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Cutting Sales Costs, Not Revenues
Many customers don't want or need expensive face-to-face interaction.
Posted May 5, 2010
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There's a reason companies fear experimenting with the sales force: It is the engine that drives revenue.

Yet extraordinary economic times force companies to take every opportunity to cut costs and arrest declining revenues and margins. Unfortunately, two common mistakes often result: trimming only the back office or instituting across-the-board cuts that include frontline sales reps. While both mistakes are understandable, they're likely to yield disap­pointing results.

Cutting the back-office budget may have worked in the past, but greater complexity has made support functions essential. Also, not all sales efforts are equal, especially in a downturn. It's crucial to determine where cuts will hurt customer per­ceptions and buying behavior.

There's a simple principle to follow when reducing sales costs: do no harm. Small changes can have large consequences, so companies walk a fine line between reducing expenses and maintaining sufficient resources. To achieve this balance, companies should consider a new approach.

Match resources with customers

Most companies allocate sales resources according to customer size: big accounts get more coverage than little ones, though a few small, high-potential accounts get extra coverage. But imagine an approach that takes into account both profitability and opportunity and distinguishes between highly complex, competitive transactions and simple ones. In most industries, adopting this approach will have the single biggest impact on sales force costs.

Companies must analyze the size, service costs, and true profitability of deals, not just gross margins. Some customers buy big, for example, but the cost of serving them leaves little room for profit. Others make small orders but are inexpensive to service and thus highly profitable. Knowing how to find stable, profitable customers through micromarket targeting can help deter­mine the appropriate sales channel and coverage.

Consider the case of a B2B wholesale company. As a result of its high-cost, face-to-face model for prospecting and managing accounts, only 45 percent were profitable.

In response to this discovery, the company moved all prospecting and account-management activities for smaller customers to telephone sales, with strong Web-based transaction support. That cut total sales costs by more than half and doubled the number of profitable customers. For larger customers, a team of telephone sales reps contacted pur­chasing staffers who control individual orders. This move provided intensive service for people who actually make daily buying decisions and reduced expensive face-to-face contact.

This story has two lessons. First, many customers don't want or need expensive face-to-face interaction. Second, serving the same customer with more than one service channel can lower service costs and improve customer satisfaction.

Stop wasting sales reps' time

Maximizing the amount of time reps spend selling while ensuring that they sell the right products to the right customers is of primary importance. Many companies hire back-office staff to minimize the time reps spend on nonrevenue generating activities only to see back-office costs rise and sales productivity remain flat.

One retail power company created a back-office deliberately proportioned to undertake specific support activities and reevaluated their needs semiannually. The company also increased its sales quotas and coverage ratios — in each territory — to ensure that freed-up time was devoted to selling.

Another challenge is focusing reps on activities likely to drive results. Creating a model that uses customer information to predict needs and spending can help focus reps on products clients are likely to buy.

Deliver "best thinking" with presales support

In most companies, small groups of decentralized sales support staffers — or even sales reps themselves — prepare for initial customer discussions or respond to bids. This is hardly the most effective approach: because individual reps see only a fraction of a company's interactions, they may fail to use its best thinking.

Using the whole company's best thinking, drawn from experience with similar offerings (and competitors' experiences), a centralized group can increase win rates. At the same time, preparing key proposals centrally — rather than continually reinventing them in the field — saves costs.

Squeeze out post-sale inefficiencies

An inefficient post-sales back-office not only diminishes the quality of customer service but also is costly. Seg­menting the back-office to separate high-value, high-complexity issues from simpler issues allows basic sales to flow through a less rigorous process and minimizes exceptions.

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About the Authors

Anupam Agarwal (anupam_agarwal@mckinsey.com), an associate principal in McKinsey & Co.'s Silicon Valley office and a leader in the consultancy's marketing and sales practice, specializes in CRM, go-to-market strategy, and sales force productivity.

Eric Harmon (eric_harmon@mckinsey.com), a principal in the consultancy's Dallas office and a leader in its high-tech practice, has extensive experience with B2B services businesses across strategy, sales, and operations topics.

Michael Viertler (michael_viertler@mckinsey.com), a principal in McKinsey's Munich office and a leader in its sales and channel service line, has extensive experience with high-tech and automotive businesses across go-to-market and strategy topics. 

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Please note that the Viewpoints listed in CRM magazine and appearing on destinationCRM.com represent the perspective of the authors, and not necessarily those of the magazine or its editors

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For the rest of the May 2010 issue of CRM magazine please click here.

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