26th Mar 2012
Are CRM systems offering a fundamentally flawed way of looking at our customers and prospects?
Around 90% of new leads don’t convert to a sale for most businesses. And yet we spend the majority of our time, effort and money focusing on the 10% that do convert. Why did they come to us and not to our competitors? What was the reason they converted? Of course we need to manage, nurture and grow business from existing customers. But what about the other 90%? There are lessons to be learnt from why they didn’t convert that have a significant and positive impact on business performance.
Our business environment is tougher today than ever before. We’re facing the worst economic slowdown in 80 years. This is after two decades of sustained growth, which saw new markets emerge, trade boundaries removed, and increased competition from international markets. In an uncertain world where control of markets has shifted from suppliers to customers, it has become increasingly important to predict the future behaviour of customers, rather than simply analysing their past.
This is where existing CRM systems fall down. Understanding how your current customers behave doesn’t let you predict what future prospects will do. You might know why your customers leave, but you’re unlikely to know why others didn’t convert in the first place. Neither will CRM used in isolation tell you the likely impact of commercial drivers and limiters on your future business.
To be competitive in today’s environment, a business must understand not just how to manage its customers, but to share commercial intelligence across other parts of the business to foster collaboration on a common business strategy. Buying decisions are no longer based on relationship but made with perfect knowledge and extensive choice.
Surprisingly few businesses have a realistic view of their commercial performance. Their CRM systems only tell them what their sales force have recorded, and what their forecasts (subjectively driven by optimistic sales teams) appear to show. It’s no longer enough to track intentions of customers through interactions and sales forecasting. A new wave of adaptive management thinking is emerging among companies who are outperforming their markets and competitors, even in tough economic times; replacing inaccurate forecasting with reliable sales trajectory and management. It uses three principles to determine sales outcomes:
- Forecasting, i.e. where the business is now. This analyses what current active sales, order bank and backorders look like; and is completely based on fact, not forecast. In other words, what would happen if the business did nothing?
- Sales trajectory is the combination of forecasting and active sales pipeline. Trajectory is a very reliable measure of sales deliverables currently in-hand. But the critical thing here is that the sales pipeline should be quantified using a number of specific commercial performance criteria from the business. All subjectivity, speculation and delinquency should be removed: spurious ‘probabilities of success’ are replaced with data-driven conversion rates; and decay rules applied to avoid false optimism. Sales tails are filtered according to the businesses’ appetite for risk (i.e. below what conversion rate would a lead be considered too speculative to include in the planning trajectory?); and forecasts sensitised using actual measured conversion statistics.
- Trajectory targeting - accurate sales forecasting has little to do with predictions or statements of aspiration. Utilising commercial intelligence derived from lead generation, attrition and sales churn to make continuous improvements that promote drivers and limit the impact of limiters enables management teams to influence future sales outcomes.
But continuous improvement means understanding the real causes of lost sales opportunities. This understanding doesn’t come from micro-managing the number of telephone calls and sales visits made by salesmen. It comes from the effectiveness of lead generation activities. It also comes from understanding the causes of lead attrition and their correlation with commercial processes and the effectiveness of sales inputs. These are generally fundamental issues like pricing, specification, performance, compliance, approval etc. which have a far more significant impact on future sales trajectory than relationship issues. Understanding the impact of commercial drivers on customer conversion rates enables you take corrective action and improve performance.
Often the issues that require corrective action are straight forward to correct once they’re understood. This was the case for a UK flavour and perfumery manufacturer for whom roughly 50% of sales were sold on a sample approval basis; that is to say, customers would request a sample and a price, and if both were satisfactory an order would be placed. A thousand requests were received each month but the conversion rate to sales was extremely low. It transpired that the top reasons for this were late, or no sample delivery and poor follow-up. An investigation quickly determined that the sample department was only capable of making 500 samples per month. The solution was so simple - employing a few extra people in the department plugged an opportunity leak that was costing the company millions of pounds every year.
Lead attrition information is also a hugely rich and valuable source of continuous data about customer reactions to your sales proposition, which CRM on its own doesn’t provide. It is better than any survey because it is 100% based on qualified and identified prospects, and the impact of their attrition on trajectory is measured.
Understanding the market’s reaction to your business is an incredibly powerful way to evaluate the direction in which your business should go, in order to out-perform a tough market. Knowledge really is power.
Brian Hawkes is CEO of a growth management company, Foresite SPA, and a member of the CFO Panel for the international private equity firm, 3i.