Archive for October, 2011|Monthly archive page

The worst question in a sales conversation

Perhaps the most popular opener of many sales reps is the question: “What keeps you up at night?”  A recent article in the Harvard Business Review by the authors of a new book, The Challenger Sale:  Taking Control of the Customer Conversation says that this technique may prevent sales and reduce customer loyalty.  According to Matthew Dixon and Brent Adamson and proven through our consulting experience, a better strategy would be to redesign the entire sales experience.

Conventional wisdom underscored by numerous sales training programs says that the above question is a good beginning to a sales conversation.  The objective is to identify a client’s burning needs so that the rep can promote his or her own solution aka help them sleep at night.  No doubt, this approach has worked with many clients.  However, it suffers from three important but habitually ignored flaws which limit its effectiveness: 

  1. Diagnosing needs by a sales rep is a very difficult undertaking, especially in real time.  The more complex the product or problem, the tougher the process;
  2. We have seen this seemingly innocuous question be perceived as disingenuous or cliché when delivered crudely and;
  3. The question is based on an unproven assumption that companies including their agents will always understand or will admit to a stranger their true needs.

A new strategy

A better sales path would be to tell customers what they need to know.  In essence, the sales person educates customers on problems and solutions that they may not be aware of.   This isn’t your standard solution-selling approach, focused on open-ended needs diagnosis. Instead, this sales strategy emphasizes delivering valuable information to customers instead of extracting information from them. In effect, the sales rep assumes the role of a problem-solving, trusted advisor at the beginning of the conversation. 

Customers benefit in many ways from this new approach.  They get fact-based insights and solutions from the outset; they feel that they are not being “sold to” and; they experience real empathy for their concerns.  These types of sales interactions will predictably improve closing rates, increase client satisfaction scores and enhance loyalty.  In our research, sales outcomes improve for a variety of reasons: 1)  a company or sales rep can more easily differentiate themselves, particularly in highly transactional or commodity markets;  2) delivering value up-front establishes an implicit obligation for the client to continue a conversation and;  3)  providing rich insights clearly demonstrates corporate capabilities and knowledge.

Research-based findings

Dealings such as these are core elements of a client-centered sales experience, which has been proven by research to be the major driver of customer loyalty. Dixon and Adamson conducted a loyalty study on 5,000 business customers. The biggest driver by a factor of 2x is something most companies don’t even consider: the Sales Experience, which was identified as a loyalty driver by 53% of all customers.  For perspective, Product & Service Delivery and Company & Brand Impact was each noted by 19% of the respondents.  Interestingly, the Price-to-Value Ratio was identified as a customer loyalty driver by only 9% of respondents.

According to the study, customers will reward suppliers who offer a compelling sales experience which includes “offering unique and valuable perspectives on the market” and “educate them on new issues and outcomes.” Simply put, loyalty and closing rates are more a function of how you sell than what you sell.

Turning theory into practice

Importantly, figuring out the right sales experience is not something to leave to your individual reps to figure out. The entire organization plays a part.  For example, sales management has a key role in designing a differentiated, advisor-based experience based on a customer’s stated and hidden needs and the seller’s unique capabilities. Specifically, we have used the principles of behavioral psychology to help tailor the experience – messages, practices and process – to the customer’s unconscious drivers of feelings and behaviors. Finally, marketing plays a critical role in identifying and messaging the teachable insights and equipping reps with the sales tools to deliver them to customers.

For more information on services and work, please visit the Quanta Consulting Inc. web site.

Game Theory powers decision making

As a decision making tool, Game Theory is rapidly moving beyond the realm of economics and psychology into the boardroom.  GT is a branch of mathematics that increasingly is helping managers, regulators and lawyers predict how organizations and people will act in certain situations based on what they perceive to be in their best interest.

Up until recently, government, academia and think tanks have used these methodologies to help forecast the actions and reactions of various countries, organizations and leaders around particular issues such as: when will Iran develop a nuclear weapon or how will certain countries negotiate trade deals.    Not surprisingly, managers discovered that GT has practical uses and delivers compelling value in many high risk/high payoff business situations such as:  how to counter a competitive entry; what price should be submitted in a closed auction; how to negotiate with a union; how to negotiate a M&A transaction or; what is the likely competitive response to a price cut. 

Each business “game” contains common elements.   A modeler frames the strategic question, identifies the key players (e.g., competitors, regulators, customers), and estimates their possible options.  In consultation with management, numerical values are placed on the potential positive and negative payoffs of each option.  A computer or mathematical model is then used to determine the best course of action by simulating the interplay of various decisions, the impact of random and planned influences, and the financial results of these decisions.  The consequence of multiple simulations is the prediction of an event and the choice of the ideal strategy for the firm. 

GT is now moving into mainstream business.   The Economist magazine recently highlighted a number of examples in which these tools are being used.  In one noteworthy case, GT was used to assist a consortium of bidders in the 2006 online auction of radio-spectrum licenses run by the Federal Communications Commission in the U.S.. Two bidders, Comcast and Time Warner, ended up paying approximately a third less than their competitors for equivalent spectrum, saving them almost $1.2B.  GT has also been used to help decide which television shows to run;  to ascertain the optimal wholesale pricing for services like electricity and water, and to uncover the best strategies to sway juries and outfox prosecutors.  Interestingly, GT was credited with helping locate Osama bin Laden’s hideout  in Abbottabad, Pakistan. 

All these deployments share some common features.  They utilize custom and sophisticated software programs; they leverage advanced mathematical methodologies and they are pricey, starting from $50K and easily hitting hundreds of thousands dollars.   No doubt, many managers and Boards facing high stakes, strategic questions will look to a bespoke GT solution as an important decision making aid.

However, one doesn’t always need a Ferrari to take them to the corner store. Most GT executions have been expensive, time-consuming exercises.  After making a significant investment in the tool, managers may be tempted to over rely on the model (i.e. the sunk cost effect) at the expense of other valid decision analysis tools.  Furthermore, the high cost and time needed for many exercises makes GT impractical for most important, though not mission critical, decisions faced on a regular basis.  Finally, the value and accuracy of GT become less reliable when non-monetary (i.e. more subjective to calculate) payoffs are critical to the decision. 

We believe GT can be used by the average company in more circumstances than just game-changing decisions.  In order to increase application scope and appeal to more firms, we developed a new product that retains the essence of GT but also reduces the cost, speed and management burden of running simulations.  This express solution keeps the core of GT – the mathematical logic, strategic choices and influences, and management assessments of financial payoffs – while dispensing with the luxuries of a custom software build.  Our GT product is still software-based, but relies on standard Excel modeling. 

This approach has been successful in anticipating competitive reactions to a new product launch and in deciding which channel partners to engage with.  Outside of the cost and time advantages, our solution is also flexible enough to enable managers to more quickly model more scenarios based on new information availability, changing assumptions and multiple impacts of non-financial payoffs.  Finally, the entire modeling experience has proven to be a richly rewarding management education experience.

When it comes to decision analysis, there is no magic bullet.  GT is a powerful complement, and not a replacement, to traditional and innovative decision making strategies such as business war gaming.  Like other management tools, GT’s effectiveness will depend on the skill on which it is used, the expectations around its predictive value as well as the ability of managers to recognize and compensate for inherent biases and incorrect assumptions.   As more case studies are publicized, look for GT to become a standard part of any strategist’s arsenal.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Crossing the innovation commercialization chasm

It is commonly accepted that introducing more innovative products is a key strategy to stay ahead of competition, grow revenues and earn market-leading profits.  However, turning this vision into a reality is a difficult process for every company.  Every manager has seen innovative ideas falter due to their firm’s inability to bring a concept or prototype to a market-ready, production-proven launch, a milestone known as commercialization.  Accurate data is hard to come by but various sources put the commercialization failure rate at between 50-66% of all initiatives.  High failure rates waste scarce capital and time and may be the biggest reason why corporate innovation strategies falter…and why many business sponsors hit a career speed bump. 

We have studied commercialization successes and failure for over 20 years.  Below are six of our best practices:

Make commercialization a priority within the corporate innovation strategy

Many firms simultaneously pursue multiple innovation initiatives – and hope one bears fruit. Typically, short term concept and prototype development activities receive fixed funding commitments. As commercialization activities are often a couple of years out, their investment commitments will often be weaker and low-balled (frequently to make the business case look better).  For example, we have seen new, breakthrough technology fail to get to market because management was unwilling to adequately fund sufficient marketing and product programs. Successful commercialization efforts require a committed multi-year capital plan and mandate to ensure sufficient support.

Get closer to the customer

A poor understanding of customer needs and requirements is a major reason innovations are unable to garner vital customer interest during the commercialization phase.  This problem begins early, in the concept development and prototyping phase when innovators fail to gain enough, objective customer feedback. One way to avoid this knowledge gap is to complement traditional quantitative and qualitative research with specialized research tools like ethnography, anthropology and conjoint analysis.  Another approach is to bring the customer directly into the innovation process.  All of these techniques will help company’s gain a deeper and more holistic understanding of the customer, as well as channel and supplier needs in critical areas like price sensitivity, design and usability.  

Pre-empt competitive reactions

Bold and aggressive competitive moves can kill innovations once they enter the commercialization phase.  Managers need to study the mindset and competitive position of key competitors in order to predict their potential behaviour.  To accomplish this, managers could run a business war game or simulation to model competitive reactions and identify an innovation’s vulnerabilities. For example, we conducted a war game with a communications firm looking to introduce a new, innovative service.  The client wanted to analyze a competitor’s potential technology and pricing reactions and to design counter-strategies.

Get the management systems right

Very often, the accompanying management systems – processes, practices and structure – play a significant role in hindering commercialization efforts.   A 2010 McKinsey survey on Innovation identified a numbers of management challenges including: a lack of formal accountability for innovation, poor or conflicting measurement and reward systems and ill-defined priority setting.  In other cases,  an organization’s traditional approach to innovation creation – for example, centralized and siloed R&D centers – is often less productive in getting compelling innovations to market versus an Open Innovation approach.

Watch out for stakeholder misalignments

Many, high impact innovations fail because key stakeholders such as suppliers, channel partners and even a firm’s sales force have not aligned their priorities and resources with the innovator’s commercialization strategy.  In particular, we recently witnessed a market-beating, new product flounder when channel partners and internal sales operations were not ready (or willing?) to promote and support the launch. 

Remember, patience is a virtue

At the end of the day, successfully commercializing an innovation with the right positioning at the right price is not easy.  Creating the winning combination of attributes – in areas like product performance, manufacturability, and serviceability – takes time, trial & error and patience.  Well known innovators like Apple, P&G and 3M are known to nourish and tweak their innovations over many years.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Retailing discovers science

More than at any other time, Canadian retailers face a myriad of business challenges, from a slowing economy to the entry of American giants like Target and Marshalls.  To drive sales, improve customer service and increase profitability, Canadian retailers should consider the insights of Professor Marshall Fisher, an operations professor at Wharton.  Fisher argues that operational “science” can help merchants better match product supply with customer demand. OS is already being practiced by some leading retailers including Zara, Walmart and World, a successful Japanese clothing manufacturer. 

In laymen’s terms, OS looks to ensure that customers can consistently and easily find the items they are looking for.  At the same time, OS emphasizes product supply management to minimize over-stocking,  a situation which leads to expensive discounting.  At the heart of OS is the use of advanced marketing and IT methodologies known as data analytics.

Marshall Fisher was recently interviewed in Knowledge@Wharton, a newsletter published by the Wharton School at the University of Pennsylvania.  Below are some of his key conclusions:    

Poor operational performance is costly

Over-stocks create inventory problems, leading to cash flow issues and expensive discounting.  For perspective, the average item now sells for 40% off its full price, up from 33% in the mid 1990s.  Furthermore, out-of-stocks and poor merchandising decisions are resulting in sizeable revenue losses.  According to Fisher,  up to one-third of potential sales are lost when customers walk into a store clearly intending to buy something and walk out empty-handed because they couldn’t find the item.

Small operational gains can drive big bottom line improvements in a high fixed cost business like retail.

Assuming a merchant has a gross margin of 50%, a small 5% increase in sales can generate a 2.5% increase in profit.  For those retailers who lose one-third of potential customer sales via out-of-stocks, modest operational improvements could lead to revenue increases that double their profits.

Retailers are not effectively using the data they have. 

Most firms are awash with point of sale, customer satisfaction and demographic data.  To fully leverage this data, managers should apply data analytics methodologies, such as: 1) determine what of the collected data (e.g. product sales by form by store) is relevant to its corporate strategy;  2)  ensure the collected data is granular enough to be actionable by store;  and; 3) understand what and how factors like weather, merchandising and promotion impact these numbers. 

There is a “science” to deciding which products to add. 

Deciding which products or stock keeping units to add is more difficult than figuring what to cull – that is, eliminating low performing SKUs by store etc.  One data analytics approach is to  compare sales results of different SKUs by their attributes like color and style.  New products that have attribute profiles that mirror the most successful SKUs or fill obvious gaps (e.g., needed for the local selling area) would be added to the merchandising mix.

In-store execution is crucial.   

OS strategies will flounder if the customer experience is poor, merchandising strategies are counter-productive or front-line staff are poorly trained or lacking sufficient numbers.

According to Fisher, most merchants are (on average) under-staffed, and they tend to under-invest in the people they have.  A human capital deficit arises from the fact that retailers typically view labor as an expense rather than an investment. This deficit creates an in-store execution gap that translates into poor customer service and lower revenues.  For perspective, Fisher’s research with customer satisfaction surveys suggest that for every extra $1 invested in adding employees, an incremental $10 will be generated in revenue.

Explore greater supply chain speed and agility

Inflexible or slow supply chains are often a root cause of the supply and demand mismatch.  Increasing speed can be accomplished in many ways, including:  producing more accurate demand forecasts, optimizing the product mix and enhancing supply chain management.  To accomplish the latter, managers could analyze the optimal (read:  fastest and cheapest) way of getting product from offshore to the store.  For example, will operational performance increase with faster but more expensive shipping as opposed to slower but cheaper shipping?  This analysis could prompt retailers to backshore production previously sourced in Asia or consider faster shipment strategies like air freight.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.