Business Update

Do you want to close more sales? How about improve your sales forecasts? Have a better handle on you sales force’s productivity?

I can’t think of too many companies that would answer “no” to these questions. One of the simplest ways to move the needle on sales for your business is to implement an effective sales process. There is a lot of information on the web about designing sales incentives and how to sell, but there is a surprising lack of information on how to design and manage the process.

The basic sales process is really quite simple. The goal is to transform your company’s leads into paying customers. However this is not a one-step process. Have you heard the adage that the average sale requires ten contacts with a customer? On the journey from lead to customer there are a number of steps that you and your customers most go through. The key to being successful is to define, measure, and continuously improve these steps.

Let’s first define the 3 basic objects in the sales process:

1. Leads are potential customers (and their contact information) that you don’t know much about and don’t have a relationship with. Leads can come from business cards dropped off at a trade show, people who signed up for a demo on your website, of even listings in a phone book.
2. Opportunities are the sales deals that have not yet closed, i.e. the opportunities that you company has to make a sale. Opportunities are the core piece of the sales process.
3. Sales – you know what sales are!

At the highest level, the sales process consists of the following steps:

1. Generate Leads: Find potential customers. Leads can be generated in any number of way. Common examples are incoming sales queries (via phone or internet), contacts made at trade shows, or purchased lists of companies.
2. Qualifying Leads: Many leads aren’t potential customers for your business. They might be outside of the geography that you serve, the wrong type of company (if you only sell to a certain industry for example), or unwilling to speak with your firm. Because of this you must determine which leads are genuine opportunities to sell your service, and which should be ignored. A qualifieds leads is an opportunity.
3. Selling: This is where the rubber meets the road! Your sales agents explain the value of your service to prospective customers (i.e. opportunities), and convince them to purchase something. The most important thing to understand about this step is that it actually consists of many smaller steps. These might include finding the decision maker, explaining your offering, quoting services, or negotiating price.

If you don’t already think about and manage these three steps separately, start doing so. If your entire team is performing each step, then you need to determine how they allocate their team between each step. For larger teams, you may have different people perform each step.

Mathematically speaking, the number of sales your company makes will be:

# Leads contacted  x % Leads Qualified  x % Opportunities that Purchase  x Average Sale Amount  = Total Sales

Now that we’ve broken down the top level process, we can start to improve it. Start measuring each component in the equation above. Use your best managerial skills to figure out how you can improve them. Measuring these will also help you  with your forecasting.

In my next post I’ll go into the details of tracking your selling opportunities. Stay tuned.

I thought I’d use my first “real” post to discuss a company that I have first hand experience with, Amazon.com. A lot has been written about Amazon.com, in particular how their focus on customers is an important ingredient to their success. In fact, there are many ingredients that contribute to Amazon’s success – one of the lesser known ones is their attention to cash management.

Amazon’s stock has a price to earnings ratio of 48.5, almost twice as much as Google’s stock. How can this be? Amazon sells physical goods like books and electronics, many of which have slim profit margins. Selling products is expensive, as I’m sure you know. You need warehouses for storage, lots of inventory on hand to meet customer demand, fleets of trucks, etc. Google sells advertisements and has incredibly huge profit margins (I’ve heard they’re over 80%). So why is Amazon’s stock so much more “expensive” than Google’s? The answer is cash management.

Let’s say that you purchase a book on Amazon.com. Amazon receives cash from this purchase almost immediately (via a credit card payment). The same is true for most retail businesses. However Amazon hasn’t paid for that book! Because Amazon has great negotiating power with their suppliers, they can demand that they won’t pay for goods for months after receiving them. In addition, Amazon’s inventory moves very quickly. They will turn over their entire inventory in just a few days (i.e. if they weren’t purchasing new products, they’d be out of everything in under a week). So when they sold you a book, Amazon has probably had it in their warehouse for just a few days, and they probably don’t have to pay for it for 2 months! In the meantime, Amazon can put that cash in the bank and earn interest on it, or use it to fund their ongoing operations (for example, to purchase more inventory for sale).

Why is this such a huge advantage? The interest on the price of a book over two months is only a few cents. The answer is working capital. Most businesses need working capital in order to operate and expand. If you run a shop, you will need a loan from the bank in order to purchase products before you can make your first sale. If the shop is doing well and you want to start a second one across town, then you’ll need a bigger loan to purchase the new inventory that you’ll sell in that shop. But amazon doesn’t need to do this. Instead of getting a loan from the bank, they are getting a loan from the customer! Because the customer is paying them before the sale, they don’t need to invest more money in order to expand. And because Amazon has been growing at break-neck speeds (15-30% per year), this is a big deal.

This is especially important in the great recession that we are living through. We are experiencing a global credit crunch – which is a fancy way of saying that it’s hard to get a loan. Business loans, home loans, credit lines, they are difficult to get because banks are scared of lending (and they don’t know how much their assets are worth). Amazon’s risk exposure to this credit crisis is therefore greatly minimized, because their need for working capital through credit is greatly reduced.

What’s the lesson here? Cash management is a great way to reduce your business’ exposure to risk in this economic climate. Negotiate hard with all of your suppliers for better payment terms. If you are paying cash on delivery, ask for to pay 30 days after delivery (Net 30). If they are giving you Net 30, ask for Net 60… or 90. Often vendors will use payment terms as a way of getting out of giving you a better price, so a great negotiating technique is to ask for a 20% price reduction, and if they don’t give it to you, insist on better payment terms instead.

If you can’t negotiate better payment terms, you might want to look for ways to get cash from you customers more quickly. If your customers are businesses and already getting terms, offering them an incentive to pay early can work great. A practice is offering 2%10, Net 30, which means that a customer has 30 days to pay, but if they pay in the first 10 days they get 2% off of their order.

Retailers can get customer to pay earlier if they are creative. Costco sells memberships for $50 in exchange for offering deep discounts to their customers. Amazon gives free 2-day shipping to their customers if they pay $80 per year. These are all way of getting customer to pay ahead of time for services that they will get later. Gift cards and gift certificates are another way to do this. The customer pays for the gift card up front, but they don’t use it for some time (if they use it at all). The key here is to be creative, and to offer customers genuine value. Customer will pay for things ahead of time if they think they are getting a good deal (e.g. Costco discounts), or if it makes their life easier in some way (e.g. Amazon Prime, or giving gift cards instead of having to think of a good gift idea).

Who am I? My name is Matt Soldo. I worked for Amazon.com for two years as a product marketing manager for their Clickriver Ads product. While I was there I defined and executed the product’s marketing strategy, built and managed the group’s sales team, and closed a few business development deals along the way.

Prior to Amazon I received my MBA at The Wharton School. Wharton was an incredible educational experience, and I hope to share a lot of what I learned here on this blog. I’ve also worked at PayPal, Olympic Horticultural Products, Team Dennis Conner’s 2003 America’s Cup Campaign.

I have founded two companies in the past. Realitysoft.com was a start-up that I founded in college to build the “web-top“. It was a great learning experience, even though we never launched a product. The second was Hortnet.com (now offline). Hortnet was a B-2-B e-commerce company that sold hard goods to professional greenhouses and nurseries (i.e. the horticulture industry). We were an off-shoot of a brick and mortar wholesale distribution company. In the two years that I ran Hortnet we launched our website, grew the business to about $1 million / year in sales, and then sold it to a competitor.

Welcome to the business update blog. I decided to start this blog because I couldn’t find any great websites about how to run businesses better. The articles here will be aimed at business managers and owners, and will be applicable to any company, from a small mom-and-pop shop to the largest enterprise.

My articles will focus on telling the stories of real businesses. In business school they call this the case study method. It’s a great way to understand what a business is doing right, and what it’s doing wrong. At first I’ll feature businesses that I’m familiar with, either because I know the owner, know someone who works there, or am otherwise familiar with their operations. I hope that as the blog grows I will get to know the readers’ businesses and can feature them as well. Please get in touch with me at blog@team-update.com if you’d like to have your business featured here. I’ll also feature companies that are in the news – we’ll go behind the headlines and examine what the companies did right and wrong and try to figure out what they should do next.

Stay tuned, I’ll be posting the first articles soon.