Small Customer Today, Revenue
Giant Tomorrow
A new
segmentation strategy can help sales teams identify their growth hot spots.
Most large
companies rely on bread-and-butter customers, those whose repeat sales
have long provided a steady stream of revenue. But with each new digital
innovation, this model loses some of its luster. Telecom companies feeling
price pressure from over-the-top mobile players, health insurance payors
coping with the spread of private health exchanges and increased
consumerization, and financial-services firms facing the rise of fintechs are all
reexamining their business models and offerings.
The market is also changing for tech firms.
Cloud startups with their growing customer base are rapidly becoming a
legitimate source of competition. Incumbents are trying to solve the problem by
investing in their own cloud offerings. But in many cases such moves have not
been accompanied by a shift in the sales strategy. Incumbents are still
segmenting almost exclusively by value, which leads sales teams to stack-rank
customers on the basis of revenues and operating margins. Because the
revenue model for software-as-a-service (SaaS) trades up-front license fees for
a subscription model whose
fees are spread over several years, SaaS customers aren’t identified as
strategic priorities. Yet many of these companies, although small today, will
likely become key customers in the near future. By placing them in the bottom
tiers, companies may be leaving millions on the table.
With a new approach to segmentation, incumbents can find
their “growth hot spots,” those high-potential customers obscured by more
traditional methods. Sales leaders need to consider two critical but often
overlooked factors when assessing their current and future customers: need and
behavior. When combined with value, these indicators will reveal the customers
whose strategic direction and operating model come together in a way that could
make them huge sources of revenue. Sales teams should then tailor their
deployment strategies toward these customers.
Although growth hot spots might seem elusive, they are
within reach. After all, companies have access to unprecedented troves of rich
customer data. But in large firms, this data is often spread among various
business units — sales, analytics, marketing, and customer support — operating
in silos. The units aren’t sharing their information in a meaningful,
integrated way. That’s a problem for incumbent tech firms as well as for
companies in other industries facing an influx of online competitors. The
online players, which are often more nimble and flush with digital natives, are
already embracing these new segmentation strategies.
Smarter Segmentation
Small fixes won’t be enough to help incumbents identify
the customers they are missing. They need to rethink their approach to
segmentation, moving beyond present-day revenues and margins as the primary
driver of their sales efforts.
Measuring customer need, value, and behavior reveals
growth hot spots. For each factor, companies need to ask themselves a series of
qualitative and quantitative questions. Here, coordination among functions is
critical. By deploying a standard technology platform across all sales-related
functions, businesses can easily move data across different organizational
units. This provides the backbone that sales leaders need to collect, combine,
and analyze a wider variety of data in real time.
To determine customer need, a company would consider
questions such as these: What percentage of the customer’s portfolio is
covered by our offerings? To what extent is the customer’s buying
portfolio aligned with our future growth plans, particularly in newer areas
such as SaaS offerings? To what degree does the customer require a high-touch
model in terms of services from sales reps?
To determine value, companies would ask some of the more
traditional revenue-based questions: How much business do we currently do with
this customer? What is the total opportunity from this customer? How important
is this customer to our share of wallet? Does the customer usually buy
higher-value/higher-margin goods and services?
And to measure behavior, companies should ask: How
empowered are the buyers (procurement reps, product leads, etc.) to make
forward-looking product decisions? How progressive is the customer leadership
in identifying market trends and making bets on products and services? How
regular and streamlined are account-level processes such as payments and
notifications?
Once companies have answered these questions, they can
calculate a score for each customer using appropriate weighting for each
dimension depending on a product’s life-cycle stage. Those customers that rank
high on both value and need (typically about 10 percent of the total customer
base) make up the growth hot spot; these should be Tier 1 customers. Behavior
then distinguishes two types of customers within this tier.
The first group (Tier 1a) will be easy to work with,
because their way of thinking and operating is already aligned with your way of
doing business. For example, you may have a customer whose growth strategy is
closely aligned to the products and services you sell. This same customer may
be highly evolved in terms of its ability to identify market trends. And it may
be organized such that purchasing decisions are streamlined — the procurement
team and product groups work together to buy as one unit.
Customers in the second group (Tier 1b) are high in value
and need, but you will likely have to work with them to modify some of their
practices. Their procurement department may use external vendors that have
their own set of metrics, which may or may not be aligned with those of the
business leaders using your products. Or perhaps the business leaders
themselves are unable to identify growth trends and key market indicators that
would encourage them to shift to your higher-growth product offerings, or they
are not influential enough to sign off on working with you.
In other words, the Tier 1b customer clearly needs your
services or your products, and the products themselves are at a high value. But
because of various ingrained processes or mind-sets, key stakeholders don’t
realize this value or aren’t empowered to act on it. You may have to invest
significant time up front in changing that behavior, helping them see things
from your perspective, before you make your sales pitch. But odds are, that
investment will pay off.
Targeting Your Top Tier
After identifying your hot spots, you will need to create
sales-force deployment strategies specific to these customers.
1. Engage through a tailored,
high-touch model. All Tier 1 customers are best served by sales
reps with whom they have a strong personal relationship. The sales reps should
make a point of meeting face-to-face at regular intervals and providing
tailored service. A strategic account management team or senior leader should
oversee the sales force, setting the direction for the account managers who
serve the top tier. The role of strategic account management is to take a
longer-term view of the customers’ needs and help provide them with customized
support designed to boost recurring revenues — and to pinpoint opportunities to
sell these customers new or higher-end products.
2. Focus on selling solutions,
rather than individual products and services.
Selling a solution is a big ask for
technology firms, in which products typically exist in silos, each with its own
sales reps. Further complicating matters, these reps are essentially competing
for the same share of wallet. For example, one sales rep may be offering a
customer traditional on-premises software, whereas another sales rep from the
same parent company is offering that customer a SaaS product. To avoid these
issues, focus on selling solutions. The idea is to tailor your sales strategy
to the customer’s specific needs, and include a bundle of products and services
that are most critical for that customer.
3. Take a “consultative
selling” approach.
Consultative selling is particularly
important for the customers in Tier 1b, who need your products but may not yet
have realized it or may not have the ability to act on that need. Account
managers should embed themselves in growth discussions with these customers.
They need to see themselves as consultants, and not just as sales reps, so that
they can help their customer look at the market differently, identify growth
trends, and select the products that are best for their future. However, the
shift in mind-set needed to go from being an order taker to being a consultant
is not easy, and will require significant training and incentives.
4. Have a robust compensation
plan.
Staff incentives can be used strategically to
encourage sales reps to focus on high-margin growth products, to retain
top-performing reps, and to reward the behaviors that improve the key metrics
critical to Tier 1 accounts. Ways of rolling out incentives include variable
pay with additional compensation for sales of products that are aligned with
the company’s growth plan; pay linked to margin, rather than to volume (to
mitigate the impact of volume discounting on the sales rep’s compensation); and
quotas based on product families, rather than volume.
5. Simplify the sales process
through data and technology.
Back-end processes such as quoting, pricing,
proposal writing, and so on should be frictionless, low-touch, and easy for the
customer. This will free up the sales team to focus more on the customer
relationship. In studying sales practices at approximately 45 companies, we
determined that roughly 40 percent of a salesperson’s time is spent
on non-client-facing work that ideally should be automated. Automation
also provides the best medium through which to integrate data across different
channels, whether involving social media, CRM, support, or marketing campaigns.
This may sound obvious, but it’s difficult in practice. In many companies, the
social media channel is divorced from customer support, which is usually
embedded within operations, which is distinct from CRM.
Better segmentation, effective use of big data, more
targeted strategies — it all adds up to a sales approach that will enable
companies to capture their best potential for growth.
Implementing the new model will require a systematic
transformation, one that hinges on embracing change throughout a company and on
engaging the sales leadership, sales representatives, and back-office employees
at all levels. It won’t be easy for large incumbents, but those that wait may
see startups claim an ever-larger share of their market.
by Namit Kapoor and Lavanya Manohar
http://www.strategy-business.com/article/Small-Customer-Today-Revenue-Giant-Tomorrow?gko=217ba&utm_source=itw&utm_medium=20160929&utm_campaign=resp
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