single sales rep to cover 100 customers or more. Even within these high value customers that sales reps cover, we have seen a consistent breakdown in coverage that can lead to a stagnation and loss of sales. On average, for any given company within the building product industry, roughly 80% of revenue comes from only the top 20% of customers. The Challenges Outside sales organizations face distinct challenges in executing their roles of retaining and growing customer bases. Generally, the larger the customer, the more time that is required to manage the account, and customer expectations can outpace the resources available to the sales rep. For instance, if a sales rep s largest customer finds a missing piece from an order, it is often the rep who must then drive to the job-site and deliver the piece and assuage the customer. These seemingly small issues can add up quickly, dramatically decreasing the amount of time and energy that can be spent managing other client needs or cultivating new customers. Even during the course of a normal workday where there are no customer fire drills such as the above example, it may be impossible to physically visit every customer during a one or two month period. Leveraging some assumptions, the numbers below show that it s virtually impossible for a typical field sales representative to adequately cover the business they are being asked to: Appointments per Day 5 Business Days per Week 5 Weeks per Year 50 Total Appointments Available 1,250 Extrapolated for the concept of the Rule of Thirds, the chart below shows how a field sales representative assigned 100 accounts may face a similar scenario in lacking capacity to effectively treat even their top third of accounts, let alone the rest of their portfolio. Third # Customers Visit Frequency Visits/Mo Visits/Yr Weekly Monthly Quarterly , Total Needed: 2,111 3

4 Even in the best of circumstances, not all customers are equal nor do business in the same way. Many different kinds of companies necessitate individualized treatment. For instance, national accounts must be managed differently than residential contractors, who need to be managed differently than large commercial contractors. In each type of organization, differences in leadership, decision-making processes and product approvals change, requiring time for reps to learn to work through each unique system. Though the top 20% of customers are usually covered by field sales, they are hardly ever covered in an optimized way that is designed to maximize profit. Due to time restrictions and a desire to focus only on the highest short-term value items, it may be difficult for the representative to promote every product that is stocked in inventory. As a result, core products may be favored, while non-core or lower priced (but often high margin for the company) are left out of the discussion. This is often the case with new products, since it is much easier to keep a customer reordering a product than it is getting them to switch to something new. The Findings The Rule of Thirds Many or all of these challenges combine within almost every manufacturer, distributor or dealer of building materials to create a perfect storm of inefficiency. Though the top 20% of customers are usually covered by field sales, they are hardly ever covered in an optimized way that is designed to maximize profit, as shown in the exhibits above. A split among those field-covered accounts can be seen across the industry. Through our analysis of transactional sales data for many of the largest distributors in the building materials industry, clear observations have emerged, and have led MMC to coin the theory of the Rule of Thirds. While field sales may be assigned anywhere from 50 to 100 or even more accounts, sales data shows that reps tend to lose effectiveness when assigned more than 30 accounts. When we look at all accounts that are actively assigned to sales reps and sort them from highest volume to lowest volume, a clear pattern emerges: a deviation in sales performance can be seen to separate the accounts into three distinct groups. Below is an example from one recent analysis, which uncovered significant pain (and opportunity) within their field sales assigned customers: # Current Year Prior Year Third Customers Sales Sales Delta $ Delta % Current Avg Size Prior Avg Size 1 2,072 $510,931,331 $464,714,616 $46,216,715 10% $246,588 $224, ,072 $70,551,388 $76,594,719 -$6,043,332-8% $34,050 $36, ,072 $14,776,791 $19,091,812 -$4,315,012-23% $7,132 $9,214 Grand Total 6,475 $596,259,510 $560,401,148 $35,858,362 6% $92,086 $86,548 4

5 This prominent building materials distributor employs 75 field sales representatives who are collectively assigned to 6,475 accounts (an average of 86 per rep). This averages out to about 28 accounts per rep for each of the thirds shown above. (1) The Top Third: These accounts are the highest in sales volume and always show strong sales growth, usually in double digits. These are likely the accounts that sales representatives have very close personal and professional relationships with; wedding anniversaries, kids birthdays and vacation plans are likely firsthand knowledge along with frequent face-to-face work (and play) excursions. These accounts grew by 10% and an average of $22k apiece in the 24 months of analysis. While field sales may be assigned anywhere from 50 to 100 or even more accounts, sales data shows that reps tend to lose effectiveness when assigned more than 30 accounts. (2) The Middle Third: These generally show modest to flat sales growth. In this case, our sample analysis shows year over year attrition of 8% despite average annual sales of $34,050. Reps likely respond to these customers when prompted but due to their size, may only infrequently proactively reach out to service customers otherwise. (3) The Bottom Third: These represent our lowest sales volume accounts. In many cases, they may not even know they have a field sales rep assigned. Many times, these customers are added to a sales rep s portfolio to hit a certain revenue target for a W-2 even though it is likely not cost-effective to deploy a field sales resource against these accounts. These customers almost always exhibit significant year over year sales decline. Our sample client saw a reduction of 23% in sales volumes over a 24-month period. While only one example, this scenario correlates to MMC s universal findings, which are the outcome of several hundred sales datasets. Account Segment Average Sales Performance Top Third +12% Middle Third +3% Bottom Third -17% Ultimately, the structure of the sales role produces an environment in which large clients are necessarily prioritized over smaller clients, leading to attrition and stagnant clients, even within the top 20% of accounts. 5

6 What Should I Do? A study released in 2015* by CEB Inc. underlined the importance of sales coverage and two numbers that all B2B marketers should know. As it relates to this whitepaper, we ll focus on the first number: 57%. The first 57% describes how far along in the purchase process a typical B2B customer is before they engage directly with any supplier. This is critical because, during that time, customers learn about products and decide on what product features they think they need for their business. The Rule of Thirds challenge boils down to a struggle with reach and ensuring that sales is in front of a customer consistently and early as they navigate through purchasing decisions. When sales reps used to be involved earlier in the process they could discuss the business problem with the buyer and either point them towards the right features or, sometimes, help them reframe the problem and end up buying a product which would be more beneficial than they thought possible. Now, sales teams are often confronted by a buyer contacting them to tell them what product they want. This leaves a rep with little negotiation room other than over price and a race to the bottom against their competitors. And that rarely ends well for B2B sellers, or customers in the long term. The Rule of Thirds challenge boils down to a struggle with reach and ensuring that sales is in front of a customer consistently and early as they navigate through purchasing decisions. The good news in these situations is that within all three of these customer segments, there is significant opportunity to extract more value and increase share of wallet with your customers. Within the top third, this occurs through targeted cross sell and upsell based on current purchasing habits. By marketing new or smaller products through these methods, increased growth can be attained. Long-term loyalty can also be increased through communication of various company value-added services and loyalty programs that customers may not currently participate in fully. For the middle third, the same opportunity to increase share of wallet through cross sell, upsell and loyalty programs exists. In addition, however, adding more frequent sales touches can increase engagement with your company and brand, pushing these clients into the growth category from a more stagnant position. Reference: 6

7 In the bottom third, customers are currently effectively unmanaged. Through consistent multichannel, multi touch marketing with support from an inside sales group, these customers can be reached in a cost effective way. By tapping into these currently underrepresented customers, significant return can be provided at a reasonable cost of sale. This multichannel method utilizes several layered aspects to create a successful marketing and sales approach: Data building a data container that houses customer information (key people in the customer organization, who owns decisions on which product purchases, contact information and purchasing motivators/preferences). Through consistent multichannel, multi touch marketing with support from an inside sales group, these customers can be reached in a cost effective way. Analytics combining the customer marketing data with transactional sales data allows scoring of customers, identification of high potential sales growth clients, propensity scoring to determine who is most likely to adopt your product, behavioral analysis (to identify those customers showing warning signs of possible attrition based on their purchasing habits past and present) and gap analysis to determine which products may be getting purchased from competitors. Further, this analysis can be shared directly with your sales force to help them sell more effectively with customers. Strategy Development of a data-based marketing strategy where the message type, frequency, channels of communication and campaign design is created from a deep understanding of the target customers and industry. The development of content that is directly relevant to the customer in the current sales lifecycle is key to the effectiveness of any campaign. Multichannel Execution A multi-channel approach is critical to engage any customer, as multiple touchpoints keep brand presence strong and increases the likelihood of response. Channels should include a mixture of outbound calls, video, , direct mail, fulfillment, social media, digital, live chat and inbound response management. Inside Sales A well trained inside sales group (well versed on industry, company, product and sales) is paramount to a successful initiative. Depending on the customer (and how likely they are to be seeing an outside rep regularly), this channel may be turned off in favor of less invasive channels like direct mail, and digital. 7

8 Support Many marketing communications don t stop with receipt of an , postcard or phone call. Being able to support the response from customers is also a critical component. Having a plan to fulfill requests for product information (catalogs, brochures, sell sheets), product training (in person or through web conference) and other customer inquiries help to increase customer engagement with your brand and loyalty in purchasing. It s critical to develop a measurement mechanism to track a customer s journey through the marketing and sales communications to learn what is effective and what may need to be optimized. Insights & Optimization The steps outlined above require a substantial investment in time, effort and cost. As such, it s critical to develop a measurement mechanism to track a customer s journey through the marketing and sales communications to learn what is effective and what may need to be optimized. When executed seamlessly, the above focus areas will ensure that all customers are being marketed to on a consistent basis, not just the highest of the high value customers. Further, by receiving near-custom messaging and offers that are directly applicable to their business, significantly higher returns can be generated than with a one size fits all communication. Summary Today s method of buying and selling is constantly changing. The modern marketplace is governed by new rules that give the customer access to more information, changing the role of the field sales rep and putting more power in the hands of the consumer. Finding new ways to adapt to these changes is critical for any company hoping to grow its bottom line. Eliminating attrition within the Bottom Third, finding additional share of wallet opportunity within the Middle Third and helping field sales teams sell more effectively to your Top Third can have substantial impact to your company s bottom line. While it may be an economic impossibility to simply add sales reps to cover all accounts fully, utilizing a full multichannel marketing strategy can help to manage currently uncovered or leaving accounts and grow existing accounts in a cost effective way. 8

9 About MMC MMC is a sales optimization company, expert in working with manufacturing and distribution clients in the building products market to deliver profitable growth through programs that increase sales reach while lowering the overall cost of sales. When deployed in concert with, or in place of a traditional field sales model, our methodology will increase the efficiency of acquisition, improve existing account performance, and reduce customer attrition. About the Author John Schnitzler Product Director, Channel 80/20 John joined Modern Marketing Concepts in 2006 and has since specialized in developing and executing database marketing and sales programs to drive sales growth for his clients in building materials markets. He currently oversees operations for various clients in building products distribution, working with his clients to build and launch programs to ensure growth in some of their most underserved customer segments. 9