Growing a Business Requires That You Nurture Your Customers
You're driving your company's sales strategy toward growing a business, both in terms of revenue and profits. How do you use your customer mix to make that happen? Sales isn't random; you can control the ratio of new to old. It depends on where you commit resources.
You need to control cost of sales. As a middle market company, you are generally fighting it out with competitors. Growth is a concern, profits are needed to fuel expansion, and as the leader, you are consistently navigating your company through turbulent waters.
In essence, you need to do the following simultaneously:
- Find new customers
- Expand your sales to old customers
- Increase your capacity to deliver (since you have all these new sales)
- Be profitable so that you can reward the company's owners, increase its value, and have resources for further expansion.
Achieving all of these goals is tough. How do you use your sales budget as a tool to help you?
Imagine your sales team is divided into hunters and farmers. Salespeople who find new customers are hunters, and those who tap into existing customers are farmers. Hunters cost more than farmers because making sales to strangers is more expensive than selling to people who already know you.
Middle market companies have finite resources. You must keep and sell to as many existing customers as you can at low cost. Then, you must allocate your resources to obtain more new customers than the number of old customers you lose. These new customers must eventually be turned into current, satisfied customers to sell to at low cost in the future.
Here's an example: Suppose you're aiming for a cost of sales of 10 percent. (We'll use small-business numbers instead of middle market numbers for this example to simplify the math.) If you anticipate $3 million in revenues, your targeted cost of sales is $300,000. Now suppose that your cost of sales to existing customers is 5 percent and the cost of sales to new customers is 20 percent. In this case, if you plan to have $3 million in revenues, two-thirds of your revenue needs to come from old customers — or through your farmers — or you'll be over budget.
But now suppose you want to increase revenues by 15 percent. It would be good to increase profit margins as well. Increased revenues of $450,000 will give you that extra 15 percent. Would you rather have additional sales expenses of 5 percent times $450,000, or $22,500, getting that increase from old customers, or pay 20 percent — or $90,000 — to get sales from new customers? Which strategy will contribute more to your bottom line?
Don't just think of selling to the same people over and over, by the way. Your farmers need to be more than order-takers. They should be out there with your satisfied customers to get them to recommend you and introduce you to others within their organizations and to people they know in similar organizations.
Depending on your industry, you're always bound to lose customers while growing a business, meaning you will always have a new sales component. But when you can spend effort on selling to a customer who knows you, likes what you sell and deliver, and can recommend you to others, it's good a investment.
Peter Miller is an NCMM contributor and a career entrepreneur who has built sales forces in multiple companies. He is currently COO of Genomic Healthcare Strategies in Charlestown, MA.