Partners in Profit: Value-added Selling
As a recent Fortune magazine article pointed out, these harder times have forever changed the ways in which customers buy. The customer is tougher and more demanding. The customer expects higher quality, faster service and a lower price.
This is a permanent change in customer expectations; the customer will not go back to the days of relationship selling. Initially, the tactic was to be the low-cost provider. But this brought us only price switchers” and eroded the loyal relationship between buyer and seller. We must meet this challenge with better selling techniques.
Instead of being the low price providers,” the surviving and thriving sales force will be business partners with their customers. Customer loyalty and value shopping go hand in hand – when the customer perceives that our product achieves his broader profit objectives, then we will have a loyal customer.
Today’s sales force needs to make a business case for your product/service as the solution to your prospect’s business problems. This will be based on knowing the customer’s critical success factors and the quantifiable value that your solution provides to his business.
In this article, we will demonstrate how to become Partners in Profit by showing three key elements of building a profit-partnership selling strategy: 1.) Developing the value-added model that quantifies your product’s contribution. 2.) Shift the role of sales reps to business advisors. 3.) Train the sales force to become a value-added partner.
1.) Developing Your Own Value-added Model
As a first step in becoming the customer’s partner, you need to know his business. You need to think not about your business, but about his business, but about his business as a business. You need to understand the key leverages in his business.
We use a simple financial model as a starting point to understand any business:
Profit equation: Getting a bigger bottom line
Sell More
Reduce the Cost of Sales/Service
Reduce the Cost of Operations
Reduce the Cost of Money
= PROFIT
Of course, the specific complexities of any business will modify the actual model so that it is a better fit to your client’s company or industry. The points – the sales rep who does not understand how his product helps to achieve his customer’s overall profitability, will be able to compete only on price and a few differentiating product features.
So let’s look at an example of how this PROFIT business model applies to the food retail industry.
Food retailers carry over 26,000 stock-keeping units on a store’s shelves. We have slected this customer for an illustration because of the broad number of products sold into it (yours may be one of them) and because it has well-established information resource, the University of Southern California’s Food marketing Institute.
Sell More:
Food retailers are very concerned about their weekly sales volume. A typical chain food store will average $200,00 gross revenue weekly. Their use of scanner information provides the exact sales volume of each SKU and how this volume is trending. Does your product help them sell more? Larger purchases per customer? Pull in more customers?
Reduce Cost of Sales:
Food retailers typically work on 17.5% margin before G&A are deducted. A product that has a lower margin must make up the difference in faster turns. Food retailers are very competitive and want the large-volume weekly shopper in their store. They look for suppliers to provide advertising and in-store promotion support to bring in more customers. Does your product help them with the cost of sales? How does your margin compare? What do you contribute that offsets your price? What value can you demonstrate for your premium price?
Reduce Cost of Operations:
Food retailers spend a lot of labor (approximately 12% of the retail dollar) for pricing, stocking, displaying, checking and cleaning. Any product that can reduce labor either in the back room or on the selling floor makes a profit contribution. Does your product help to reduce the cost of operation? Do you save money on labor? Do you provide higher service levels? Do you make your product easy to work with, such as pre-priced or pre-merchandised? Do you provide shelving and equipment? Is your company easy to work with?
Reduce the Cost of Money:
Food retailers average 18 product turns per year; in essence, the shelf inventory turns over every three weeks. Products with a higher rate of sales improve the store’s cash flow. Does your product help with the cost of money? Do you have favorable payment terms? Will your product sell before the first bill is due? Do you help with financing?
Here’s a question to test your understand: Which has the better selling story?
You’re a warehouse item that sells at a 22% margin and turns 15 times a year.
You’re a direct-store-delivered item that sells at an 8% margin and turns 47 times a year. (The answer is at the end of the article.)
It is important to gather such intelligence about each of the primary business channels or industries that your sales force sells to. This intelligence can be gathered from annual reports, industry research institutes and internal resources. The sales rep should ask about this information on his calls.
As a further step, you need to conduct the research needed to test that your product or service provides a bottom-line result. This study can be done with your clients participating.
2.) Shift the Role of Sales Reps to Business Advisors
Such a business partnership model shifts the role of the sales force. The sales rep no longer sells the product alone, but the product’s bottom-line benefits. Sales calls cannot be made only on the buyer who is interested in price. Sales calls must also be made on all of the client’s profit team members” – the marketing, operations and financial stakeholders.
Let’s use an example of the contrast between the product-focused and profit-focused sale in an industry going through a rapid transformation: health insurance.
Option A: Product-focus Approach
The sales rep presents the prospect with the costs for insurance with the following characteristics: $xxx,xxx coverage for basic medical, $xx,xxx coverage for emergencies and surgery, yy% co-payment, $z,zzz deductible. The total cost is $tt,ttt per year.
Option B: Profit-focus Approach
Instead of merely quoting the cost for the same coverage, the profit-focused sales rep would approach the prospect differently. First of all, the sales rep knows that he is selling the total cost of health care, not just health insurance. To demonstrate this, the sales rep determines how much the prospect spends for health care throughout the year. He plugs in these numbers into his coverage. This demonstration shows that even though the prospect spends more on the insurance coverage, he pays less on health expenses.
In this profit-focus example, the buyer is totally responsible for the entire purchase and its impact on his wallet. Let’s look at a business-to-business example. You’re selling a consumer product to a food retailer. Instead of telling the store buyer about your current promotion and your discounts and allowances, talk to the buyer about how much money he’ll make on your product. Then, continue to report back to the buyer about the results of your sales. But this report is much more comprehensive – a business review, so to speak, more like a quarterly profit report. You can demonstrate how much he has made from your volume, margins, turns, dollar contributions and service levels. You can also show him how your product compares against his industry’s standards for profit per square foot and return to inventory invested.
3.) Train the Sales Force to Become a Value-added Partner
Gathering this information does not necessarily mean that the sales force can understand and use this information. There are several tools that can be used to help internalize this business data:
Business simulations. You can teach your sales force to understand its customer’s business. We have designed business simulations that quickly provide an overview and comprehensive understand of the customer’s business.
Your product’s profit model. You can teach your sales force how to demonstrate how your product fits the customer’s business model.
In conclusion, we would advise any company that wants to implement a value-added selling strategy to take the following steps:
Understand the customer’s business. Know how your product compares to the customer’s profit benchmarks and how it contributes to the bottom line.
Call on the right level. The typical sales call for retail food chain is made at the buyer’s level. But the buyer only buys on price, not on the overall profitability of the product category. Thus, the sales rep who wants to become a business partner must sell to a higher level of business sophistication to make profitability case for introducing a new item, expanding an existing one and protecting shelf space against a competitive onslaught.
Keep telling the profit story. The sales call should become a business review, not only recapping past sales volumes but also recapping total service and profit that your company has provided. The new perspective is that the customer is no longer spending money on your product, he is making money on your product.
Train the sales force. Give the sales force the skills to shift from the relationship sale to the business partnership sale. Teach them the business analysis skills and high-level selling skills they need.
Answer: The direct-store-delivered (DSD) product. Here’s how to figure: As a basic point of comparison, the store use ROI (markup times turn) to compare each item; our customer’s standard ROI is $3.49 (20.5% times 17). The ROI for the warehouse item is $4.23 (28.2% times 15). The warehouse item will also have advantages if it provides marketing assistance and larger than average customer purchase size (increasing cash flow). The warehouse item’s disadvantage is that it contributes nothing to reduce the cost of operations. The direct-store-delivered product has an ROI of $4.18 (8.7% times 48). The DSD product makes a major contribution to the cost of operations because it provides another 8% profit to the store by having its own delivery and merchandising done for the store. The bottom line: The DSD product is more profitable.