Harvard Business School Confidential

by Emily Chan

  E = Other expenses like printing and direct mail related to this promotion

  G = Gross margin $ per unit without promotion discount

  V = Total volume that would have been sold without discount (including baseline and forward buying)

  For a promotion to be profitable:

  G,´ G, and E are all known variables. V´ is either the target or actual total volume, which is also a known variable. This means the right side of the equation can be turned into a number. V must be smaller than this number for the promotion to have a positive impact on company’s financials. The question to ask is whether the company believes it would only be able to sell V or less without the promotion.

  PLACE: WHAT IS THE MAP LIKE?

  Before a decision can be made on where to distribute, a thorough understanding of the market is necessary. I have found two tools particularly useful as a first step to understanding distribution of any market: a channel map and a cost structure calculation.

  Basic Channel Map

  A channel map displays how products are distributed and the importance of each channel. Figure 8.2 is an example from my liquor client (data is disguised).

  A few points are worth noting on channel maps. The percentages on the maps can be drawn based on volume or value of goods depending on market characteristics and data availability. The idea is to show the relative importance of the channels. Make sure that the percentages add up to 100 percent, so you’re looking at the whole picture.

  Draw a few channel maps to help you brainstorm and to highlight any issues. This includes a map for the whole market, for key competitors, and for the company itself. These maps should then be compared and the similarities and differences should be identified and assessed.

  For markets where channels have been changing or are changing, it may also be valuable to project the future channel map. For example, for the liquor client, imagine that Internet sales are expected to grow much faster than the other channels. Then by estimating the growth rate of each channel and then applying the growth rate on the current map, the future map can be drawn to assess the importance of the new channel and to stimulate discussions on channel strategy.

  Figure 8.2 An Example of a Channel Map

  * All percentages are based on volume, not value.

  Figure 8.2 is just an example of the format of a map. The format can be adapted based on the situation. For example, sometimes it may be possible to draw the different boxes of the distribution map proportional to the importance of the channel. Alternatively, if you’re working with a manufacturer who sells directly to retailers with no middleman, you may want to display the information in a format like the one shown in Figure 8.3, so you can also see the margins from each channel.

  The key is to creatively design a map that displays the data in a format useful for analysis, discussion, and decision making.

  Data for these maps can come from similar sources to the ones used for quantitative data for strategy study: government statistics, trade journals, internal experts, and supplier and customer interviews.

  Cost Structure

  In addition to channel maps, understanding distribution cost is also critical in any distribution plans. This includes two aspects of distribution cost: the impact of total distribution cost on total company cost and the relative cost of serving different channels. As an example, Figure 8.4 is the distribution cost breakdown for the music industry, where distribution cost represents a major cost of the product.

  Figure 8.3 A Channel Map with Margins

  In Figure 8.4, the retailer margin is not unusually high. It is important to understand distributors’ (wholesalers, agents, retailers) margins. The margins should be studied together with the value-added by the distributor. High margins but replaceable value-added means there may be an opportunity for a more cost-effective distribution strategy, or even disintermediation (going direct and by-passing the distributor).

  If the cost of different channels is very different, it is worth doing a cost breakdown for each channel. For example, if selling music CDs through major department stores has a different cost structure (different manufacturer margins due to different price points, different amount of sales staff time, and so on) than selling through specialty stores, then it will be worth doing the cost breakdown shown above for each of the channels.

  Figure 8.4 Cost Breakdown for a Compact Disc

  Source: Nirmalya Kumar, “From Declining to Growing Distribution Channels,” Harvard Business Review, March 2005, Figure 4.3.

  When used together, the channel map and the cost structure can provide some basic information as the first step to identifying the key channels that best fit with the company’s strategy and target end users.

  Notes

  1. Clayton M. Christensen, Scott Cook, and Taddy Hall, “Marketing Malpractice: The Cause and the Cure,” Harvard Business Review (December 2005).

  2. Miklos Sarvary and Anita Elberse, “Market Segmentation, Target Market Selection and Positioning,” Harvard Business School Module Note (Boston: Harvard Business School Press, April 2006). Module notes are written to provide HBS students with basic knowledge in selected areas.

  3. Conjoint analysis is a rather widely used statistical technique used in market research to determine how consumers value different features of a product or service.

  4. Akshay R. Rao, Mark E. Berge, and Scott Davis, “How to Fight a Price War,” Harvard Business Review, (March–April 2000).

  5. Clayton M. Christensen, Scott Cook, and Taddy Hall, “Marketing Malpractice: The Cause and the Cure,” Harvard Business Review (December 2005).

  6. Ibid.

  7. Betsy Gelb, Demetra Andrews, and Son K. Lam, “A Strategic Perspective on Sales Promotions,” MIT Sloan Management Review, Summer 2007.

  8. Magid M. Abraham and Leonard M. Lodish, “Getting the Most Out of Advertising and Promotion,” Harvard Business Review (May–June 1990).

  9

  SALES

  PEOPLE: BORN OR MADE, OR BOTH?

  No classic, well-known, well-accepted framework for sales is comparable to the powerful Four P’s marketing framework. Trying to come up with the key tools in sales, I realized, by pure coincidence, that they can be summarized into my own four P’s for sales: people, perspective, process, and performance management.

  People first. While all functions depend on good people, sales seem to be the one that relies on people most. Salespeople are the key point of contact between the company and its most important constituents, its customers. Everyday experience and academic research both indicate certain inherent, generic personality traits, such as empathy (ability to treat customers’ problems as their own) and ego drive (ability to persist even after experiencing failure) make some people naturally better at sales than others.1 Sports is a good analogy here—although everyone can try to play, some people have the speed, bone structure, or determination that make them naturally more suited for sports.

  However, this does not mean people with one specific set of personality traits can excel at any sales job. Different categories of sales jobs will require different mixes of personality traits. Using the sports analogy again—while people with speed, sturdy bones, and determination are generally good at sports, the requirements for football will be very different from those for gymnastics. In the Harvard Business Review article “Comparing HBS MBAs with Top Hunter and Farmer Sales Reps,” the authors explained that there are at least two different kinds of sales jobs:

  Hunters. This is where salespeople have to source new leads and secure new business. This kind of sales job requires people with strong initiative to identify and follow-up on new leads, persuasiveness to “get a foot in the door,” and ego drive to bounce back from frequent rejections.

  Farmers. This is where salespeople have to maintain long-term relationships with recurring customers and get new business largely through customer referrals. This kind of sales job requires empathy and the ability to develop long-term relationships.

/>   People who fit well with one kind of sales job may not fit at all with the other kind. This becomes especially apparent when a company is making or in need of making a transition. For my property investment clients, for example, the decades before 1997 saw a booming suppliers’ market. Commercial and retail tenants were lining up to fill the client’s retail and commercial properties. The 1997 Asian financial crisis turned real estate rentals into a buyers’ market. The sales force, made up mostly of farmers, had difficulty getting new tenants. They did not even know how to start—how to come up with a target list and how to make a cold call. They also were not used to the rejection inevitable with cold calling. As a result, the sales manager and many members of the sales team eventually had to be replaced. As another example, in late 2007 and early 2008, Alibaba Group announced that it would reorganize its sales force into two main groups, “hunters” and “farmers.” Despite the immediate negative impact on revenues since salespeople had to spend time training for the reorganization rather than selling, the company believed this move was important to its longer-term competitiveness.

  PERSPECTIVE: DON’T LOSE IT

  Sometimes even the most talented sales rep can lose perspective. Perspective is critical to ensure focus and priorities. This section discusses the key perspectives I learned from HBS:

  Sell benefits, not products.

  Put words in their mouths.

  You are not there to eat, drink, and be merry.

  Angry customers—if they don’t kill you, they will make you stronger.

  Sell Benefits, Not Products

  The great Harvard professor Theodore Levitt used to tell HBS students, “People don’t want to buy a quarter-inch drill. They want a quarter-inch hole!” This quote is often mentioned in classes and among students to remind us to keep perspective when selling (and marketing). While it may seem like a simple concept, it is easy for salespeople or even companies to lose track of, as explained by Professor Steenburgh of HBS: “While it may seem obvious that time should be spent trying to anticipate customers’ needs, many firms give training only on product features, not on customer benefits.”2

  Jeffery Fox, HBS MBA graduate and best-selling author, goes one step further, advising us to not just sell benefits, but sell quantified benefits. In How to Become a Rainmaker, he writes, “Rainmakers (successful high-level salespeople) help the customer see the money. Rainmakers turn benefits into dollars.”3 This is especially true when selling new products or big-ticket items to companies. I found that while it is often difficult to quantify with perfect accuracy, the logic and analytics for quantification are already very helpful to both the prospect and me. The exercise helps convince prospects that I understand their business and can think in their position (empathy). The exercise also helps enforce a discipline on me to understand the details of what I am selling.

  Put Words in Their Mouths

  Once the benefits for the prospect are obvious to the sales rep, the temptation is to go on and on to explain them to the prospect. But it must be remembered that people tend to take ownership of their own ideas more firmly than when they have to champion other people’s ideas. In the same HBS module note mentioned earlier, Professor Steenburg teaches HBS students: “A critical component . . . is that the prospect feels that they participated in defining the benefits that would be attained or, better still, that they defined them on their own. This leads to stronger commitment and a sense of urgency to complete the purchase. It also increases the prospect’s willingness to ‘sell’ the product to others in the decision making unit.”4

  You Are Not There to Eat, Drink, and Be Merry

  To maximize time for business and to be able to speak in a more relaxed manner, it is now very common to have business breakfast, business lunch, business golf, and so on. It is important to keep in mind that these are business meetings and sales calls. The focus is selling, not the daily specials at the restaurant or the golf score. Take a business lunch for example. I have learned to eat a snack and have my coffee before I go so I don’t suffer hunger or caffeine-withdrawal pangs. When I am there, I order one course only unless the prospect insists I order more. This is to minimize interruptions from waiters. I order something I can eat easily, like shell pasta, soup, or a rice dish so I won’t be prevented from talking because my mouth is full or I have to chew for a long time before swallowing. I never order deep-colored food like eggplant that can be conspicuously caught between my teeth without my knowing. I never order messy food like burgers or spaghetti that can easily spill on me. I like food that I can easily eat with one hand, like soup or risotto, as this can free up my right hand if I need to write. This is all common sense. As long as you keep the perspective that business comes first, it is easy to figure out the other details.

  Angry Customers—If They Don’t Kill You, They Will Make You Stronger

  Management guru Tom Peters writes on his Web site, “There’s nothing cooler than an angry customer! The most loyal customers are ones who had a problem with us... and then marveled when we went the Extra Ten Miles to fix it! Business opportunity No. 1 = Irate customers converted into fans.”5 You will understand how this works if you have been very mad but a salesperson managed to solve your problem beyond your expectation.

  PROCESS: MAKE ANYONE A BETTER SALES REP

  As Professor Thomas Steenburgh explains in the HBS module note “Personal Selling and Sales Management”: “Some people are better suited to selling than others . . . and yet most people can sell more effectively by learning to follow a process.”6

  As noted earlier, to me, process includes not just defined procedures but automation and tools that can support the process. Many key strategic and managerial issues in sales can be much better addressed using a more scientific, process-oriented approach. One such issue is resource allocation, as discussed for “Company P” in Chapter 6.

  Once a process is developed to allocate sales resources to the most attractive customer segments and accounts, another area that can be improved by a similar approach is the selling process. The selling process includes presale preparation, actual selling, and post-purchase service. Each of these steps can be made more effective by a disciplined, defined process supported by automation and tools. For example, for pre-sale, a systematic procedure can be set up whereby the sales team is required to follow a defined checklist to prepare for each sales call (see sidebar). Another tool useful for pre-sale is systematic data and information. For example, SAP Americas (a major U.S. software company) is well-known for regularly informing its sales force of which SAP products can be most valuable to the target customer segment based on latest industry trends.7

  An example for effective post-purchasing service process is FedEx: the package pickup and delivery process is clearly defined and handheld computers help track it for each package.

  Sample Pre-Sale (or Pre-Sales-Call) Checklist

  Written sales call objective

  Needs analysis questions to ask

  Something to show

  Anticipated customer concerns and objections

  Points of difference from competitors

  Meaningful benefits to customers

  Dollarized approach: investment return analysis

  Strategies to handle objections and eliminate customer concerns

  Closing strategies

  Expected surprises

  This list is very broad. Each of the items on the list can be made more detailed, with further guidelines, rules, best practice, and so on to provide salespeople with a more structured, guided approach.

  Source: Jeffrey J. Fox, How to Become a Rainmaker (New York: Hyperion, 2000), 16–17.

  PERFORMANCE MANAGEMENT: MEASURE TOP, BOTTOM, BACKWARD, FORWARD . . . ALL DIRECTIONS

  What gets measured gets done. Performance management, including the setting of sales targets and performance measures and the monitoring of performance, is especially important for the sales function for the obvious reason that performance of the sales function makes
a direct impact on the company’s financials. Sales targets that are too high or too low can demoralize or demotivate. Performance measures that focus solely on sales achieved will mean, as Bill McDermott, president and CEO of SAP Americas, explains, “You’re missing the most important element, which is the future.”8 Some of the best practices in performance management are target setting and measurement by balanced scorecard and pipeline analysis.

  Target Setting: Top Down and Bottom Up

  I once had a multinational client who commissioned a major global consulting study to find the optimal way of doing its annual plan, especially the budget part of the plan. More than 20 leading multinationals were interviewed. The simplified skeleton of the recommendation is given in Figure 9.1.

  Figure 9.1 Best Practice Target-Setting Process

  In the Harvard Business Review article “The New Science of Sales Force Productivity,” the authors described how adoption of a similar process at Aggreko North America, a division of U.K.-based equipment rental company Aggreko, led to a 29 percent of increase in sales and 90 percent increase in sales force productivity within one year!9

  Performance Measurement: Balanced Scorecard and Pipeline Analysis

  The Balanced Scorecard framework (discussed in more detail in Part III) can be applied effectively to the sales function. Among the measures for sales, the one I have found especially useful is pipeline targets. For example, CEO Bill McDermott set a pipeline standard whereby his salespeople were expected to have three times their annual sales quotas in their pipeline of prospects. The target for pipeline is usually determined by estimating the conversion rate. That is, if you expect 10 percent success rate, then you should have 10 prospects in the pipeline for every sale you expect to make.