Generating Steep Rewards through Intelligent Pricing and Sales Effectiveness

Capital Machine Manufacturer generating $250M in revenue

Client Situation

The company sold machines averaging $1M per unit and was the premium quality supplier in its industry, with a recognized brand name, and always priced between 15 to 30% above all other suppliers. The US subsidiary was responsible for sales, light manufacturing and final assembly, and was was the national service provider for training and maintenance.

In recent years, the US subsidiary was revenue neutral and had a prior 3 year EBITDA averaging just 1.2%.

The US CFO had ambitious plans to invest in improving their operating systems and technology. It would wipe out all earnings for a year with the promise of increasing earnings in future years. Before moving forward, we were retained by the CFO, with support from the US CEO, to find out “what the hell is going on” before any investments were made. We were given free rein to examine every nook and cranny affecting their performance, and began a deep dive into every moving piece of the US subsidiary’s operation.

Findings

We found a corporate culture obsessed with “best in class” quality and exceptional customer service. Senior management reinforced this culture at every turn, and it was echoed at all company levels. Their “on time” delivery was an admirable 92%, and cash flow was reasonable enough to manage continuing operations. Their technology platform was outdated, understandably drawing the attention of the CFO who wanted to invest in IT, yet we found their systems serviceable for the time being. We concluded, the issue was not with the company’s “back-end”, which was productive, well managed, largely efficient and even admirable.

Knowing that revenues had been flat for 3 straight years, we turned our attention to sales & marketing and systematically asked and answered questions to understand the root cause behind the company’s lackluster performance:

  • Had industry demand fallen? Their industry was dominated by 4 manufacturers, with only one manufacturing in the US, so we turned to export / import data as a proxy for market demand and surprisingly, found a slight increase of imports in the company’s sector.  We concluded industry demand was not a root cause of their revenue problem.
  • Was competition stealing market share? We found their marketing spend was one tenth of 1% of revenue and while anemic, this spend was similar to prior years. The company had not changed their core message for some time, however our competitive research uncovered no major advertising changes that would affect market share.
  • Was pricing or the sales team to blame? Almost immediately we discovered their sales tools, policies, behaviors, and “espirit d’ corps” was “set up for failure”. The staff themselves were competent professionals, but morale was at rock bottom and much of their activity lacked justification. To pinpoint every issue at the heart of the situation, we invested a full month interviewing all sales and sales management staff, listening as each person responded to our question “what do you think is wrong with sales?” and probing each area they identified.

After months of digging, we uncovered their root problem was quite simple: the parent company exerted 100% control of all sales activity in the US market. Through transfer pricing and approval of all sales quotes, they fully controlled gross margin. Further, the parent controlled where they prospected, required onerous opportunity update practices, and had poorly trained and equipped sales to answer common prospect questions such as, “why are you priced so high”? Admittedly, we were dumbfounded that the US sales force relied on the company’s brand and reputation for quality in order to justify their product’s premium pricing and further they could not “prove the economic value” of a $1M capital equipment expenditure.

After months of digging, we uncovered their root problem was quite simple: the parent company exerted 100% control of all sales activity in the US market and stemming from this, the US sales force relied on the company’s brand and reputation for quality in order to justify their product’s premium pricing.

Recommendations

We recommended two solutions:

  1. Equip and re-train the sales force with important, necessary tools to professionally “sell” and “support” their premium product, including information that would “financially rationalize” their product’s premium pricing.
  2. The US CEO needed to disrupt the control-heavy relationship with the parent company and gain necessary latitude for his sales team to price and sell as US management determined optimal. Both the US CEO & CFO were aware of the parent’s pricing control, but unaware of the extent to which it wasted staff time and slowed sales activity.

To our delight, our presentation of findings and recommendations was met with ponderous silence and then an actual standing ovation!

Solution

Within just one week we designed a spreadsheet-based calculator, for use by all customer and prospect-facing staff, to demonstrate how their higher-quality machinery produced accounting and manufacturing benefits would accrue to deliver greater long-term value to the customer when compared to the company’s lower-priced competitors.

Upon completing a 3-day training session on how to use this new weapon, including drills and tests on the last day, morale was sky high, with comments like: “I can’t believe how I sold anything before seeing this“ and “How can I possibly lose a sale with all this “stuff”?

Next, we armed the CEO with hard information and facts about the state of affairs in the US sales department, for his presentation to the parent company’s President. The two most damning facts were:

  • Due to “call-on lists” and reporting demands of the parent, it was conservatively estimated that between 33% & up to 40% of the time sales people spent was wasted on satisfying the parent company’s reporting mandates and approval policies.
  • The sales staff provided a list of opportunities for which a quote had been requested, and which had been lost to a competitor before the company’s sales person even received an internally approved quote. The company took as long as 2 weeks to approve a quote when competitors required no more than 24 hours.

Results

A year after training customer-facing staff to demonstrate the value of their offering and guide the US CEO to reclaim control over pricing and closing, we measured the following results:

  • Revenue was up 8%, and13% greater in the next fiscal year plan.
  • EBITDA doubled in 12 months. This was admittedly a direct result of the US controlling its own pricing, and the slightly higher prices they justified using the economic value calculator we developed.  We anticipate it would continue to rise further.
  • Sales force morale continued to be “off the charts”.
  • The US Head of Sales was re-assigned back to headquarters, and a new VP Sales was hired from the US market.
  • The HQ Head of International Sales was re-assigned.
  • The US CEO was promoted to headquarters, with global responsibilities.
  • The US CFO became the new US CEO.
  • We remain on speed dial with the client.

Sales force morale continued to be “off the charts”.

 

 

 

 

8%

Revenue growth

13%

Revenue growth forecasted

in the next fiscal year

 

 

 

 

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Generating Steep Rewards through Intelligent Pricing and Sales Effectiveness