Objectives are a plan's purpose. Strategies are the methods of achieving objectives. In Consultative Selling, strategies are packaged in PIPs. Each proposal represents a strategy to improve customer profit by solving a cost or sales problem. If the customer is a not-for-profit organization or a government agency, proposal strategies focus on reducing costs and improving the dollar value of productivity. Either way, the mix of strategies must make a measurable impact on customer profit or operational performance, or both.
PIPs are the sales vehicles for penetration strategies. They are designed to penetrate the customer's business at high-level points of entry. Each proposal contains a strategy for solving a specific customer problem or realizing a specific opportunity. The sum total of profits contributed by each year's proposals constitutes the value added by Consultative Selling.
Many vendors remain in denial. At Motorola, Jim Caile of the Cellular Subscriber Group is still trying "to figure out how to put value back in the hardware." Motorola's Two-Way Radio people are doing the same, even though value has long ago been commoditized out of the hardware and relocated into customer operations. For a plant of Cummins, Motorola discounted a sale of its factory floor radios down to $100,000. Within the first twelve months, Cummins had saved $1.20 million in downtime costs by speeding up maintenance and reallocating raw materials and labor. In return for selling the performance value of its radios instead of the financial value of their application, Motorola came away with only a fraction of the 12 to 1 value-to-investment ratio of the radio system's contribution to improved profits.
Consultative Selling makes vendor selling schemes obsolete. Even when vendors "earn the right" to sell upstairs, they have nothing to sell to a customer manager who opens by asking, "What have you got for me?" The vendor's typical response is a valueless value proposition that cannot price the investment because it cannot value the return.
NCR offers a valueless value proposition when it says, "NCR is your knowledgeable, safe, and innovative partner with proven experience." What is the value to a customer of NCR's "unmatched knowledge and expertise"? What is the added value of making "the safe choice"? NCR does not say.
Digital Equipment was typical of valueless proposers when it put forward characteristics of itself that may enable value but contribute no quantifiable value in themselves:
"Proven track record"
"Reliability and confidence"
"Diverse set of capabilities"
"Customized approaches to addressing needs"
"Commitment to implementation"
A single number—the most likely improvement in a customer operation's contribution to profits—is worth all these words. In addition, it is a true value proposition.
There are three steps to take before you can propose profit improvement:
Analyze a customer's business position.
Position penetration strategies.
Pinpoint penetration opportunities.
A customer's business position determines your sales strategy. Each position presents a different penetration challenge.
Penetrating a growing customer. A growing customer is sales-driven. If you want to affect the sales function, you must increase its productivity so that it can generate more profits per sale or yield added profits from incremental sales. If you cannot affect sales but you can only reduce costs, the savings you achieve for a customer must be valued for their ability to support more sales. Your entire penetration strategy must focus on improving the customer's profit by increasing sales.
Penetrating a mature customer. A mature customer is driven from two directions at once. Sales must be increased, but not if this requires increased costs. If projected sales fail to result, the customer's stability can be threatened. Costs must be reduced, but not if this reduces sales or market share. If sales fall, the customer's stability can be threatened. Your penetration strategy can focus on improving profit through sales increases or cost decreases, but it must avoid the unaffordable risk of increasing costs or decreasing sales in the process.
The purpose of analyzing a customer's business position is to be able to custom-tailor your sales penetration. If a customer is growing or stable, you must present yourself as an improver of profit on sales. If the customer is declining, you must present yourself as a reducer of costs.
Unless your sales position coincides with the customer's business position, you can never create a partnership in profit improvement. The customer will not understand where you are coming from in your proposals. You, in turn, lacking a sense of your customer's objectives, will not know where the customer is going. As two unknowns, you will be talking past each other; you will be proposing to yourself.
To ensure that your sales positioning is in gear with how your customer is positioned, your penetration strategy should be preceded by a positioning statement. Here is a model statement:
In our penetration of the manufacturing functions of the ABC Company's XYZ Division, a stable business, we position ourselves as the manufacturing vice president's partner in profit improvement primarily by means of the reductions in cost we can deliver through our quality control system. We also show how enhanced product quality can help improve profit through incremental sales.
A customer's inability to bring down a cost or need to increase profitable sales volume are business problems. Accordingly, they can be your sales penetration opportunities. In order to find out, you will have to identify them and then put dollar values on them and on the most cost-effective solutions.
Opportunities to penetrate a key account have a special genesis. A penetration opportunity does not automatically come into being simply because a customer has a problem and you happen to have a solution for it. Discovery is not opportunity. To determine whether a penetration opportunity exists, you must first analyze three specific dollar values.
The dollar value of the customer's problem. How significant is it? Is it making a significant negative contribution to customer profit? Does it justify a significant expenditure for solution?
The dollar values of the profits from your solution that will accrue both to you and to your customer. How significant are they? When will they begin to flow? How long before their total amount finally accrues?
The dollar values of the costs of your solution that will be incurred both by you and by your customer. How significant are they? Are they all up front, or can they be paid for progressively out of the solution's improved profits?
Penetration opportunities are entry points. You should regard them as windows. An opportunity window opens for you when the following conditions are met:
The dollar value of the profits from your solution exceed the dollar value of the customer's problem.
The dollar value of the profits from your solution exceed the dollar value of the costs of your solution.
The dollar value of the profits from your solution exceed the dollar value of the profits from competitive solutions.
The first condition ensures that a customer problem is worth solving; that is, it is beneficial to solve. The second ensures that a problem is profitable to solve. The third ensures that your solution will be the preferred solution. All three conditions place the burden of proof squarely where it belongs—on your ability to create the most profitable solutions to customer problems in the business functions you can affect. This is the supreme standard of performance for Consultative Selling.
A consultant's solutions improve customer profit in proportion to the consultant's skill in prescribing added value.
The ability to prescribe the right solution system the first time is a result of three factors. One is the consultant's experience. The second is expertise. The third factor is skill in solving customer business problems and helping capitalize on opportunities: in other words, helping a customer improve profit.
A system's combined advantage is expressed as a single benefit: profit improvement of the customer's business operations in which the solution is installed. This benefit is a partial function of system price. It is also a function of the system's return on investment. The ability of a system to yield a return on investment that exceeds price endows it with premium-price capability.
Prescribing a system and pricing it for high customer return are the two most demanding tasks of Consultative Selling. Together they determine the customer's value and the profit from the solution. Because they have such a direct effect on both value and profit, the acts of prescription and pricing are keystones of the consultant's selling proficiency.
The standard of performance for prescribing and pricing a solution is met when its system's premium price is accepted as a cost-effective investment in added value to meet customer objectives.
When consultants prescribe a profit-improvement package, they must follow the rule of "necessity and sufficiency." Components should be sufficient, but only those that are necessary to solve the customer's problem should be prescribed. This guideline helps protect consultants against underengineering or overengineering a system. If a system is overengineered, it may have to be overpriced; if it is underengineered, it may contribute to customer dissatisfaction and invite competitive inroads.
To avoid underengineering, you may have to incorporate equipment or service components from other manufacturers to round out some systems. At times, it is possible to market these components under your company's own brand name. This is the preferred way. But even if they cannot be branded, they should nonetheless be integrated into your systems if they are necessary to realize value objectives.
To be of maximum benefit to your customer and deliver maximum profit to you, a system should have turnover built into it— that is, one or more of its components should be consumable. This allows you to generate an ongoing razor-and-blades type of market for product-related services and consumable supplies by providing continuing sources of income for your business and continuing participation in your customers' businesses.
A basic rule of system prescription can be stated in this way: To maximize profit, standardize the hardware and customize the services, software, and consumables. When the nonhardware components are customized, a system's premium contribution can be accelerated. When frequent turnover of consumables is multiplied by premium price, maximum profits can result.
The return-on-investment approach is the most helpful tool for determining which of two or more systems to propose to a customer as well as how to price them. Two competitive systems illustrate how a choice is made.
System A is forecast to improve customer sales by $200,000 and yield a profit on sales of 10 percent, or $20,000. The investment required from the customer is $100,000.
System B is forecast to improve customer sales by $300,000 and yield a profit on sales of 10 percent, or $30,000. The same $100,000 of customer investment is required.
These two systems appear equally worthwhile in terms of their 10 percent profit yield on sales. But in terms of the return each system can achieve on the amount of customer capital it employs, System B is superior. With System B, $100,000 of capital can produce a $30,000 profit—a 30 percent return. System A also requires $100,000 of capital but can produce only $20,000 in profit, for a 20 percent return.
The difference between the two is the relationship of the improved sales volume to the capital employed. System A allows its capital to appreciate at the rate of 200 percent. With System B, however, the appreciation is 300 percent: It turns inventories into cash faster.
There is a shorthand formula you can use to determine ROI:
In the case of System A:
In the case of System B:
In this simplified approach, the first fraction calculates the percentage of profit on sales; the second fraction calculates the turnover rate. When the two are multiplied, the result is return on investment. Any improvement in the circulation of funds invested in a system's total assets, working assets, or any component part of an individual asset has a multiplying effect on profits.
A system's marketability lies in its competitive advantage: the value added by improving customer profit. This customer advantage becomes the system advantage in the minds of customers, who evaluate systems both individually and competitively. A system does more than offer a customer advantage; the system comes to "own" the advantage as its single most crucial selling point. This is preemption, a system's ability to seize an advantage uniquely to itself.
The competitive advantage of a system acts as its market selecting mechanism. It selects customers in two ways. First, it seeks out and qualifies the segment of a market that has the greatest need for the system's advantage. Second, it comes to represent the system by acting as a shorthand way of describing its incremental contribution. The customer advantage determines the market and documents the system's capabilities.
A system's customer advantage must conform to three requirements:
It must confer a superior added value over competitive systems, as well as over the option of doing nothing, in at least one important respect.
It must be at least equal to competitive systems in all other respects.
It must not be inferior to competitive systems in any important respect.
A competitive advantage can be an attribute of the system, or it can come from the way it is implemented, maintained, migrated, or marketed. The question of how much quality to build into a system therefore merits a minimal answer. Enough quality to deliver the customer advantage is enough quality. A maximum quality system as determined by the aggregate quality of its components may not be perceived as offering the maximum customer advantage. Minimal systems from the consultant's perspective are often preemptive systems from the customer's perspective.
The concept of competitive advantage is not just an argument against overengineering, overpackaging, or overcosting, although it speaks powerfully against all three. It is essentially an argument in favor of prescribing systems from a customer orientation. And it provides the direction for establishing a system's branding: the capture of customer preference because the customer's profit is being improved best, not because the consultant's system is constructed best.
Customers who use EVA, the Economic Value Added to their operations, as a criterion for what to acquire or apply to their operations are ready-made partners for consultative sellers whose value propositions are additive to the customer's EVA.
EVA is the sum of two components, the second of which is subtracted from the first to get the added value:
NOPAT (net operating profits after taxes), which is calculated by adding the cost of products manufactured to GS& A expenses (general, sales, and administrative) and subtracting the result from sales revenues. In order to improve the contribution of NOPAT to EVA, a consultative seller's PIPs must improve sales revenues or reduce either GS&A or the manufactured costs of products.
Cost of Capital, which is the sum of outstanding receivables plus inventories. In order to reduce the contribution of a customer's capital costs to EVA, a consultative seller's PIPs must reduce receivables or inventory.
In addition to increasing the contribution of sales revenues to NOPAT and decreasing the contributions of receivables and inventory to the customer's cost of capital, PIPs can also improve EVA by speeding up new product development, improving production scheduling, reducing scrap and rework, and cutting down on warranty expenses. These are all exemplary objectives of Consultative Selling.