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Death of a Leader

Stop the War of Politics and Personalities


Versus Principles and Performance Before
It Kills You and Your Company

Joel Davis
Boundary Press
Temple Terrace, Florida
www.boundarypress.com

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Death of a Leader

Death of a Leader. Copyright © 2008 by Joel Davis. Manufactured in the United States
of America. All rights reserved. No part of this book may be reproduced in any form or
by any electronic or mechanical means, including information storage and retrieval
systems, without permission, in writing by the publisher, except by a reviewer who may
quote brief passages in a review. This material may not be used in whole or in part for
presentations, training classes or seminars. Although the author and publisher have made
every effort to ensure the accuracy and completeness of information contained in this
book, we assume no responsibility for errors, inaccuracies, omissions or inconsistency
herein. Any slights of people, places or organizations are unintentional. All names have
been changed to ensure confidentiality. Published by Boundary Press, located at 5004 E
Fowler Ave., Unit C-115, Tampa, FL 33617.

Visit our Web site www.deathofaleader.com for additional and up-to-date contact
information.

Davis, Joel

Death of a Leader: Stop the War of Politics and Personalities Versus Principles and
Performance Before It Kills You and Your Company

ISBN: 978-0-9791397-1-0
Edited by Marjorie Bulone.
Cover Design and Book Layout by Toné Mojica.
Production Coordinated by Toné Mojica.

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Death of a Leader

Go-To-Market Strategy

You have collaboratively created the vision, mission and values of the
firm. You have defined what business you’re in and also the ones that
you’re not in. You understand your industry position. You have defined
and refined your value propositions and SCAs—and, I hope in the process,
you figured out how to be #1 or #2 in your category, or you created a new
category where you can be #1 or #2. So far, so good!

Now you need a go-to-market strategy that will enable you to become the
category leader in either your existing category or your new category. A
go-to-market strategy is an overall plan for reaching profitable customers
in growth markets via the right blend of cost-efficient and effective
channels with the right positioning and messaging, and with the products
that fit both the customer and the channel.

A successful go-to-market strategy enables you to:

Ø Attract and retain the most profitable customers—leaving


marginally profitable or money-losing customers for your
competitors
Ø Increase sales faster than the market

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Death of a Leader

Ø Measure the P&L and, hence, the ROI of each channel over time,
enabling you to change your channel investment mix to stay ahead
of your competition

The elements of a successful go-to-market strategy are:

Ø Market Assessment
Ø Customer Segmentation
Ø Sales Force Coverage and Productivity Models
Ø Creating and Leveraging Indirect Sales Channels
Ø Optimizing Direct and Indirect Channels
Ø Pricing and Profitability

Market Assessment

For most firms, there are usually many more market opportunities than
there are marketing and sales resources. It becomes critical, therefore, to
determine which markets to target first, second and third, as well as which
markets you are not going to target.

Your senior management team, along with your marketing people, need to
develop a list of markets in a creative brainstorming session. Let’s say you
have a new software product that you want to bring to market. An initial
list of markets could be manufacturing, distribution, retail, health care,
state government, federal government, education and non-profits.

After you have created a list of markets, you can evaluate them against a
set of criteria to winnow the list down to the markets that provide the
highest ROI and give you the highest probability for success. Clearly, you
need to segment the market, but how?

Here some key elements to consider in evaluating each market:

Ø What is the Total Available Market (TAM) potential?


Ø What is the Serviceable Available Market (SAM) potential? (This
is a subset of TAM quantifying the available market you can
actually reach or serve)

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Death of a Leader

Ø What is the size and growth rate?


Ø What is the current spending on similar or competing
products/solutions?
Ø Are there certain features or benefits your products provide that
should be included as key drivers in the market assessment? For
example, if your product is in Spanish only, that will impact your
choice of market. Or, perhaps, your product won’t work in certain
situations, when firms reach a certain size or some other factor—
then that too will impact your market selection.
Ø Are some markets more difficult to penetrate? Why or why not?
Ø Are there key drivers that make one customer better and more
profitable than another?
Ø What are the costs of market entry and the cost to serve each
market?
Ø Is there channel availability or do you have a compelling
channel/product value proposition?
Ø What is your ability to leverage any type of brand equity?
Ø How competitive is this market? What are the Return On Equity
(ROE), Return On Assets (ROA) and Return On Sales (ROS) for
competitors in this market?
Ø Is this market a long-term strategic fit? If you are successful, what
next? What does step two look like?

This information will not be easy to find. Some of it may be impossible to


get. For truly unique products or services, this information simply may not
exist. However, that doesn’t relieve you from your responsibility to follow
the process, have the brainstorming session, make educated guesses,
follow your gut instincts, debate passionately, surface hidden assumptions
and, at the end of the day, pick your first market to target.

On the next page, you’ll see an example of a market assessment


framework. Please see Appendix 1 for a more complete framework that
came from a past consulting client who wanted to understand the retail
market overall and to identify the ideal retail segment to target for their
products.

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Market Assessment Example

Number of Number of
Segment Segment Includes Examples of
Stores in Stores in
Classification Description Subsegments Firms
Segment Subsegment

Wal-Mart,
1 Big Box 5,384
Costco
Pharmacy 12,191
Grocery + Walgreens
Grocery/
2 28,200 Pharmacy 15,173 Safeway
Pharmacy
Specialty Whole Foods
Grocery 836
Large
Sears,
3 Department 9,083
JC Penney
Stores
Specialty –
General 58,602 Gap
4 Specialty 75,914 Specialty Home Depot
Big Box 9,030 AutoZone
Auto Parts 8,282
7-Eleven
Fast POS 11,634
5 Convenience 62,534 Exxon
Gas Stations 50,900
Mobil

6 Auto Dealers 952

Total Retail
182,067
Stores

Now that you understand what market you are going to target, you now
need to follow the same segmentation process at the customer level.
Customer segmentation is very important—do not skip this step. Within a
given market, there will be more customer segment opportunities than the
typical firm will be able to reach. You need to segment the customers
based on varying criteria all the way down to an “ideal customer segment
and ideal customer profile.”

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One last note: go back and review your value propositions and SCAs in
light of the market you’ve chosen. What additional value propositions and
SCAs can you come up with to make your offer even more compelling for
this initial market?

Customer Segmentation

Refer back to our previous example of bringing a software product to


market. Let’s assume you decide to target the commercial market overall,
and manufacturing firms specifically. Customer segmentation slices these
markets by additional criteria. For example, an initial customer
segmentation could include large enterprises—1,000 employees and up,
mid-size enterprises—100 to 1,000 employees and small enterprises—less
than 100 employees.

As the brainstorming session continues, and your marketing people


present market and customer-specific research information, your customer
segmentation might become more focused on mid-market, manufacturing
firms in the discrete manufacturing business, with at least $50M in annual
revenue and at least 100 employees. This is an important concept. You are
trying to tightly define what the ideal customer segment and the ideal
customer profile look like so your marketing and sales messaging breaks
through all the clutter, hits home, generates awareness, interest, desire and,
ultimately, action (buying your product).

The following are excellent questions to help you identify your ideal
customer profile:

Ø Do certain segments/customers buy and behave differently?


Ø Have you gathered information about how each group of your
current customers and targeted customers want to interact with
you? Have you heard from them relative to what their ideal total
buying experience looks like?
Ø Do some customers only want to use a specific channel? (Field
Rep; Inside Rep; Partner; Distributor; Mfr. Rep, Retail; Web).
Ø Do the needs of these customers vary by order size?
Ø Are the customers using these channels differently over time?
What will it look like next year?

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Ø How many of your clients fit this ideal profile today and how many
do not?
Ø What percentage of each sales rep’s customer base matches the
ideal customer profile?
Ø Does the firm know the sales potential for each customer and
segment?
Ø What are the drivers for determining sales potential at the customer
level?

Once you have identified this ideal customer, stop for a moment and
define the opposite. In other words, what would the worst customer profile
look like? Many firms fail to take this step, resulting in marketing and
sales investments, programs, people and time being wasted on customers
who may be close to the ideal profile, or have a few elements of the profile
but, in actuality, are terrible prospects. If you can come up with four to six
qualifying questions that would enable your sales people to smoke out
prospects that don’t fit the profile, you’ll save yourself a lot of grief along
the way.

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Below is an example of both profiles. This example is for a hypothetical


software firm selling into the business-to-business market.

Item Ideal Client Profile Worst Client Profile


Manufacturing and
Industry Retailers
Distribution
Less than 500
Greater than 1,000
Size – Employees; employees and/or less
employees and/or
Revenue than $25M in
$100M in revenues
revenues
Operating System
Linux or Windows Solaris
Platform
Multi-Site Yes No
Geography West Coast East Coast or Europe
IT System
CFO or Vice
Entry Point Administrator or
President of Finance
Purchasing
Hard dollars savings Unidentified savings
Minimum Business
identified of at least or hard dollar savings
Value Proposition
$1M of less than $250K
XYZ Etc. Etc.
123 Etc. Etc.

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Below is an example of a high-energy soft drink maker selling to a select


group of consumers.

Item Ideal Client Profile Worst Client Profile


Under 35; Preferably
Age Over 40
between 18 and 28
Ethnicity Hispanic or Caucasian French
Sex Male Female
At least AA degree; if High school degree
Education Level
not BS only; Not in college
Hourly jobs earning
Income Level Greater than $40K less then $24K per
year
Own/Rent Own Rent
XYZ Etc. Etc.
123 Etc. Etc.

Revisit the ideal client profile on a consistent basis. Use it to guide your
marketing and sales efforts and be extremely cautious NOT to chase
opportunities that are closer to your worst-case profile than not. Many
marketing and sales organizations consume as much as 25 percent of their
resources, time and money chasing customers and deals that are outside
their ideal client profile by a mile—so don’t let them even enter your
system! Don’t let these “leads” or “requests for proposal” enter the
customer relationship management (CRM) system. Don’t let sales people
talk you into pursuing the deal. Don’t let these deals make it into the
forecast. In organization after organization, I’ve seen the bottom 10-15
percent of customers actually COST the company 25 percent+ of their
total profits—and, when analyzed, they typically met the worst-case
customer profile or major portions of it. So do everything you can to block
these accounts from ever entering your system!

Bring the ideal client profile to life by developing additional compelling


marketing messaging that I call: “A Day in the Life.” Here’s how you do
it. Describe what the person, department and firm look like before
acquiring your product. Describe how they are doing things without your

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product along with all the problems, tribulations, costs, productivity loss
and uneven quality. Or, describe on a line-by-line basis; chart, report, etc.
how their life is different the day AFTER they’ve acquired your product.
By completing the before and after sections as completely as possible,
you’ll identify more value propositions for your messaging and validate
that this customer is actually your ideal customer.

A Day in the Life Example: Before ‘Business Intelligence Software’

The Vice President of Marketing has placed numerous calls to Accounting


to find out where she is at in terms of her revenue, gross profit and budget.
When she finally does get a call back, Accounting gathers the information
from multiple disparate systems and sends her a file with information
that’s four weeks old, rife with errors and doesn’t tie to prior reports at all.
Faced with her monthly business review (MBR) the next day, the Vice
President of Marketing has two choices: try to recreate the information
based on the prior month’s report, which will require most of her team
staying late into the night; or postpone the monthly business review
meeting until Accounting can get their act together. Since this is the third
time the meeting has been postponed, and the Vice President of Marketing
desperately needs approval for more headcount, she is left with no choice
but to proceed with the business review and take her lumps for falling
farther behind her revenue goal.

A Day in the Life Example: After ‘Business Intelligence Software’

The Vice President of Marketing turns to her business analyst and asks her
to run the “MBR Report” from the company’s business intelligence
datamart. This datamart collects information fed from the company’s
multiple, disparate and, in many cases, obsolete systems. Each information
feed has been validated from both an IT and a business perspective as
being from the right source at the right time. If there is any discrepancy in
the information feeds, a red flag is displayed along with the potential
source file where the error might have occurred. Since the business analyst
has been running this report for months, all red flags have been eliminated
from the system and the data is accurate and consistent. The Vice
President of Marketing reviews all the key metrics from her monthly

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business dashboard and is able to drill down on the fly to dig deeper into
any specific area. After about one hour of review, the Vice President of
Marketing lets her business analyst know that the information is ready to
be dropped into the report (which takes about five minutes). Armed with
complete, accurate and up-to-the minute information, the Vice President
of Marketing enters the MBR with her boss and walks out of the meeting
with her new headcount increase approved!

Horizontal Versus Vertical

Many marketers think horizontally about markets and customer segments.


By horizontally, I mean that many marketers think about targeting
geographic areas first. They might start off locally, expand into the
surrounding areas or states, and expand nationally and then
internationally.

Another segmentation strategy is to think along industry lines instead of


geographic lines. This would require you to deeply understand a specific
industry and to tailor all strategies, programs, investments, messaging and
value propositions accordingly. Some industries have high concentrations
within a specific geographic area: automotive in Detroit, financial services
in New York City and oil and gas in Texas and Oklahoma are just a few
examples.

So, before you launch horizontally; think vertically. There are definite
advantages to this approach, because it’s so often overlooked. Further, as
companies grow, competitors enter the market and many products become
commodities. A way to change the game on the competition is to tailor
your products, services, programs and messaging to a specific industry.
Intuit has done a masterful job at this with their QuickBooks product.

However, changing your go-to-market approach form horizontal to


vertical is a strategic, 24-month, game-changing decision. Please see
Appendix 2 for a detailed “Horizontal to Vertical” template. Clearly, the
template needs to be customized for your firm but it does provide a solid
blueprint to make this transition.

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International Market Entry Criteria

Even with the Internet, cell phones that can work anywhere in the world,
instant messaging, English as the “Microsoft Windows” of languages and
international trade agreements, going international is not the same as
selling into your local market. Senior executives need to follow the same
process of assessing which international markets to enter as the one I just
described for local markets. Marketing and selling internationally adds a
level of complexity to your business strategy, programs and execution.
You’ll save a tremendous amount of time and money by doing your
research, and doing it well, before entering any international market.

In addition to the market assessment platform already covered, you’ll need


to list all of the international markets that you’re considering targeting and
gather the following data on each one:

Ø Population total
Ø Demographic breakdown of the population
Ø GDP total, growth trends, historical averages
Ø GDP breakdown by industry
Ø Currency, currency conversion, currency fluctuation, inflation rates
Ø Per-capita income—this is incredibly important!
Ø Taxes, fees, tariffs. Don’t forget to break out the differences in
taxes on capital investments versus operating investments.
Ø Ownership requirements and other regulations for foreign firms
Ø Business demographics—total, by size of business
Ø Government integration with businesses
Ø Are there state-run businesses? Which industries? Are there any
hints about privatization?
Ø The “Top 100” analysis. This is a list of the top 100 firms within
the country with their total revenue, profits and employees, as well
as what percentage of total GDP they represent. This data may
shock you, for in many countries, these top 100 firms are 90
percent of the country’s GDP.
Ø Political stability
Ø Geopolitical stability (stability of the region; not just the one country)
Ø Cultural attributes—manners, customs, norms, behaviors, the
importance of time, gifts, holidays, religion(s)
Ø Historical perspective—get a good understanding of the country
form inception to today. It can teach you a lot about doing business
in that country.

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After you’ve gathered this information, typically available from the


country’s Web site and/or the U.S. government’s Web site, you need to
rate each of the items on a scale of 1 to 5 based on how important it is to
the success of your international market entry. This will help you quickly
narrow the list to two or three countries.

Still, there’s no substitution for being in the country, so what you have to
do now is go visit the country! There are trade offices in nearly every
country that can provide information and arrange for you to visit and meet
with various government officials and business leaders. After you’re done
with the official tour, stay a while longer. Introduce yourself to local
business people—the ones running small businesses—and get their take
on doing business. Take their pulse on the economy, political officials and
what keeps them up at night. You’ll learn as much or more from these
conversations as you did through formal channels.

In addition to that, leverage your network to find people who have


established and run businesses in the countries that you’re thinking about
entering. Hire them as consultants to assist you in this process. Use their
in-country network to get to know what it’s really like to be a foreign firm
doing business there.

At the end of this complete process, you should be able to identify the
single best country to enter and have a solid business plan to do it
successfully. Remember that entering a new country is a multi-year
investment of time and money, and it can be a significant management
distraction. Still, the rewards can be substantial, so don’t shy away from it
if you believe there is an opportunity. Just make sure this is a conscious
decision, well thought out, with detailed plans, timelines, milestones and
the business flexibility to handle surprises.

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International Market Entry Matrix Example For One Country

Scale: 1-5 (1 being


International Market Entry – Country XYZ least important; 5
most important)
Population total: 1B 2
Demographic breakdown of the population:
4
60% under the age of 50
GDP total, growth trends, historical averages:
5
10% per year
GDP breakdown by industry: Unavailable 3
Currency fluctuation etc.: +/- 5% 3
Per-capita income: $10K 5
Taxes, fees, tariffs: 20% 3
Ownership requirements: None 1
Business demographics – total, by size of
5
business
Government integration with businesses: Not
1
important
Are there state run businesses? Yes: but not an
1
issue for us
The “Top 100” firms equal 50% of GDP 4
Political stability 5
Geopolitical stability 5
Cultural attributes 2
Overall Scoring 49

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Product Launch Process

We now come to one of my very favorite topics—the product launch


process. If your firm sucks at this, don’t fret, so do 95 percent of the firms
on the planet. This is really a shame because poorly executing a product
launch can undermine all of the solid go-to-market, customer
segmentation, value proposition, and SCA work that has gone ahead of it.

Further, since most firms are terrible at launching a new product or


service, being able to do this correctly can be a competitive advantage.
Most firms, sadly enough, got the first product launch right by almost pure
luck, or at least luck played a part in it, and they have been unable to
duplicate the success of the initial product launch for many years. You
need to invest in making product launches an SCA because:

Ø You leverage any time-to-market advantage


Ø Maximize the ROI on the new product development
Ø Maximize market share gains and revenue growth

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Sales Force Coverage Model

A sales force coverage model is a fancy term for determining how you are
going to deploy the sales force to cost-effectively reach your ideal end-
user customers. This definition is simplistic, as you will see in a moment,
but it’s a good working definition for now.

Developing a realistic sales force coverage model is a pivotal moment in


the firm’s development. Too many executives make the mistake of
thinking that the development of this model is a one-time event. In fact,
senior executives need to evaluate and refine their sales force coverage
models every two to four years, depending on the industry.

In order to develop an efficient and cost-effective sales force coverage


model, you need to understand TAM/SAM, structure, sizing, territory
drivers, productivity drivers and the actual selling work itself. Go back to
the Market and Customer Segmentation sections that I covered earlier.
Make sure you identify the TAM and SAM for your chosen market and

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customer segments. Make this an iterative process. For example, clearly,


your sales people need to be deployed where the money is (follow the
SAM). However, there are many structural options to consider. Depending
on the structure, different people could be doing different parts of the
selling work, requiring a different size organization. After you complete
each step below, go back and evaluate how well it integrates with what
you created in prior steps. Keep doing this until you’ve covered all six
areas and are confident that you have developed the optimum sales force
coverage model and have contingency plans for the next two to four years
based on different growth forecasts and trends in the market.

TAM/SAM

Remember these terms from earlier in the book. TAM stands for Total
Available Market and SAM stands for Serviceable Addressable Market.
TAM shows you how much and where the money is overall—while SAM
shows you how much of that TAM you can actually get. You will want to
organize your sales force around SAM; not TAM. You will need to
monitor potential shifts between TAM and SAM as markets move through
their life cycles. If you don’t do this, you could find yourself in a situation
where your sales people literally can’t reach the customer segments that
you want because you’re in the wrong markets. A simplistic example is
this: if you’re targeting the financial services industry, deploying your
sales force in the middle of Iowa would not be the best thing to do.

There are many mapping programs available that work with Microsoft
Excel. Plug your market assessment information into Excel and then map
it so you can visualize it. This “seeing is believing” step is very important.
The mapping software can help you visualize the revenue potential (SAM)
of each of your target markets, the number of current customers, the
number of prospects (non-customers), number of businesses overall and
the population. Anything you have in Excel can be visualized on the map
and—as we all know—a picture is worth a thousand words! Remember,
this is the first and most important step, but not the only step.

Sales Force Structure

Now that you have a solid idea of where your ideal customers and market
opportunities are (SAM), you now need to understand how to structure
your sales force to reach it. Remember, these steps are all to be done

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iteratively, and I’m forcing you to go through these steps in this order on
purpose, from high level down to the ground level, in order to identify
problems before you have deployed people and spent millions of dollars!

What’s the optimal structure of the sales force?

Ø Geographic based: This is typically the most cost efficient.


However, will it deliver the customer and product-mix objectives?
Why or why not?
Ø Industry/Market based: Can the market be segmented so that
customers and prospects in each industry or segment have similar
selling processes? From a marketing perspective, there is customer
synergy within each segment, so you can actually make a meager
budget stretch longer. However, there have to be enough customers in
that specific industry/segment to be economically viable for the sales
person and the company.
Ø Product/Product Line based: Can one person sell all the
products? Should one person even try to sell all the products? Will
important products be ignored if a geographic sales force sells
them? Can significant effectiveness be achieved through product
specialization?

The three structures highlighted above are the ones that are most typically
used. However, hybrid versions of these do exist and can make sense. For
example, you can have product or market specialists reporting to first-line
geographic sales management. Or you could have product or market
specialists reporting through a separate management structure. For
example, if you’re organized around industries, you might have an
Insurance or Automotive Strategic Business Unit (SBU) with marketing,
sales and support all under that umbrella. If you’re organized by product,
you might have an “Organic Foods” SBU or a “Heavy Tractor SBU” or a
“Laptop SBU.”

Another way to structure the sales force is to look at it from an activity


perspective, and segment or structure the sales force that way. Significant
effectiveness can be gained if the sales force specializes by activity, e.g.
inside sales handles lead generation, lead follow up and appointment
setting; field sales handles major accounts, customer visits calls and RFP
responses. Sometimes a geographic sales force will avoid doing certain
things because of the nature of their compensation plan and structure.

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Sales Force Sizing

For most firms, sizing of the sales force is part art and part science, and
too often is based on politics, personalities, who has control and, in many
cases, unrealistic assumptions about what mere mortal people can do. This
flawed process has been the undoing of many a sales leader, so I would
really like to help prevent this from happening at your firm.

Let’s assume that you’re running an existing business. The first thing you
need to understand when sizing a sales force is to know what percentage
of revenue is coming from each of the following categories:

New Customers

How long does it take to acquire a new customer? What percentage of a


sales person’s time should be spent on acquiring a new customer? Should
a segment of the sales force be 100 percent dedicated to “business
development”? What is the total cost to acquire a new customer? What is
the lifetime value of a customer to the firm?

New Products/Services

What percentage of revenue is coming from products/services that you


launched in the last 12 months? What would you like this number to be?
What percentage of a sales person’s time should be spent launching new
products, programs or services? Will sales of existing products/services
fall off during the time they are focused on the new stuff?

Existing Customers

What percentage of revenue is coming to you automatically through


ordering systems, special pricing agreements and service level
agreements? What percentage of a sales person’s time should be spent on
account management versus hunting for new business?

Existing Products

What percentage of revenue is coming to you automatically through


ordering systems, special pricing agreements and service-level
agreements? For established products, how much time should a field sales
person spend maintaining this revenue stream? What about an inside sales
person?
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Lastly, determine how the size of the proposed sales force compares to:

Ø Competitors above it, equal to it and below it


Ø Market/sales potential and growth
Ø Year-over-year growth required by the company
Ø Order volume and order size trends
Ø Changing customer requirements
Ø Changing technologies and products

As you probably can see from this list, most firms don’t have a clue about
sizing the sales force and so, right from the beginning, the sales leader is
behind the eight ball—as is 80 percent of the sales team. In fact, many
sales force sizing discussions go something like this:

Death Trap—How Not to Size the Sales Force

CEO (Engineering or Operations Background): “We are here today to


hammer out the final budget for the sales force.”

Vice President of Sales (Career Sales Exec): “Based on my 25 years of


experience, market, territory, competitor and customer analysis, I believe
that we will need 25 new field sales people to make our target for the year.
If I had been allowed to start the hiring ramp process in Q4 as I proposed,
we would have only needed to hire 20 new field sales people for the new
fiscal year. As you know, we froze all budgets in Q4 to make our numbers
for the last fiscal year, but this obviously impacts this year.”

CFO (Career CFO): “Ha, ha, ha. You are such a kidder! Listen, I told you
last week in an e-mail, the budget will only support 10 new field sales
people. And, yes, I saw the competitive analysis you did, showing that we
are substantially outmanned in the field but, hey, that just means that we
need to work harder and smarter.”

Vice President of Sales: “We already are working harder and smarter. Did
you read the business plan, program and metric targets for my department
this year? I can’t think of another time at any other firm in my life where a
team could hit these metrics and execute all of these programs without
burning out.”
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CFO: “I wish you would negotiate this hard for us with our customers.
Listen, it is what it is, unless the CEO wants to do something different.”

CEO: “These discussions have been going on for weeks via e-mail. Based
on my experience (Author’s Note: he does not have any sales experience,
so watch out), these numbers are a stretch, but they are doable. So, you
just better figure out how to do it with only 10 more people.”

Vice President of Sales: “I understand your position, but I’m telling you
right now that we are putting the entire revenue plan at risk. In addition,
you cut the training program from my budget, so not only are we going to
have fewer people than we should, we will have to get them up to speed
by cobbling together internally developed training delivered by people
who already have other full-time jobs to do.”

CFO: “Well, you said a lot of these same things last year, and you still
figured out a way to make the numbers, so let’s just revisit this in 90
days.”

Vice President of Sales: “We worked people 60 hours a week; held


planning and customer meetings on weekends; had people doing e-mail,
proposals and other work on weekends; and burned out some of the top
sales people in the firm. And, if we had not pulled in that big deal late in
Q4 with creative financial terms, we would not have made our numbers.
Clearly, planning for all of that to happen again is not prudent or logical.”

CEO: I hear you, but our products are the best in the market! If you can’t
sell these products…well…anyway…we are done here…let’s go sell
something!

Sales Territory Drivers

Now that you know where the SAM is and have a good idea of how you
want to structure the sales force, it’s time to take a first pass at creating
sales territories for each sales rep. The single most important rule for you
to understand is this: you will need to create, refine and restructure
territories every 12 to 24 months, depending on the industry. Territory
management is a process, not an event.

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Each territory should have the same SAM and hence the same sales and
earnings potential! If you miss this step, you might end up rewarding a
poor-performing sales rep who happens to be in a great (high SAM),
territory and let go of a top sales rep in a poor (low SAM) territory. For
example, let’s say your “top rep” did $2M in sales last year but was in a
territory with a SAM of $100M—clearly this rep is getting his tail kicked
by the competition. However, your supposed “poor sales rep” did $1M in
a territory that had a SAM of only $10M. This “poor rep” has a market
share of 10 percent in her territory, which is 5 times the market share of
the supposed “top rep.”

Do your best to carve out territories with the same amount of SAM. If you
can’t, acknowledge it, and keep it on your radar, so that as reps come and
go and the business changes, you can load balance the territories over time
until you achieve your objective.

Speaking of load balancing, if you monitor your territories closely, you


can increase sales on average five percent simply by making sure no
territory has too much SAM for one person and no territory has too little
SAM for one person. Load-balancing territories is not only good for the
sales person, it’s also good for the company.

A good way to approach this load-balancing concept is to clearly outline a


“Minimum, Average and Maximum” territory size. If a territory drops
below a certain SAM, revenue and gross profit, you’ll dissolve the
territory because it’s not economically viable and isn’t capable of
delivering the ROI that the company needs. The sales rep will have to find
a new job or a new territory.

Conversely, if the territory has very large SAM, revenue, gross profit and
reaches a certain maximum that is more than a single person can handle,
the company needs to split the territory into one or more territories and
add sales reps. This divide and conquer strategy was used successfully by
Cisco, EMC, IBM and many other high-tech firms to consistently
penetrate deeper and deeper into markets, thus becoming the category
leaders.

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Below you’ll find a real-world example of “Min/Ave/Max” SAM banding.


Don’t get hung up on the numbers, because every industry is different, and
different business models will change the numbers. Just make sure you
understand the concept!

Min/Ave/Max Territory Banding Example

Inside Sales Minimum Ave Max


Quarterly SAM $ 5,000,000 $ 10,000,000 $ 20,000,000
Quarterly Sales $ 2,500,000 $ 5,000,000 $ 10,000,000
# Accounts 25 50 75
Inside Sales Guidelines

The minimum SAM and Sales for an Inside Sales Rep is $5M and $2.5M.
If an inside sales rep falls below this level, the company will either collapse the
territory or replace the rep. Sales management should try to keep the average SAM and
sales at $10M and $50M. When an inside sales rep grows their territory to $5M –
$7M, Sales management needs to begin the process of identifying how to divide the
territory and add more sales resources.
Field Sales Minimum Ave Max
Quarterly SAM $ 10,000,000 $ 15,000,000 $ 20,000,000
Quarterly Sales $ 2,000,000 $ 2,500,000 $ 4,000,000
# Accounts 5 10 15
Field Sales Guidelines

The minimum SAM and sales for a field sales rep is $10M and $2M.
If the field sales rep falls below this level, the company will either collapse the
territory or replace the rep. Sales management should try to keep the average SAM and
sales per field rep at $15M and $2.5M. When a field sales rep grown the territory to
$2.5M+ in quarterly sales, Sales management needs to begin the process of identifying
how to divide the territory and add more sales resources.

Sales Productivity Drivers

As we continue to drill down into the sales force coverage model, it’s now
time to begin identifying what the productivity drivers are, as well as the
systems and processes that you’ll use to track and manage those drivers.

Now some executives go overboard in this area, wanting to track


everything, which can actually diminish sales force productivity. My

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advice is to understand the 80/20 rule yet again, and make sure that you
can monitor and track the 20 percent of the drivers that deliver 80 percent
of the results. Start with this segment first, then you can expand over time
if you like.

Make sure that you automate as much of the reporting as possible,


otherwise you’ll reduce available selling time while reps and management
grudgingly fill out reports at the last minute. At the end of this section, I’ll
introduce many of you to the concept of a Sales Operations Analyst and
how this one person can increase selling capacity dramatically.

What are all the ways that the sales force is measured currently? Here are
more good “sales metrics” questions to guide you:

Ø Sales, profits—overall, by vendor, customer, by percent of


achievement to goal
Ø Phone stats: calls, talk time
Ø Reach or penetration
Ø Account planning
Ø Forecasting or pipeline management
Ø Prospecting
Ø Account management
Ø Demonstrations
Ø Proposals
Ø Evaluations
Ø Customer knowledge
Ø Product and program knowledge
Ø Category knowledge overall
Ø Industry knowledge
Ø Internal systems and processes competency
Ø Sales skills
Ø Attitudes
Ø Behaviors
Ø Motivations
Ø Turnover
Ø Job satisfaction

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To really understand, monitor, manage and leverage the productivity


drivers, your goal needs to be the creation of an easily accessible
dashboard or portal for reps and management to see where they are in real
time across each of the main sales productivity drivers. Further, they need
to be trained to read and act on these reports. When they see a problem
area, they need to know what to do or who to go to so they can address it
in a proactive manner.

This is why you need a Sales Operations Analyst (this individual also can
be known as a Business Analyst)! They literally can create additional sales
capacity (see the next section) across the entire organization by being the
focal point for creating reports, updating corporate databases, training reps
how to read and use portals and dashboards, doing “what if” analyses, pro-
forma projections, deep dives on specific areas, etc.

A Sales Operations (Business) Analyst would perform the following


activities for the entire sales department:

1. Gather requirements from every department in sales and channels


using a variety of methods: interviews, document analysis,
requirements workshops, surveys, etc.
2. Evaluate information gathered from multiple sources, ensure
accuracy of the data and identify the “systems of record” for each
data input area; breakdown high-level information into details;
abstract up from low-level information to a identify patterns
3. Proactively communicate and collaborate with IT to analyze sales,
product, customer, channel information needs and functional require-
ments, and deliver the following as needed: Business Requirements
Document, Sample Screen Shots, Sample Report Output, etc.
4. Automate, analyze and improve the various reports used within the
department: forecasts, pipeline, large deal reports, budgets, business
model P&L analysis, product trends, channel P&L, customer income
statement, commissions and quotas.
5. Create ad-hoc report requests as needed, but determine how this ad-
hoc report request could serve the needs of the entire sales
department and build that into the next iteration of reporting tools.

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6. Drive and challenge business units on their assumptions of how they


will successfully execute their plans. Develop new reporting tools to
manage each new initiative and program, and provide early warning
notifications if they materially drift off course.
7. Be the liaison between the business units and IT.

The alternative to having a Sales Operations Analyst is to not do it all,


which doesn’t make sense. Or you could waste precious sales resources by
having the sales reps and management do it themselves—and do it poorly
since this is not their core competency! Yet company after company is
penny wise (let’s not hire a Sales Operations Analyst) and pound foolish
(let’s lose the selling capacity of five to six full-time sales reps and
managers as they try to do this on their own).

Selling Work And Sales Capacity

Memorize the following phrase: “sales capacity.” Repeat it over and over
and over. Sales capacity is the amount of time actually spent selling
(demand generation) versus non-selling (administrative, internal meetings,
account servicing, forecasting and reporting). Sales capacity must be
understood, measured, benchmarked and constantly protected. Firms that
guard and increase selling capacity will grow market share more
consistently over time. Firms that don’t get this concept will continue to
whittle down their outbound selling capacity, lose market share and
become take-over bait or, even worse, a niche player struggling to survive.

Review the questions below to determine sales capacity:

Ø Where does the sales person spend his time today: selling,
prospecting, account servicing, administration?
Ø What essential work is required for each segment, territory or
customer? List the specific steps for each one.
Ø How does it vary by industry, geography, order size, product line,
customer size?
Ø Who does demand generation today—lead generation, prospecting,
inbound call handling and requests for information? How many
full-time equivalents (FTEs) does this add up to? Could you do it
better or for less if you created a focused group rather than having
one person’s time sliced into doing many different tasks?

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Ø Who does the pre-sales work—explaining features, benefits,


programs, promotions, qualifying needs, assessing problems and
opportunities? How many FTEs does this add up to? Could you do
it better or for less if you created a focused group rather than
having one person’s time sliced into doing many different tasks?
Ø Who closes the sale—presenting, bidding and proposals,
negotiating, closing?
Ø Who processes the orders, handles order management and
customer satisfaction issues?
Ø Who is responsible for post-sales work—delivery, installation,
complaints?
Ø Is there an activity-based costing (ABC) system in place to
measure the true cost to serve each segment?

As you go through these questions, you might discover that you need more
selling capacity than you have. This leads us to the next section, Indirect
Channels!

Indirect Sales Channels—Increasing Sales Capacity On Someone


Else’s P&L

Most firms start off selling their products directly, whether it is via the
Web, a direct sales force, manufacturer’s rep firms, inside sales and
catalogs, etc. As a firm grows, it runs into the problem of “reach.” Simply
put, even the most successful firms can’t reach all of their target prospects
directly on their own. Even if they have an incredibly large sales and
marketing budget, there are just simply too many prospects for them to
reach. For example, say you have a product that is perfect for the small
business owner. There are more than 10 million small businesses in North
America. How will you reach them all? You can’t—at least not directly. It
wouldn’t be economically feasible to create an internal sales capacity large
enough to reach this market. Expanding sales capacity externally is where
indirect channels come in!

Sales channels or just “channels” are adjunct routes to market a firm can
use in addition to their direct-selling approach. Channels also are used to
describe the types of firms that can help you reach your ideal target market
via their marketing, sales and support services as well as their large
existing customer bases. You buy and shop in channels every day—Publix
Supermarkets, Home Depot and Lowes, CDW and Dell, Best Buy, Lands
End and Victoria’s Secret are each channels within their respective
industries.

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Channels can be segmented into channel tiers or distribution steps. One-


step channels are those in which the maker of the product sells directly to
another firm that resells the product to the ultimate end user. Two-step
channels are those in which the maker of the product sells to a wholesaler
(also known as a distributor) who, in turn, sells to another firm that resells
that product to the ultimate end user. For example, if Apple sold their
iPods directly to Best Buy, who sold the product to you, that would be a
one-step channel. If Apple sold their iPods to Ingram Micro, a distributor,
who sold them to Best Buy, who sold them to you, that would be a two-
step channel. There are pros and cons to creating additional routes to
market but, for most firms, the pros outweigh the cons. So let’s move on
to the next section to discuss whether or not you should create an indirect
sales channel strategy.

Below is a table to help make the channel tiers easier to understand.

Firm Selling to Channel Type Channel Tier


Dell End Users Direct
HP Ingram Micro Indirect 2nd level
HP Best Buy Indirect 1st level
Coke Albertsons Indirect 1st level
Coke “Bottler A” Indirect 2nd level
Duraflame Logs Home Depot Indirect 1st level
Duraflame Logs Distributor A Home Depot 2nd level
Thomasville People directly
Direct
Furniture in their stores
Thomasville People directly
Direct
Furniture via the Web
Thomasville
Rooms to Go Indirect 1st level
Furniture

Creating An Indirect Sales Channel Strategy—Who, What, When,


Why, Where?

The first step is to go back to your ideal client profile.

Ø Who are these ideal clients in detail?


Ø Who do they turn to for advice?
Ø Who do they go to for installation, customization, training and
after-sales support?
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Ø What do these ideal customers read and use to gather information


to make buying decisions?
Ø What are the critical factors for their purchasing decision?
Ø What complementary products (to yours) are they already buying?
Ø What channels (where) make sense for these people to logically (or
emotionally) go to find your product?
Ø Where are they buying products that are similar to yours today?
Ø Where could they be learning more about your products today
(think new and upcoming channels)?
Ø Where could they be going to buy your products today but can’t?

From those questions, you should be able to list all of the potential
channels to consider. Next, map your customer’s total buying experience
to your potential channels. For example, where would they go to get
expert advice, training, customization, an integrated total solution, on-site
installation, maintenance, price and product information? These are
important items to consider because they will help you winnow down the
list of potential channels and prioritize the ones that remain. If you’re
selling a product for home improvement that’s easy to install and use, your
choice of channels could be much larger than if you were selling a product
that took two people to carry, one person to set up, six hours of training
and twice a year servicing to maintain.

That leads us to the product. What product-specific filters should be


applied to segment your list of potential channels? How complex is your
product? How long does it take to get up and running? How differentiated
is it? What is the price tag relative to the buying process of the firm or
individual? Is there negotiation involved? As a general rule of thumb, if
you have a low price point product that’s easy to install and use, then you
can and should leverage the volume channels that have tremendous
marketing and sales reach. If your product is higher priced, is more
complex, requires some specialized knowledge to get up and running and
maintain, you should look for value-add channels that can provide the pre-
sales and post-sales support that your product requires.

Channels evolve, so you need to be flexible in terms of thinking “volume


or value-add” channels. For example, a few volume channels in the high-
tech space are retail (Best Buy, CompUSA), direct marketing firms

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(CDW, PC Mall, PC Connection, Tiger Direct) and corporate


resellers/integrators (Softmart, SHI, Forsythe, ePlus, MoreDirect). These
channels reach a lot of customers very cost effectively, and they move a
ton of product. However, who would have thought that Best Buy and
CompUSA would begin offering technical services, including home and
small business wireless networking installation and support? That clearly
had been the domain of the value-added resellers (VARs). There are more
than 100,000 VARs in North America, most of who are small businesses
themselves. They focus on specific niche technologies or service offerings
where they can differentiate themselves, earn better product margins and,
ultimately, build a profitable services business.

A great example of changing channel models is Dell. Everyone knows


they sell laptops, and desktops. No one thought their model could support
high-end servers and storage—until they built multi-billion dollar
businesses around each one. They also provide support, maintenance and
on-site services. And, by the way, did you know they have a multi-billion
dollar, third-party business where they compete head-to-head with CDW,
PC Mall, and PC Connection? So what the heck is Dell—a PC
manufacturer? A direct response firm? A volume channel? A value-add
channel? The answer is yes to all; it just depends on the product category
and the market they’re trying to target.

Switching gears slightly, in the home improvement area, Home Depot and
Lowes are volume channels. But they also provide in-depth training and
how-to-classes, as well as a tremendous variety of on-site services
including remodeling and landscaping. Weren’t these services the
exclusive domain of tens of thousands of small businesses like
landscapers, cabinet makers and general contractors? You need to identify
which channels are the best match for your products based on the ideal
end-user profile, the price point of the product, and the pre- and post-sales
support required.

On the next few pages, you’ll find a channel analysis matrix and a channel
management checklist to help you determine which channels might be
suitable for your product as well as potential metrics to measure within the
channels. Again, this example is for a high-tech firm.

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Channel Analysis Matrix


Direct Service VAR
Item OEM Retail Etail Disti
Resp. Provider SI
Business Model Review

GM%
OPEX%
Rev/Head
Business Drivers
Current Trends
Cost of Doing Business Review

Key Decision Maker Titles


Create Demand? Create Branding?
Fulfill Demand?
Support their end user?
Soft dollars required?
Types of soft dollars
Level of soft dollars
Control over marketing programs/$$$
Order cycle time – order to “shelf”
Bill-to order characteristics
Ship-to order characteristics
Cash flow impact/DSO profile
Returns profile
Contract/paperwork characteristics
Packaging requirements
Training requirements
Sell-through activities required
Cross-sell/promo opportunities
Field coverage required
Inside coverage required
Support requirements
What’s needed to sell/close/launch?
Channel Penetration Strategies

One only
All channels, first come, first serve
Selected, prioritized based on goals
Exclusive or Non-exclusive
Account Penetration Strategies In Each Channel

One only
All accounts, first come, first serve
Selected, prioritized based on goals
Exclusive or Non-exclusive

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Channel Management Checklist Example

Strategic

Ø ROI and profit and loss statement by channel


Ø ROI and profit and loss statement by product
Ø ROI and profit and loss statement by product within a given channel
Ø ROI and profit and loss statement by geography
Ø Expense to sales and revenue per head models by channel and
geography
Ø Expense to sales and revenue per head models by product
Ø Sales forecasting integrated across sales (dollars by channel),
marketing (products in units and dollars), manufacturing,
operations (units) and finance (revenue recognition net of
allowances)
Ø ROI on marketing programs in any given channel, on any given
product or on a product within a channel

Tactical

Detailed channel, customer analysis and modeling:

Ø Who are the top ten customers by product?


Ø Who are the top ten customers by total revenue?
Ø What percentage of my customers equals 80 percent of my
revenues?
Ø What is the ASP by product by customer type?
Ø How many customers only bought one product? Two or more?
What percentage do they make of the total?
Ø How many unique customers buy every month? What are the year-
over-year and quarter-over-quarter changes?
Ø How many new customers buy every month? What are the year-
over-year and quarter-over-quarter changes?
Ø How many past customers did not buy from us last month? Which
ones?

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Ø By product, what is the average purchase size of these new


customers?
Ø By channel and customer, what is my inventory position, in units
and dollars? Sell through?
Ø By product, what is my inventory position, in units and dollars?
Sell through?
Ø By product, by channel and customer, what is my inventory
position, in units and dollars? Sell through?
Ø What does sell through need to be to hit different revenue
numbers? Which are the best accounts for me to target for
additional revenue?
Ø What percentage of sales is MDF, co-op, rebate? What are the
year-over-year and quarter-over-quarter changes? What happened
to sales during those time periods? What is the ROI on that?
Ø Based on the ratios immediately above, what additional MDF will
be required to hit the new, higher goal?
Ø Where is the MDF being spent—by product, by channel, by
activity type?
Ø How many units per store per week need to sell to hit the retail
revenue target?
Ø What percentage of my retail inventory is in stock versus out of
stock?
Ø What is the average price by chain and how does that compare to
what it’s supposed to be?
Ø POP compliance reporting—facings, end caps, shelf talkers.
Ø What is my unit and dollar volume by store and chain?
Ø What is my unit and dollar volume across stores and chains but
totaled by region?
Ø What are my lost sales based on the stock-out percentages?
Ø What percentage of quota is each sales person, channel and
product? What is the delta in dollars and percentage? What are the
sales per day required to achieve quota by person and by channel?

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Tactical

Detailed product and order analysis and modeling:

Ø What are the top-selling products in units and dollars, overall and
by channel? What are the year-over-year and quarter-over-quarter
changes?
Ø What is the ASP by product, by channel and overall? What are the
year-over-year and quarter-over-quarter changes?
Ø How many orders per day, overall, by channel and geography?
What are the year-over-year and quarter-over-quarter changes?
Ø How many orders by order size by channel and geography.
Example: less than $1K, $1K – $5K, $5K – $10K, $10K – $50K.
What are the year-over-year and quarter-over-quarter changes?
The same questions apply to the aggregate amount of revenue in
each of those categories.
Ø Compare the list price to actual selling prices. Which products are
being discounted the most in dollars and percent? Does it vary by
order size or channel? How many dollars of profit are we losing
based on those extra discounts? When in the quarter are the most
price changes occurring? Are there any trends by sales rep, branch
or channel?
Ø How many orders have more than one unique product on it? What
is the percentage of overall orders?
Ø What is the average number of line items per order? What is the
average order size? How much does it vary by channel?
Ø How many orders have a maintenance contract on it? What is the
percentage of overall orders?
Ø How many orders have free freight included? What is the
percentage of overall orders? What is the dollar amount being
covered?
Ø How do order dollars and unit volume vary by day-of-the-week,
week-of-the-month, month-of-the-quarter and quarter-of-the-year.
Ø What is the net revenue of each order by channel, based on return
rates, defectives, MDF, rebate, co-op, special deals or terms and
sell-through trends?
Ø Accounts receivable reconciliation—how do I collect the cash and
what amount do I ask for?

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Successful Indirect Sales Channel Principles—Cross Them At Your


Own Peril

Now that you have decided to create an indirect sales channel, it’s time to
review the fundamental principles of success in any channel program.
These principles for success are battle proven across all industry lines,
product and service categories, and geographies. I’ve seen them work at
start-ups, fast-growth firms, mid-size firms and large Fortune 500
enterprises. I’ve also seen successful companies violate these principles at
their own peril—resulting in market share and revenue losses, declining
profitability and erosion of their customer bases. Review this list
frequently, especially when you’re evaluating adding new channels,
modifying existing channels and, of course, exiting channels.

All channels are not created equal. This applies to what markets each
channel can reach, the cost to reach those markets, the services each
channel can provide and, finally, the P&L of each channel as well. Don’t
expect each channel to deliver the same level of revenue, gross profit or
operating profit in dollars or percentage, because that isn’t possible based
on the different business models each channel has developed.

All channels are connected, whether you plan for it or not, so plan for
it. Customers have access to more information than ever before. They are
more sophisticated. They are more connected than ever before. Never
assume that your channel programs will remain in channel-specific silos.
Never assume that customers in one channel will not find out about special
pricing, promotions or programs in another channel.

Channels can synergistically sell (increase sales) for you or they can
compete (decrease profits) for you so, again, plan for the former and
do everything you can to prevent the latter. You need to understand
how customers use each of your various channels for each step in the
procurement process. They might use the Web for early, initial research,
then call an inside sales person to get some specific questions answered,
then develop a request for a quote that goes directly to the manufacturer
AND to multiple channel partners found on their Web site and so on. The
point is that you need to understand how each customer procures their

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products and where they like to go for that information, and then make
sure you have the right channels in the right place with the right
information to enable the customer to make a decision as easily as
possible.

Channel conflict can be minimized through clear rules of engagement.


Each sales team and each channel should have clear goals, rules of
engagement, programs, business models and compensation plans that
reinforce the go-to-market strategy and minimize conflict and friction.
Even with all of this in place, it will still take principle-centered leadership
within the sales and marketing departments to manage all of the various
“one off” situations that always seem to pop up! Please see Appendix 3 for
detailed rules of engagement and partnering principles.

Channels have life cycles too, so make sure you are in all of the right
channels to diversify your revenue streams. If one channel gains share
at the expense of another channel, and you are in both channels, you will
most likely be okay. If you are only in the channel that lost share, then you
probably missed your revenue numbers as well. Monitor each channel’s
revenue growth and make sure that you are properly protected on the
downside while ensuring that you are not too highly dependent on one
channel on the upside. If you see one channel really taking off at the
expense of another, you should re-evaluate your channel investments to
make sure they are optimized. In some cases, you might decide to invest
more in the channel that is losing share for some strategic reason, or you
might decide to cap investments in that channel at the current level to free
up dollars to invest in the emerging fast-growth channel. Just be aware
that all channels have life cycles and monitor investments and programs
on a periodic basis.

It’s the pricing model, stupid! All good channel programs have as their
basis the following objective: The price to the end user is within a narrow
band (+/-10%), regardless of which channel the customer decided to buy
from. The determining factor for the customer to choose should not be
price, but what services (or lack thereof) that channel is able to provide.

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Optimizing Indirect And Direct Sales Channels

Let’s assume that you have successfully established indirect channels or


that you joined a company with indirect channels in place. How can you
optimize indirect and direct channels and leverage each of their strengths?

The first step you need to take is to do an audit of how channels are
performing, both from your perspective AND from your customer’s
perspective. Here are some great questions for your audit. Please note that
the word “channel” here is used to cover both direct and indirect channels.

Your Perspective

Ø What are your current channels? How have they evolved?


Ø What percentage of revenue does each channel contribute?
Ø Which channels are your most profitable? Which channels are your
least profitable?
Ø Which channels cause the most conflict? Why?
Ø Which channels actually work together to increase sales? How?
Ø What does your market coverage model look like? How have you
assigned channels to the various markets and segments?
Ø What percentage share of each channel does the competition own?
Ø What do your competitors use each channel for? How well are they
working for them?
Ø What non-traditional channels might be used to reach your target
markets?
Ø What additional filters should be used? P&L by each channel?
Channel profitability and ROI? Cost to serve? Time to market?
Diversification of risk?

Your Customer’s Perspective—The Channel Experience Audit

Ø Please describe your overall relationship with our firm.


Ø Please describe your experience with our firm when we make a
mistake.

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Ø Please describe your experience with a recent or large purchase


with our firm.
Ø Are we the easiest company to do business with?
o If not, why not and who is?
Ø Where do you get your:
o Pricing
o Product Information
o Pre-Sales Support
o Post-Sales Support
Ø How would you rate our execution on:
o Pricing
o Product Information
o Pre-Sales Support
o Post-Sales Support
Ø What three things would you like to see us start doing?
Ø What three things would you like to see us stop doing?
Ø What one thing is our competition doing better than us that means
a lot to you?
Ø What would we have to do to double our business with you in the
next 12 months?

At the end of this audit, you will come away with a good overview of
which channels are performing as intended and which ones are not. Even
better, this valuable information will be validated from your customer’s
perspective; not just your own.

However, channel conflict does happen, even within firms with the best of
intentions. In fact, by following the steps in this section of the book, you
will have a huge head start in creating a powerful go-to-market strategy
that has a minimal amount of channel friction or conflict. When you do
run into it, and you will, you need to look at your compensation system for
your own sales people and at the compensation system for your channel
partners.

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Building a Compensation System That Optimizes Indirect and Direct


Sales Channels

Let’s start off with some basic compensation principles:

1. Clearly defined and communicated corporate objectives are the


foundation for all compensation plans.
2. Your go-to-market strategy must be integrated with your
compensation plan. The profitability of your channel will mirror the
compensation plan for your sales team.
3. Sales objectives, and hence the sales incentive structure, either
through the channel or direct, must be linked with these corporate
objectives.
4. Goals, compensation and performance management are all integrated
—you can’t change one without impacting the others

There must be a “sales management” process in place to hold both sales


people and channel partners accountable for performance. Compensation
plans CAN be a substitute for sales leadership. While this is not the right
way to go about things, it is a fact of life—people work their
compensation plans. Period. I’ve seen highly motivated, aggressive, quota-
busting sales forces working for sales managers with little to no sales
management training, experience or background. I’ve seen just the
opposite—when compensation plans are out of alignment with corporate
objectives, sales leadership is rendered totally ineffective at best. At worst,
the compensation plans can actually create an “us versus them” mentality,
with sales management becoming the enemy! To liberally paraphrase a
political campaign slogan, “It’s the compensation plan stupid!” As
corporate objectives change, so may be the need for a change in channel
compensation. No magic pay plan exists—the key is consistent and
periodic review of objectives, plans and results.

In many companies, the primary source of channel conflict is simply this:

Ø Unrealistic goals established by the CEO to align the sales


organization with what was promised to the shareholders

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Death of a Leader

Ø This forces unnatural acts at end-of-month and quarter


Ø These unnatural acts decimate the pricing model and are reinforced
by the sales rep compensation plans
Ø This frustrates, confuses and undermines the channel to the point
of the channel actually divesting itself of the partnership and
looking to partner with your competitors—which is exactly the
opposite of what you want!

Goals must communicate what’s important, ensure the proper customer


focus and reinforce the desired sales culture. Well set channel goals,
combined with a good channel compensation plan, motivates, reinforces
and rewards specific behaviors of the sales organization that align with
and support strategic corporate goals. A good sales model is all about
demand generation, territory coverage, account penetration and,
ultimately, share of the customer’s total spending.

So do your best to ensure that the sales teams earn at least as much on an
indirect sale as on a direct sale and, if you are really serious about the
channel, make it more lucrative to have the business go indirect. One way
this can be accomplished is with commission uplifts to overcome the
channel pricing model. Some real-world examples follow.

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Goals and Compensation Example

Pricing Model Example Item

List $ 100
Street Price $ 80
VAR Acquisition Cost $ 60
VAR Margin to List 40%
VAR Margin to Street Price 25%

If an uplift is not in place, the sales


rep will take the order direct at the
An uplift must be in place to street price. They will make more
overcome the VAR acquisition commission because the street price
cost being the basis for the becomes their basis for commission
sales rep’s commission. and is higher than the VAR
acquisition cost.

Uplift Example of How to Overcome the VAR Acquisition Price Issue


Direct Channel
List $ 25,000 List $ 25,000

Street Price $ 20,000 VAR Acquisition Cost $ 15,000


Commission (5%) $ 1,000 Uplift of 35% $ 5,250
Commissionable
Amount $ 20,250
Commission (5%) $ 1,013

Notice that it takes an uplift of 35 percent to overcome the VAR


acquisition cost issue. If you choose a lower uplift, the sales rep will
“work his compensation plan” and a large percentage of the deals, if not
all of them, will go direct.

Don’t kid yourself by saying things like, “Smart reps will route this
business through the channel because it multiplies their feet on the
street and will make them more money in the long term.” There is no
long term in the sales business. It’s the compensation plan, stupid!

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Death of a Leader

Creating Hard and Soft Decks to Optimize Your Indirect and Direct
Channels

Building an integrated compensation system is crucial to optimizing direct


and indirect channels, but you need to do one more thing. Make sure that
your channels are pointed at, and focused on, very specific market
segments that they are best suited for. You want each channel servicing
the customer segment that they serve best. In the pricing and profitability
section, you’ll see how to set up your pricing to remove that as source of
channel conflict. For now, let’s make sure your sales team and each
channel stays focused where you need them to focus and where they have
the best chance to win.

The best way to do this is to create hard decks that sales reps are unable to
drop below, and soft decks that provide the flexibility to do what is right
to win the business without impacting the sale rep’s compensation. Below
is a real-world example of how a software firm could do exactly that!

In this example, if the direct field sales team tries to drop down below the
enterprise account level, which must have at least 1,000 employees, they
can take the order, but they won’t receive any commission on it. This

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Death of a Leader

should ensure that the direct sales team leverages their finite and
expensive resources on the accounts with the highest possible ROI. As you
move into the mid-market, sales reps will earn the same amount of money
whether the orders flow directly to the firm or through the channel. If the
sales reps are smart, they know that routing orders through the channel
increases their revenue potential because more people are selling their
products within their territory and, since they get the same credit either
way, it should be a “no brainer.”

However, we can’t have even moderately expensive sales resources


deployed in SMB space, where firms have less than 100 employees (and
the majority of them have less than 20 employees). All of these orders
need to go through the channel. If someone has to buy it direct, they can
do so only at list price (which will be rare).

Please notice that as the customer segment drops in revenue potential


(from the high of large enterprises with thousands of employees to the low
end of a small business with less than 100 employees), we also are
reducing the cost of our selling resources and the percentage of overall
selling investment. What we’re doing is trying to balance our cost to serve
a customer segment with that customer segment’s revenue and profit
potential. On the flip side, we want to invest in customer segments that
have the highest revenue and profit potential for our firm.

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Death of a Leader

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