Growth IQ

by Tiffani Bova

  —ARTHUR MILLER, Death of a Salesman

  OPTIMIZING SALES IS THE DISCIPLINE of maximizing a sales team’s performance by improving how it deploys its full set of available resources—systems, processes, people, technology, and capital—in closing the sale and then monetizing that customer relationship into the indefinite future. This requires perpetually assessing, rationalizing, evolving, and improving your company’s sales operation and its underlying model, keeping it in lockstep with the customers you wish to serve.

  At its core, sales is about relationships and trust. Ethics have become increasingly important to a company’s reputation at a time when public opinion can go viral in an instant. Research from Mintel reveals that 56 percent of U.S. consumers stop buying from companies they believe are unethical. What’s more, over one-third (35 percent) of consumers stop buying from brands they perceive as unethical even if there is no substitute available, and 27 percent stop purchasing even if they think the competitor offers lower quality. Overall, more than three in five consumers (63 percent) feel that ethical issues are becoming more important. If that doesn’t reinforce how important it is to ensure that your sales teams are trained on best practices and ethical practices, I don’t know what would.

  There are entire books written on how to improve sales performance, and there is no way this one chapter could ever do this topic justice. The goal is to stimulate thinking about what you have at your current disposal and how this path is a critical “sequence” play. The other paths will be far more difficult to execute if your selling function is ineffective.

  How can you sell more to your existing base if your resources are only compensated to sell to net new customers? How can you expand into new markets if you can’t afford to hire more salespeople or recruit new partners? How can you build a profitable business if it costs you more to acquire a customer than the money you earn from selling your products?

  While cost of sales is just one metric used to understand and analyze the health of a business, it also may be the most critical one. The modern buyer has wreaked havoc on the sales function, just like on every other part of twenty-first-century business. Whether it is business-to-business (B2B) or B2C, there is little that hasn’t been impacted by digital technology. Even with all of the new capabilities at the fingertips of sales (social selling, Salesforce, LinkedIn, mobile phones), salespeople still struggle to “hit quota.”

  Despite all of the technology and training advancements, on average, only 50 percent of sales representatives met or exceeded quota. Furthermore, the average quota attainment still hovers around 60 percent—yes, that’s right: less than two-thirds of target is reached. Most salespeople don’t wake up every morning and think, “I’m going to shoot for hitting 60 percent of my quota.” By nature, salespeople are highly competitive and expect to deliver their commitments every day, week, month, and quarter. Even the best-laid plans don’t guarantee success. It’s crazy to think that this statistic hasn’t moved much over the past decade. While it hasn’t gotten worse, by no means has it gotten much better.

  WHAT WORKS—AND POTENTIAL PITFALLS

  What if you could flip a switch and get your entire team to hit 100 percent of the assigned quota. Would your company grow? Of course it would. So why is it that the level of rigor and planning that goes into sales improvements tends to be woefully inadequate compared with the rest of the business?

  There is much discussion in those meetings about the revenue goals and expected growth in a given year. But that is the easy part, the “what” we are committing to. What’s hard is the “how” we are going to get it done. Each growth path outlined in this book has the opportunity to improve growth in and of itself. Each will have a much greater impact if strong sales performance is combined with it. Would you ever allow your accounts receivable department to collect only 60 percent of the outstanding invoices? Would it be okay if your customer service department answered only 60 percent of all incoming calls? What if your products only worked 60 percent of the time? My guess: there’s no way that would ever fly. Each alone could negatively impact growth. All together, it would be catastrophic.

  Pause and consider—if you aren’t selling anything, there are no products to “work,” no accounts receivable to collect, no customers to call in. The gasoline that powers a business is sales. Without customers, you have no business. Without sales, you have no customers. So why would you ever accept substandard performance from your sales operation?

  Improving sales performance, even by a small margin, can have a significant impact. If you have a large sales force, moving those middle performers even 2 to 5 percentage points higher in quota attainment can have a massive impact. Let’s say you have one hundred salespeople. Each is expected to sell $1 million a year (for a total of $100 million) and today, to use the previous statistic, you are only able to achieve an average of about $75 million annually. If you could improve the average by, say, only 5 or 10 percent—you could add another $4.5 million to $9 million to the top line.

  Imagine that you have five hundred or one thousand salespeople. You quickly see the value of this (Optimize Sales) path. Improving the performance of existing resources without adding even one more salesperson can produce incredible returns.

  COMBINATION: PATH 6—

  Optimize Sales + Path 1—Customer Experience

  Thanks to your new and more powerful customer profiling and analytics capabilities, you now understand your installed base better than ever before. Now is the time to take that knowledge and put it to work crafting a more customized, personalized, and enriched customer experience, both to grow the range of your offerings to them and to deepen their loyalty to your company.

  COMBINATION: PATH 6—

  Optimize Sales + Path 2—Customer Base Penetration

  Once you become more effective and optimize sales, there’s every reason to take your powerful new sales machine out on the road and test it. “optimization,” of course, implies that your prior sales operation was not operating at peak performance—and that means that you likely missed a lot of potential customers, and even entire submarkets of potential customers, in your current market. Now is the time to go after them—with the advantage that gaining additional revenue from the existing base will be a lot less expensive than prospecting for new customers in an entirely new market.

  PATH 7

  CHURN

  CHURN

  The well-satisfied customer will bring the repeat sale that counts.

  —J. C. PENNEY

  MANAGING CHURN TO MAXIMIZE GROWTH

  A 5 percent increase in customer retention can increase a company’s profitability by 75 percent.

  Sixty-seven percent of consumers cite bad experiences as reason for churn and 11 percent of customer churn could be prevented by simple company outreach.

  Forty-two percent of companies invest in customer experience to improve customer retention.

  Retailers and publishers that increased their spending on retention in the last one to three years had nearly a 200 percent higher likelihood of increasing their market share in the last year over those spending more on acquisition.

  CMOs invested two-thirds of their budget in 2017–18 to support customer retention and growth.

  MANAGE CHURN TO MAXIMIZE GROWTH

  Before going too wide, start with understanding your existing users: who is the high value highly loyal consumer that you would like to go after? . . . The smarter you are higher up in the funnel, the stronger you will be lower down in driving engagement, retention and ultimately lifetime value.

  —MAYUR GUPTA, global VP for growth and marketing at Spotify

  In 2001, I was an executive at one of the largest shared Web hosting companies in the United States (Interland, now Web.com), responsible for both sales and customer service. We were early in what is now known as the “cloud, infrastructure-as-a-service (IaaS)
” space providing hosting solutions (domain names, shared and dedicated hosting) to businesses of all sizes. At a little over $100 million in recurring revenue, we were a leader in the space. We were also fortunate to be the beta clients for some of the early technology enablement tools commonly used today, such as Eloqua and Constant Contact. Being that we had 100 percent of our revenue tied to monthly recurring revenue (MRR) or annual recurring revenue (ARR), we knew all too well that keeping our customers was just as important as gaining new ones. We, of course, tracked the typical sales, marketing, and customer service metrics, but the first KPI we discussed at each quarterly review was churn.

  Customer churn rate is a metric that measures the percentage of customers (within the total customer base) who end their relationship with a company in a particular period.”

  –JILL AVERY, Harvard Business School

  Companies typically track three churn metrics: customer churn, gross-revenue churn, and net-revenue churn. The most comprehensive of these three metrics is net-revenue churn, as it captures both the dollar value lost from churning customers and the dollar value gained from expansion revenue (which comes from both up-selling and cross-selling to existing customers).

  —McKinsey Report

  For many of us, it was uncharted territory and we were learning as we went along. All of our efforts on reducing acquisition costs, success in driving traffic to our website, and innovative solutions were for naught if we couldn’t keep our customers long enough to make our acquisition cost back and turn a profit (per customer). It was my first exposure to lifetime value (LTV) and customer lifetime value (CLV). Unfortunately, back then those LTV metrics were largely managed on Excel spreadsheets and Post-it notes—not ideal, to say the least, when you are trying to understand the account-level behavior of thousands of customers. We were trapped by limited technology capabilities, not by our lack of desire to gain a greater understanding of our business drivers. The reality was, we were more reactive than proactive or predictive.

  In April 2017, subscription company websites had about thirty-seven million visitors. Since 2014, that number has grown 800 percent. Companies like Ipsy, Blue Apron, Dollar Shave Club, Home Chef, Stitch Fix, and Birchbox are some of the top subscription sites.

  Fast-forward sixteen years, with the proliferation of the Internet and cloud-based services and mobile apps—there is now a more broad-based shift from a pay-per-product model to a more predictable subscription-based model. Cloud services are probably the most often cited example of this shift. Gartner predicted that by 2020, more than 80 percent of software vendors will change their business model from traditional license and maintenance to subscription (software as a service [SaaS]). Beyond software, you may be noticing providers of utilites, financial services, education, farming, health care, and more, expanding into recurring services.

  Even the prosaic razor has been transformed from a single transaction to a monthly subscription, with Dollar Shave Club (acquired by Unilever in 2016 for $1 billion). Welcome to the subscription economy and welcome to the importance of managing and controlling churn rates!

  Whenever you can inspire a customer to join something and become part of your club, the concept of automatic recurring monthly billing is virtually assumed. Many industries have realized that a recurring revenue model is a better way to buy and sell for both consumers and businesses. Consumers get what they want, when they want it, for a price they expect, and are willing to pay for. This is one of the main reasons why subscription-based models are being applied everywhere as companies strive to build greater predictability into their business and cash flow. Plus, for those that are publicly traded, having recurring revenue is extremely attractive to investors and Wall Street.

  However, while the shift to this business model has lots of upside, it has also opened the door for an entirely new way in which companies can face an unexpected growth stall, even when the top line happens to be growing. While that may sound counterintuitive, it is entirely possible that you can be growing your top line (getting more new customers in the door) with highly effective sales and marketing efforts, even though you are losing existing customers via churn after the fact. According to a 2015 study the average Google Play mobile app lost 77 percent of its daily active users within three months after “download”—and a whopping 95 percent of daily users within ninety days. There is no way to acquire and keep every single customer, but if you don’t manage the balance between the two, it is entirely possible to put your company into a growth stall if churn wipes out all the gains you are realizing in sales growth. That’s why focusing only on top-line growth (customer acquisition) and not on the full lifetime of a customer, especially in a subscription business, is a recipe for disaster.

  When we discussed the Customer Base Penetration path, I talked about how companies put in disproportionate effort toward acquiring new customers and not in retaining those they already have. Some of it is internal inertia. Some of it is lack of understanding of the current state of churn in the business. Either way, as a result of not focusing on keeping the customers you already have and not working to reduce defection, churn leads to untold hidden revenue losses.

  Managing churn as a growth strategy is understandably tricky, especially because it tends to be more of a defensive strategy. The very idea of reducing churn implies that you must be doing something wrong (the cause) to begin with to bring about customer defection (the effect)—if customers were thrilled with your product or service, there would be no risk of churn in the first place. It’s the breakup we don’t see coming (if only we’d seen the signs sooner!), and it hurts our businesses and our egos. But churn is rarely caused by a single trigger. If you are able to examine the timing and causes of customer defection (via your technology investments), you can come up with solutions that can stop churn in its tracks (and even reverse it).

  The churn rate for European mobile phone customers ranges from 20 to 25 percent annually. U.S. credit card companies face churn rates of around 20 percent. And one McKinsey report estimated that reducing churn could increase the earnings of a typical U.S. wireless carrier by as much as 9.9 percent.

  Calculating churn for nonrecurring revenue business is a bit trickier but doable, and well worth the effort. For example, if a company knows (via data in its CRM system) that most of its customers who will make a repeat purchase do so within ninety days of their last purchase, it may choose to mark any customer who has not made a purchase in that time period as “churned.” Whether you are a subscription or non-subscription-based business, maintaining a handle on your defectors (your churn rate) will help ensure the long-term growth and health of your business.

  In retail, for example, returning shoppers spend a whopping 67 percent more than new ones. Have you ever seen a cellular commercial where the provider offers up an amazing deal to “new customers only” and not to you, its current customer? What does that say about what they think about you? Does that provider value you or only the new account? This is not to say that sellers shouldn’t go out and get new customers. But if you can extend the lifetime value (LTV) of the customers you have—and get them to buy more frequently—you can build a more effective growth business. Churn is inevitable: even if you don’t lose customers to competitors, you will eventually lose them to other factors, including changing lifestyle, cultural shifts, and technological innovation. Therefore, the goal is to minimize the “controllable” churn as much as you can.

  Why is the Churn growth path important? The proof is in the results. Management teams at companies that focus on retention are twice as likely to understand the impact of customer lifetime value (CLV) on revenue and growth. In addition, companies focused on retention are nearly 50 percent more likely to consider projected long-term profitability growth when making decisions about customer strategy.

  Mayur Gupta, Spotify’s global VP for growth and marketing, posits that churn can result from a “fragmented tunn
el mindset [where] acquisition is assigned to a ‘media team’ that is measured on cost per action (CPA), the rate and volume of acquisition . . . [meanwhile] retention is managed by a separate team, or teams, across CRM, product management, lifecycle marketing and so on.” Gupta advocates a more holistic approach to combatting churn, “controlling it all the way from awareness to acquisition and retention.” This example wasn’t about the products Spotify was developing, it wasn’t about its customer service, it wasn’t about its customer segment—it was about its organizational structure and the metrics used to manage every team. If functions are managed by different leaders, and metrics pull each group in a different direction, the result is a fragmented process.

  STORY

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  SPOTIFY

  WINNING PLAYLIST

  We don’t think of people leaving the service as churn.

  —ROGER LYNCH, CEO of Pandora and former CEO of Sling TV

  AFTER A DECADE OF DECLINE, the U.S. music industry is expected to see a compound annual growth rate of 4 percent from 2016 to 2021, led by the adoption of streaming services. This is a far cry from the doom-and-gloom predictions between 1999 into 2001, when Napster hit the scene and all but disrupted an entire industry into obscurity. In 2018, revenue in the “music streaming” segment amounts to $64 billion and is expected to show a growth rate of (CAGR 2018–22) of 5.5 percent, resulting in $7.9 billion in 2022. User penetration is expected to hit 50 percent in 2022, providing lots more room for growth.