Friday, May 15, 2009

Profit and loss

To say selling in a recession is hard should elicit eye rolling and something sounding like "duh."

It seems organizations have taken one of two strategies to manage their revenue during the current economic downturn, an aggressive new business development campaign or a conservative "retention" strategy. The former works best for relatively new market entrants, but is unsustainable long term because the reduction in service or value is not enough to maintain clients won over on price. The former sort of works for established market participants; however, while an organization pursuing a "retention" strategy may keep current clients, they won't retain the same level of revenue.

Consider this example. A client who is currently worth $100 per year to your organization says they need to cut costs and may be considering the competition. At best, you can hope to keep that client at $80 per year, but reality is that client will probably be worth between $50-60. Already you are in a $40-50 hole from last year with one client no matter which direction you go.

I feel there are three simple things "retention" organizations can do to actually maintain or grow their revenue in a downturn.

1) Increase service for the same value - keep your client at $100, but offer $150 in services; ideally this is done proactively so your client doesn't have time to start casting about for different services, but may be a defensive move to counter a competitive attack. At first blush, this approach would appear to work best in high margin industries; however, the extra $50 in service could come from faster delivery time, increased maintenance or preferential access to new products.

2) Focus on the bottom 20% of your client base - when was the last time you spoke with the client bring in $5 per year? How many of your products do they buy? Do they even know you offer other products? That $5 per year client could turn into a $20 or $25 per year client with minimal effort on the part of your sales team.

3) Organic new business development - at the start of our example, your $100 per year client is now a $50-60 per year client, leaving a $40-50 hole to fill. You might be able to fill in some of that hole by following strategy #2; however, the only way to get back to net zero or positive revenue growth is to seek out organizations that aren't doing business with your organization. Yes, your competitors clients are the easiest place to start (how happy is their bottom 20%?); however, a quick rethink of how you position your services should open up at least one new target market for you to pursue.

"Blue ocean strategy" is on the way to being a business cliche, but the reason phrases become cliches is there was some truth to them once. Being the first to reposition your products into new a market forces your competitor to act defensively, allowing you to take your competitors' clients who are being ignored in your original market and make further plans for new business growth.

How is your organization attempting to maintain or grow in this economy?

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