Is your sales team aligned with market opportunities?
It is the single most important job of any business leader to ensure that the resources of the business are aligned with the opportunities in the market. It’s called building a business strategy and there’s a reason we do it. Consider this. Of the many resources at a leader’s disposal (time, money, people, etc.) one of the biggest is the sales team and you would think that aligning your troops with the best opportunities would be second nature to an experienced sales executive. In reality, for most businesses it’s not. Far from it.
Most of us are familiar with the 80 / 20 rule famously discovered by the Italian engineer, Vilfredo Pareto, when he discerned that 80% of the Italian wealth was controlled by 20% of the population. The fact is that same, or similar, rule pops up everywhere including in your customer base but in business it goes something like this. Measured in value or profit, the top 10% of customers in almost any market purchase the first 30% of all the products or services. The next highest 10% of customers purchase about 20% of what’s on offer meaning that, in total, about 50% of the goods and services available in almost any market are purchased by that top 20% of all the customers. Okay, it’s not quite 80-20 but its darn close. That’s the good news. On the other end of the spectrum lies the bad news. Ignoring the 30% of customers in the middle, the last 20% of goods and services sold are purchased by a whopping 50% of the total volume of customers. Yeah, let’s repeat that…. half of your client base are low purchasing customers or in other words, the biggest group of customers only accounts for 20% of what you’re selling.
So, what does this mean for your sales force? It goes back to Business Strategy and the importance of aligning resources with market opportunities. Your sales force is one of your best resources and most sales teams are divided to cover a set number of clients. Although we recognize that territories will have some larger accounts and some smaller ones, we expect our sales teams to hunt down all the business they can. In most organizations’ salespeople work hard to call on every customer. Since we know the bottom 50% of all the customers purchase the least amount of all the goods and services you can see that sales people end up spending an enormous amount of time focused on customers that bring little or no value. Worse yet, when sales volume is low it can disrupt supply chains and often costs us money to service these customers while we scramble to accommodate their needs. But, knowing what we do about the 80/20 rule, if we can get our sales team to focus on the top 20% of the market we can uncover a huge, missed opportunity and make the most of our sales teams efforts.
A Typical Decile Analysis of a Sales Territory
Don’t think this applies to you? Then you’re in good company because nobody does, but in reality, it applies to everyone. A study done in the pharmaceutical industry found that 13% of all the sales people they surveyed outperformed all of the rest of their peers by 18% in sales.1 Given the margins in that industry that means those high performing sales teams brought in approximately the same profits as the other 87% combined. If you peel back all the analysis and boil it down you’ll find those 13% superior sales teams had a strategy. They didn’t try to please everyone and find every sale. They focused their efforts where it mattered most and homed in on where they were most likely to make the most sales. In short they applied the 80 – 20 rule …. it’s that simple! Or is it?
It takes dedication to develop a strategic mind set to create the opportunities provided by a well thought out strategic plan. Drawing on our own experience the evidence is overwhelming. We’ve run sales strategy programs around the world for well over 5000 sales professionals including sales managers, corporate VP’s and more than a few dozen CEO’s. In short, experienced professionals come to us and we can help.
In the sales strategy program, we run a sales simulation. Participants are set up in a situation where they are sales reps taking over a territory that is underperforming even though the product is clearly superior and has a sustainable advantage. To keep it simple, rather than using the full slate of customers, we randomly selected a 10% sample of real customers from real data. The market in which participants find themselves serves 25 customers that represent a larger market cohort of 250 customers with varying purchasing tendencies. Participants compete against two other competitors and are given a budget to spend in the simulation that includes a set number of visits, product samples to leave behind and some cash to spend on company programs that build client relations. Remember, since the simulation is representative of just about any market, the bulk of the customers in the simulated market will make up only 20% of all the purchases. From our analysis above we know that 12 or 13 of the 25 customers are poor candidates for sales resources but of all the thousands of people who have gone through the simulation less than a handful have not invested at least some amount of resources into every single customer! Over the last ten years of running this simulation no one has ever dropped more than one customer from their portfolio…ever! Yet we know a full 50% of those customers bring little, if any value back to the company.
Before we show the simulation results, we ask everyone if they know the 80 – 20 rule and they’ll all swear they know it. Perhaps more troubling is they’re not lying; they do know the 80 – 20 rule but they are all reluctant to put it into action, too afraid to miss out on some of the business. Another trend that causes concern is how many sales leaders are certain that the rule doesn’t apply to “their” business. We get this a lot. When this happens, we simply ask for their data and we plot it. Every single time we’ve been able to show that: a) not only is their sales team not aligned with the market opportunities but b) based on total sales revenue, the company is often subsidizing their smallest customers, earning a negative return on sales (see graph below). If this all sounds simple it’s because it actually is. It just needs some strategic thinking and a bit of discipline.
To recreate the graph below for your business, take your total market and add up 100% of the sales. You can do this in sales dollars or units just be consistent. For our example’s sake let’s say that your market has total sales of 10 million dollars. Now divide the total sales by ten – that’s 1 million per “decile” (or 1/10th). Step 2 is rank all the customers in purchase volume from high to low. Be sure to rank all the customers not just ones that buy from you. When you add up all their purchases, make sure it equals 100% of the market. In our example that would be $10 million. Step 3; Count how many customers make up the first one million in sales. That’s decile 10. Now count the next million in sales – that group of customers is decile 9 etc. Keep counting right down to decile one which will be that last 1/10 of all the sales.
The first thing you will always notice is the last 50% of all the customers will be in deciles 1 and 2 and make up just 20% of all the sales …ouch. We understand that all sales are important but in these lower deciles you’ll now need to cover twenty to thirty times more customers to obtain the same level of impact that only a few customers deliver in deciles ten and nine. Last step: go to your sales call records and plot how many calls were made last year in each decile. Ideally the highest number of calls will be made in deciles 10 and 9 because that’s where 50% of all the business is. In reality, for most businesses, the highest volume of calls are made in deciles 2 and 1 because that’s where the most customers are.
We all know the 80 – 20 rule but too few of us apply it. Deciling is an easy technique to ensure your sales resources are aligned with the best market opportunities. In a Covid 19 world where resources are scarce, we need more – not less focus.