How do I sell?
Most companies know What they are selling, but many have no clue why their customers are their customers, and what factors determine if they buy or not. Then how do they deliver value to their customers?
The reality is that most businesses today are making decisions based on a set of incomplete or, worse, completely flawed assumptions about what’s driving their business.
Our revenue was £750m last year and profit was £72m. We’ve launched a new product since and cut costs slightly, trading in peak seemed good, so we think that we’ll top that performance this year.
Not a very substantive statement is it?
Defining business success has never been much of a problem. If you deliver above-sector profit growth, together with positive cash flow and a growing dividend, you are certainly succeeding. But just how are you supposed to do that? What really drives your business success?
Scrutinising your internal financial reports may not really help you. The problem, is that your financial statements measure the outcome of your business, not the actual drivers of your success.
What are the drivers of success?
Once we know Why your company exists, then we seek the profits that should result from your strategy and execution.
The P&L tells you whether you have won, but not how to win.
If you want to win in business, you can’t rely on your monthly management reports. What you need instead are three ingredients that don’t appear to be taught in the accounting syllabus:
- A clear perception of “what affects what”, in terms of the factors driving your bottom line. This will help you to separate the upstream drivers, such as customer satisfaction, from the downstream outcomes, such as cash flow.
- Some realistic non-financial performance measurements to help you to calibrate those upstream drivers.
- A method of combining and presenting these so that you can tell at-a-glance both whether you are winning and what is holding you back.
You need a Business Success Driver diagram that visually depicts the chain of cause and effect. An example follows.
Measure and correlate one indicator against another. For example, does an increase in productivity produce an increase in customer satisfaction?
Profits usually increase when sales revenues improve and costs reduce. Sales revenues are simply sales volumes times selling price, so the higher the selling price we can achieve for a given level of sales volume, the better. If we want higher sales volumes, we need high levels of customer satisfaction leading to growing market share. We also need to deliver excellent value for money, which we can achieve with a relatively low selling price. But wait a minute: didn’t we just say that we wanted a high selling price to maintain our revenues? How are we going to resolve that contradiction?
Is it any simpler when we look at the costs instead? People-based costs are the product of headcount times the average salary and other personnel costs. Headcount is driven by productivity, which in turn is driven by employee motivation, which is at least partly affected by compensation. So the more we pay our people, within reason, the better quality staff we will attract and retain, and the more productive they will be. That means we will need less of them. But unfortunately, we’ve just increased the average wage in the process, so it’s not at all clear whether we’re saving costs overall – another dilemma.
A higher paid, more motivated workforce is likely to deliver better customer satisfaction, driving up our sales volumes. But will the resulting revenue increase outweigh the higher pay? Running that new advertising campaign will bump up our costs as well, but we do it because it’s supposed to increase market share. Will that be a net gain, or is it simply a feel-good factor for the marketing department?
If only we could measure employee productivity and customer satisfaction and correlate them with improving revenues, then we could see at what point increased salaries start to run up against diminishing returns. And we could see by how much the gain in customer satisfaction translates into sales. That way, we wouldn’t have to guess how to take these decisions. We would know.
So, most of the important things that drive our business don’t seem to be measured in £ at all.
Instead they are measured in rather strange units, such as “satisfaction” or “motivation” or “brand awareness” or “percentage of customers who choose our products first”. Of course, the sales and the profits are important too, but they are outcomes, not causes.
You need to measure each of the drivers of business success, and then combine two or more into meaningful metrics to guide decision making
Benefits start to appear
If you tackle this seriously, you will start to notice the following benefits:
- Your leadership team will work better together, because the process of explaining how each’s accountability is implemented helps the other Exec’s to appreciate each other’s point of view
- Your conversation about the numbers will begin to touch the core of the business, rather than the periphery
- By focusing on the performance of the upstream drivers, you will gain months or even years of advance warning of future financial problems
- Your planning and budgeting will become real, not simply an annual ritual
- Your bottom line will improve.
Once you've worked out what factor influences another to deliver value to the customer, then you are on the way to success at selling.
Next: How do I set and amend strategic direction?
In earlier posts we’ve discussed inspiring people to buy, rather than selling though a range of manipulations, and to lessen the need to compete in a commodity market. We’ve understood that your company must focus on delivering value to every customer, and that value is determined only by the customer, although we can influence their perception. We’ve also looked at what influences a customer, through drivers for success. Now we need to consider ways to increase profits and to reach new customers, which we explore in How do I set and amend strategic direction?