Do your pitches often tout how much money your customer could save with your product or service? A second, related question - do you find that you have to discount to get those sales? A recent survey of owners and executives shows that there may be a direct relationship between the two. The results also suggest an alternative that can shorten sales cycles and increase margins for your business.
Businesses repeatedly build business plans that focus on saving money for customers, pitching cost control as a primary benefit to doing business with their companies. When you look at many business-to-business proposals, you'll find that reducing cost often leads the list of benefits. But is it the right benefit to pitch?
The idea is straightforward - if the product will reduce costs, customers will buy it. Why? Because any rational person wants to save money. The operating assumption is that saving money is the highest priority for the customer. In a down economy, you may assume cost control is at or near the top of the executive and business agenda.
Unfortunately, all too often the first savings that your customer gets comes not from using your product or service. You may pay the first savings from your coffers - as a discount to make the deal happen. The focus on price is not optimal either for you or for your customer. Reducing your price cuts the margins of your business, and the price negotiation process can lengthen the sales cycle if the customer decides to wait until the end of a quarter to negotiate a better deal. Your prospective customer may focus more on that bargain than on taking advantage of the benefits that your product or service can offer the business. Worse, the customer who buys a product or service to save dollars may shelve the investment if higher priorities arise. The customer loses the business benefit and your company loses the reference and the opportunity for downstream revenue.
Clearly, attention to costs is important when the economy seems weak. At any time, the presence and level of profits are yardsticks for overall success. What makes cost controls easy to pitch is that most companies will have it on the list of urgencies. What makes it harder to close deals is that other problems rank even higher. If you want to increase sales in difficult times, you want to address the problems that feel most critical to your customers. Cost control is not one of these. Your customer may have better urgencies for your team to address.
If Not Cost Control, What?
If you are going to look for problems that business executives feel that they need to solve, you might do best simply to ask your prospective customers. So we did. During the 2001 recession our consulting firm conducted a wide-ranging survey of business-to-business companies. We wanted to find out where cost control ranks in the list of problems to manage, so we asked owners and executives to tell us what problems mattered most on the day we asked.
The survey covered four hundred managers, owners, Directors, Vice Presidents, and Chief Executive Officers on three continents. Of the owners and managers who answered, more than two-thirds of the respondents were at the Vice President level or above, with almost half being CEO or the equivalent. (Chart 1.) We asked each to tell us the top two urgent operational problems on their desk that specific day.
This question came at a unique time, a period of downturn and unsettled economic news. Instead of growing, many companies found themselves seriously overextended. Many high-flying companies were discovering unprofitable quarters for the first time. In some places layoffs were starting in businesses that had never before made an employee redundant. Given all that, you might expect cost control to be high on the list of immediate problems that owners and executives needed to solve. Yet, the survey gave us the unexpected. Only 1 percent of the respondents identified cost control as one of the top two urgencies. (Chart 2) For selling to these owners and executives, pitching cost control is selling to a lesser concern.
First - Eliminate Roadblocks to Growth
What topped the list? The most common issues (given top billing by just under a third of the respondents) were day-to-day functional problems, focused internally to the business. A Vice President with an international telecom company noted that "Management of real-time business information (concerning) sales, customers, and business metrics." For him, the issue was not information technology, the issue was the information itself.
Processes appear in this list often. A Sales Vice President at a software company said simply, "Process improvement . . . . Are we making it easy to do business with" the company?
Infrastructure problems were also common. Several executives noted how much difficulty they have getting basic services, and they seemed frustrated. Making tools work and be useful garnered the largest number of exclamation points among all the answers. We are not just talking about computers. These responses detailed issues with E-mail, phones, lights, offices, and buildings. Basic operations issues challenged the ability to get the work done.
Second - Create Revenue and Opportunity
This grouping was followed closely (about a quarter of the executives) by revenue and market positioning issues. This problem focuses on the external view, problems around making deals happen, marketing to groups of customers, and ensuring that the committed revenue actually arrived. The challenges listed by one CEO included "balancing a transition from old to new without disturbing/impacting revenue." The CEO of a software services company highlighted "forging our value proposition into our client communications and marketing message." A network products company CEO was concerned with "expanding the product portfolio to cover additional markets." Repeatedly, executives and owners were more concerned about growing out of the recession than controlling costs.
Communications and people issues came next (17% and 16%), followed distantly by Information Technology and Partnerships (6% and 3%). When we asked the people to whom you may be presenting, cost control came up only 1% of the time. Saving money may be important, but the issue is simply not as critical to owners and executives as any of the others that they mentioned.
The Effect on Your Margins
When you pitch cost savings, you create two traps for your business. One is the competition. If you base a proposal on savings, you are no longer competing just with other companies in your market. You are competing with every other proposal to save money across the entire business. Your product or service becomes a commodity in the savings race, and it becomes hard to command a premium price. The result - you may need to discount your price to get a sale, a discount that comes directly from your margins.
The second trap is the problem that you are solving. When you address the top problems on the owner or executive's desk, you command mind share and the ability to charge a premium. Cost savings is not one of the top issues. To get attention and action, you may have to discount the sale with a time limit. You may get the deal, but be forced to pay out of your pocket to do it. Discounting often extends the sales cycle. That leads to the hockey stick phenomenon, when most of the sales get booked at the end of the quarter. Not only can you lose margin, you may increase your operations costs to create the short turn around on delivery.
What to Do?
The message is clear. What matters most to these customers is the ability to grow out of economic trouble. If you wish to deal with the most important problems facing this audience of executives, look closely at the functional and revenue issues, followed by communications and people concerns. You will not want to focus on saving money for your prospective customer. Compared with day-to-day operational issues and revenue issues, cost control pales. Look for the top two problems on the desk of the owner or manager, and go where these issues lead you.
Perhaps most important, saving money solves almost none of the problems most important to customer executives. If your business pitch focuses on cost savings, you are missing the target and making it harder for your business to grow out of a down economy. Instead, focus your plan on removing roadblocks to increased revenue for your customer, and your business will have a much better chance of success in today's uncertain economy. It will pay you to solve the right problem.
Copyright 2002 by the Meyer Group, all rights reserved.
The above article is based on the new book, Creating and Dominating New Markets, by Peter Meyer. Click here to order your copy.