Striving for growth on the top line of your business rarely yields immediate results. Achieving profitable growth at a reasonable pace (GARP) is a more manageable objective. You want to be a “profitable company that is growing” and not a “growing company that will be profitable”.
Your investors, bankers, vendors and are all counting on your ability for forecast top line revenue. Staffing, financing and capacity decisions all flow from these predictions. Optimism in this area can get you into trouble quickly.
I’ve learned that predicting increases in Sales Revenue is much more elusive than achieving near term margin improvements, especially the further your business is removed from the final “customer”. Achieving growth in profitability creates more value in the business you acquire and is more important than revenue growth.
You are the best sales person at your company
It took me a full year after purchasing my business to get out on the road interfacing with customers. I was worried about looking “dumb”, not knowing enough about the product and being unable to provide adequate answers. Finally, one of my advisory board members pushed me out the door and to put on my sales hat! (See blog post Wearing your sales hat)
I discovered customers rarely see a “live owner”, especially when they buy from larger firms. The story of my entrepreneurial journey was intriguing to the buyers, engineers and managers who could all relate to the desire to take the leap away from the comfort of their own positions. They understood that you did not just have to have a great idea to be an entrepreneur.
You can be as candid as you feel necessary with your customers, since the “buck stops with you”. Often times, I found clients would not get feedback from their vendors that was honest an open. A sales person was not willing to jeopardize a relationship by providing any form of negative feedback or criticism. Customers will appreciate hearing your honest responses to their inquiries.
When you can commit the resources of your company, either to fix a quality problem, accelerate a quick delivery or offer a price on the spot, your client is impressed. More importantly, it gives you first-hand knowledge of what is important to your customer. Having a business card with “owner” as title has an impact. Your sales-force may see this as poaching on their turf, but soon recognize that you can be a valuable resource for them in closing on new business.
When two searchers are deciding their roles in leading a company, I hear often that one wants to take on the customer/outside role. I always advise for both to take on the sales role; perhaps dominated 75%/25% by one, but never zero. This insures that future strategic decisions are grounded with both partners having their own “ear of the customer”. It does take an effort on the partner with the primary sales role to “abdicate” some responsibility, but it is worth spreading client activity between both owners.
You may be tempted to make your first hires after you acquire your company may in the sales area. Being mindful of the importance of getting in touch with your customers should be a warning that perhaps you should focus on a CTO to address IT weaknesses or process engineers for streamlining and improving operating margins. Hold back on your sales hiring until you have a good sense of who your customers are, what their needs are and the cycles in the industry. Growing too fast in the first few years, can be very difficult for searchers to manage in addition to learning the fundamentals of the business.
Prospecting for new customers
Just like the search process, it is important to develop a prospect funnel that allows for qualification of leads based on criteria. Seeking the highest number of prospects for the top of the funnel will yield results at the bottom. Trade shows and cold calling yield at low levels and like search, a combination of email and direct mail is a productive approach.
The most effective sourcing comes from examining your current customers to determine what their market fundamentals are and the competitive landscape. This “expertise” in understanding the “industry” gives you credibility to share general trends and help them benchmark themselves against competition.
Providing new products or services to these current customers is a good way to expand revenue opportunities. Finding new markets and customers for your existing products is a step further along the growth path and requires more time and investment. The last area growth can come from developing new products for new markets, a risky proposition without many years of experience and discipline to avoid being distracted away from the existing core business.
Developing a clear understanding of “who” the decision makers are for your business is important to avoid wasting time with the wrong people. In technical or higher value added businesses, an engineer, R&D area or design group is responsible for selecting vendors to work with during the pre-production and testing stages. “Pitching” your value proposition to person who makes the decision and may not place the order directly are important relationships to develop.
While pictures are worth a thousand words, a sample of your product goes far beyond that. “Display samples”, even if not to scale can display a range of functionality of your product. The purpose of these “silent sales items” that are left behind or sent as a “teaser” to prospects, is that the recipient seldom throws them away, instead putting them somewhere in their office, a reminder of you even when you are not there. A quality video that portrays a range of your services, not just platitudes about what you offer, fills the same role.
Firing customers you don’t want
Jonathan Brynes, in his book, “Islands of Profit in a Sea of Red Ink“, postulates that 40% of revenues are unprofitable. In a period when sales are growing, gracefully removing clients from your customer list can reduce distractions from unprofitable accounts.
Since you want to be growing with the “right” kind of customers, setting up criteria to apply against your existing customer base is critical. Measuring customer profitability has to occur at the product or service detail level. High level of accuracy is not critical here. Be sure to layer in the non-accounting measures like ease in interfacing with them, responsiveness to your solutions, candor in their communications with you, cost of returns and most importantly their ability to see value in your offering by paying higher prices.
For the customers that you want to keep, but don’t meet your profitability levels, you can simply raise your prices. Be sure to develop a dialog that goes along with it, and be willing to suggest alternative suppliers if necessary. This is a great opportunity to remind them about potential cost reduction options, even if they have not taken advantage of them in the past. The key is being willing to lose the customer if nothing changes.
Providing a customer with alternative source can protect your reputation. Consider working jointly with a trusted competitor on a declining “commission” system over a 5 years to offload marginal customers. It was a win-win all around. You may find your customer’s buyers showing up years later who remember how well you handled this difficult situation for them.
It takes courage to walk away from customers, segments or niches. This is not a popular decision with your sales-force or customer service team who have developed relationships with these customers over time. Not all will understand the rationale of maximizing profitability and abandoning the hard work they have spent. Leadership is critical here; you need to be prepared to take full responsibility for these difficult decisions.
Finding profitable niches
Growing sales with high volume, but slightly lower margin accounts is seductively inviting. Often the rationale of “covering” overhead is used to justify this downward profit spiral. However these clients who are less willing to pay for your value proposition, just begin the slippery slope to lower and lower profits.
Would you rather have 5 mid-size accounts worth $200K each or a single $1M account? There is much more potential for profitability in serving smaller niche markets or customers. Often times, in a fragmented market, the large size competitors strategically position themselves to serve the higher volume customers and poorly serve the smaller ones opening the door to profitable revenues.
Focusing on prospects where your product/service is under 5% of their own product will keep you under the “cost driven” radar of their aggressive buyers.
Be mindful that some of your smaller customers will grow, become more demanding and that the more you satisfy their needs, the less they may need you as your services or products become more commoditized. Keep developing a list of the niches you want to exploit to replace these customers.
Holding on to the customers you have
Customer retention is often overlooked when business is growing. Closing new accounts and prospecting is a lot more fun than “maintaining” existing clients who are already buying from you. However, for your key and larger size accounts, periodic contact goes a long way to remind them why they do business with you despite other vendors knocking their door. Customer “stickiness” takes effort to achieve and you don’t want to be surprised when they become “un-stuck”.
Planned, periodic reviews with an agenda is a disciplined way to get in front of your customers, even if it is to remind them that you care about their business. More importantly it gives you mind-share with them and opportunity to learn more about how you can serve them. Just presenting a report card of their activity may not be enough and could be delivered by email. Sharing your own assessment of how they are doing compared to a competitive market basket often is useful “information” for them. Collaborating with them about defining the problems they are trying to solve with your solutions is paramount to creating value.
You never want to leave these meetings without providing a number of ways for them to reduce their overall or system costs. Regularly reminding them of what you have proposed to them keeps them mindful of what you have done “lately” for them besides just service, quality and delivery. Even if this means their design specifications would be required and likely not get attention and resources for their “legacy” products.
Understanding the sales cycle
Seek ways to learn the product life cycle of your customer and their customers. Developing prototypes can be frustratingly slow and multiple iterations may be required before initial orders are placed. In some instances, those early orders might be a slow initial roll out for your customers, customer who may be doing trial runs against their competitors. In some businesses, with long lead times like aircraft related components, it may be as long as 40 years. In others, were the technology is impacted by Moore’s law, the cycle may be as short as a year.
More significantly, learning to read the signals of a product line decline is important as a planning and forecasting tool. All too often orders for a product decline on a previously healthy line of business that has gone “obsolete” with the customer but with no notification to their vendors.
Don’t grow for growth’s sake but instead to be more profitable. There are a lot of factors that drop the revenue dollars into positive cash flow. Too much growth can suck up cash, put strain on the organization and impact your ability to serve customers. Stay focused on growing your business intelligently and profitably.
Feel free to share some of your own best practices or experiences in dealing with these issues in the blog comments. I encourage comments and dialog, allowing all to learn from both my views and the views of others – a virtuous learning cycle. Jump right in!