One common mistake companies make is to reduce costs across the board by a fixed percentage, which weakens the competitive position. Let’s instead review a few best practices.
Identify a well-defined and targeted offering. The priorities of your top customers may be different in an uncertain economic environment than in an economy of rapid growth. For example, one company that previously prioritized convenience and accessibility now prioritizes maintenance costs as one of the most important buying factors. Understanding what matters to your top customers will enable sales and marketing to tailor the offering, marketing material and key selling points based on changes in customer needs.
Furthermore, every customer consumes internal resources. By focusing on the most important customers and tailoring offerings to them, companies can focus their internal resources and eliminate, reduce, consolidate or outsource non-critical activities. One example is to tailor pre- and after-sales support activities to the most important customers and offerings. This leads to the next best practice.
Focus cost-cutting and productivity improvements on those activities that drive the largest share of their SG&A expenses. One company applied an activity-based costing analysis to identify its most costly activities and then focused on those to reduce costs – a much more effective way than just applying a cost-cutting figure across the board. Initiatives that were undertaken to reduce costs included standardizing the product design activities in the sales process, eliminate nonprofitable customers (to both drive fewer non value-added sales activities and immediately improve profitability), improve and automate the quoting tool, work with process repeatability, and cross-train across certain sales back office roles. This company estimated a total saving of 26 percent from all initiatives. Typical savings are in the range of 20 to 25 percent (but can be higher or lower).
However, some companies decide to use the improved productivity to take on more sales, without hiring new people, while others prefer using it to directly reduce operating expenses.
Be cautious with pricing.Pricing has a larger impact on profitability than almost all other means available to managers. Yet pricing does not receive enough focus in most organizations. Managers and salespeople need to be careful with discounting, especially during uncertain times. A cut of $1 directly hits the bottom line by the same amount.
More focus and stricter pricing policies are often needed to avoid price wars and price leakage. In uncertain times, it is especially important to define what those are. Differentiation is another area affecting pricing. When you are providing a different value than your competitors, the challenge instead lies in setting an appropriate price – you may even be able to raise your price in a downturn. Improving value-based selling, setting price of offerings based on your customers’ needs, and implementing stricter policies around pricing and discounting are examples of important levers available to managers in uncertain economic environments.
Other common initiatives include stricter performance management, improving prioritization of customer prospects, redefining sales deployment of both frontline and back office personnel (territory coverage, roles, activities, number of people, etc.), reducing complexity and finding new means of financing customers. Some companies reduce, eliminate, consolidate or outsource non-critical activities – both to save cost and improve focus. Others take the opportunity to improve productivity of frontline sales by implementing a value based selling approach.
Best-in-class companies use several of these approaches to improve their competitive position by working effectively with sales management in a slow-growing economy.
Rickard Alfredéen is the founder of Oneforce, a management consulting firm focusing on growth strategy and performance improvement.
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