Field Sales Manager: Not all customers are equal
SAM Showket Hossain
Your world has changed. The traditional business environment-where the acquisition of new customers at whatever cost was a priority - is no more. Suddenly there's a universal realisation that existing customers are faster and easier to sell to, that business is much less expensive to win from existing customers than from strangers. The only way to retain these valuable customers is by building solid, lasting and mutually beneficial relationships with them. In other words, by effective strategic key account management. But that's not easy.
It costs less to sell to an existing client. Much of the time in new client sales is spent in courtship- convincing the potential new recruit that you are the sort of organisation with whom they want to do business. Once he's landed, and assuming you do an exemplary job in meeting the requirements of the first deal, things become a little easier.
Well- cultivated existing customers buy more, and the buyers become a little less risk- adverse. With two otherwise matched suppliers, the lower risk is the one with the track record. The better the relationship, the more likely account contacts are to check with your account team on their ability to meet future requirements- before going to the general marketplace.
Long-term customers bring referrals. Whether these referrals are to external organisations or to other divisions of the customer organisation, they offer a valuable source of potential revenue. Referrals generally come from longer-term customers who feel comfortable enough to stick their necks out and recommend you.
Long-term customers will pay more. Existing customers value the time they save in not having to re-educate suppliers on their organisation's workings each and every time they need help, and for the lesser risk that is attached to doing business with someone who they know will address their requirements in a quality fashion, on time and within the budget. This is added value, for which they'll gladly pay.
Your focus must be on establishing a solid base of customers that represent the dominant share of your revenues. Once established, you must assert your 'ownership' on these accounts. Only in this fashion can you build a reliable source of recurring revenue that will allow you to make bold decisions and investments that will assure your future. If 70 per cent of your revenues are coming from solid key accounts, you are obviously going to feel a lot more secure than the organisation that will annually seek that same 70 per cent from first-time sales and new business.
Not all are equal
Key account management and development are not democratic endeavours. Not all customers deserve the same share of your time, effort and resources. So, which are worth your attention? When deciding where to focus your efforts, it would help you answer a key question: Will this customer return enough revenue over time to justify the effort in winning or retaining it? If so, how should I go about developing the account?
This is a question that is often addressed by the wholly subjective 'gut feeling' of the account manager or account team closest to the customer. This sort of judgement is normally made on the basis of what is known about the account or on the basis of years of experience in dealing with similar clients. Such a subjective approach to determining whether or not an account merits investment of the necessary time, effort and resources to develop can often lead to ill-advised investments.
There is a powerful, yet easy-to-implement tool that can help the large account manager to think about- and even estimate-potential in a more objective and focused manner. That tool is the 'Lifetime Value' calculation- LTV for short.
Customers are the real assets of any sales-oriented organisation. The LTV of a customer is the amount that he will contribute to your bottom line over the span of your business relationship with him. Knowing the LTV of your current or prospective customers is key to helping you make important decisions on how much you can afford to spend on recruitment of a prospective new customer account or ongoing development of an existing account.
Before you calculate the LTV for a 'typical' customer, you need to consider the following:
A. What's your 'average sale' value?
Depending on your business, some work may be involved to come up with a 'typical' or 'average' sale value for each client. If the customer you are analysing has done business with you for some time, you may have financial records that allow you to work out an average transaction value - a crude measure can be obtained by dividing total transactions in a year into total value of those transactions. If any particularly large transactions make this average unrealistic, correct the figure appropriately. If you are undertaking this exercise to analyse the attractiveness of a prospective new client, you can still use this approach, basing it on your sales forecast for the account instead.
If in doubt, err on the low side - that way, your calculation will be conservative (a reasonable precaution when you are considering whether or not to invest time, effort and resources in this account's development).
For the simple example, a nominal figure of TK.100 is used.
B. What's your percentage 'profit margin'?
Again, if you have no reliable records that give you a client-by-client or sector-by-sector insight into margins, estimate an average margin figure, erring once more on the low side in the interests of conservatism.
The example assumes a 20 per cent margin.
C. What's your typical customer's 'purchase frequency'?
If you happen to be a simple one- or two-product company, or you deal with a large commodity-oriented product or service range, you can simply calculate this figure by dividing your total number of sales by the total number of customers in a typical year.
For the example, a modest frequency of three times per year is used.
D. What's your typical customer's life span?
Think: how long will your typical customer continue to do business with you? Who is your longest-serving customer? Are such life spans typical of your business, or do they tend towards a shorter life span? If you're not too sure, then err on the conservative side.
The example uses a conservative three years.
E. How many 'referrals' does your typical customer give you in a year?
Referrals are leads which existing clients bring to you. If your customers are happy with the service they get from you, they will often bring you referrals. Most satisfied customers will be pleased to give you referrals - if you ask them to. Do so.
If you ask for them it would not be unreasonable to expect five referrals each year from an existing client. This is the figure used in the example below.
F. What's your 'referrals hit rate'?
How many of these referrals become customers? Given that these leads are pursued on the basis of a known 'recommender', the example below uses a hit rate of 40 per cent.
Calculating the LTV
Armed with this information, you can now calculate your 'typical' clients' LTV.
In order to illustrate the relative impact of the various factors used in calculating this LTV figure, it is calculated below in five separate steps: Annual profit - typical customer
(A X B) X ©. In this example: (100 X 20 per cent) X 3 -TK.60
G. Lifetime profit
(G X D). In this example: TK.60 X 3 = TK. 180
H. Referrals value
(E X F) X (H). Successful referrals become customers, so in the example, the referrals value is: (5X40 per cent) X 180 = TK. 360
(H + I). In the example: TK.180 + TK.360 = TK.540
This figure can be quite an eye-opener and would be even more telling if you factored in the reduced costs of marketing into your existing accounts and the potential for gently increasing your sales to these customers year on year.
What practical value is this LTV figure?
The LTV calculation for a prospect or client has a variety of uses:
l LTV indicates the key variables upon which you should concentrate in developing revenue from existing clients
l The LTV figure illustrates how important it is to make conscious effort to retain and develop existing profitable client accounts and indicates where you should focus your efforts for best result.
The calculation clearly shows that your efforts should be focused on:
l Increasing the retention rate/total lifespan of the account in their relationship with you. Good account management, relationship development and conscious retention efforts will boost loyalty and improve retention levels for valuable accounts.
l Increasing the number of referrals per annum. Introduce some kind of incentive to encourage the higher strata of your existing customer base to refer friends or colleagues to you.
l Increase number of transactions per annum. Do this by getting closer to the account - by understanding his needs and how you can potentially meet them.
l Increasing average sale value. Cross-sell more frequently and sell value-added services wherever you can.
l Reducing direct costs (to increase profit margin). Do this by selecting the accounts you choose to work with very carefully, focusing more on customer accounts where the cost of sale is lower, for example. You can do this by screening all your prospective account using the 'LTV' tool described earlier. Additionally, you may simply wish to take a closer look at the source of the costs associated with your product or service, and try to figure out how you may trim them even a fraction. Every little bit counts.
l Reducing defections. The LTV calculation clearly shows that a defecting customer is defecting revenue. Make customer retention a key focus - by monitoring for defections. As soon as you feel a customer is defecting, find out why. Remember that most defections occur gradually. When you detect a problem, address it and try to retain the pending defector.
Sometimes this initial cost of winning a new account can seem daunting, particularly if the value of that new customer is measured in conventional accounting terms and the cost of recruiting the account is set against the revenue it generates in the year of recruitment. If, however, you could compare the recurring revenue you might expect to earn from the customer in subsequent years with the relatively lower ongoing management and development costs, the one-off cost of winning the account can be seen as a longer-term investment.
LTV helps you to determine whether existing accounts are likely to return sufficient revenue to justify the investment of the necessary time, effort and resources to manage them.
The LTV calculation can be informative when applied to existing accounts, especially those accounts that soak up most of your time and effort. If you find yourself spending a large amount of time on any set of accounts, use the LTV calculation to examine what you can expect to receive in return over the coming years.
If there's a fundamental mismatch - the cost of managing the account to generate the revenue you are achieving is just too high - then consider whether there is any compelling non-financial reason to continue investing your current level of time and effort. Perhaps it is an influential player in its industry, and its reference value is huge; or maybe it is a source of good, well-qualified referrals that are of more interest than the account itself. If so, fine. However, if there's no sound commercial reason to continue the relationship as it is, then don't. You simply cannot afford to carry customer accounts like that.
Don't walk away too quickly, however. Either:
l Find ways to increase the revenue from the account; or
l Decrease the cost of dealing with the account - reduce the level of face -to- face support (pass them to telephone-based internal sales), move to a more transactional service; or
l Pass it to another supplier who may be able to meet its needs and make a profit doing so. You should try to establish partnership arrangements with suppliers who can work with you in such a complementary manner - taking a commission on business passed to them.r
SAM Showket Hossain is a public speaker, master trainer, writer, an editor and past District Governor, Rotary International District 3281. Email:email@example.com