Michelle Rodger: Why a foot in the door is worth more than a quick buck

Published on Saturday 12 December 2009 13:31

BEING in sales isn't easy. Particularly in 2009. And it will mean a lean Christmas for some. Bonuses are based on meeting crucial financial targets, and that has been tougher than ever lately. As a result, the past 12 months have seen some desperate techniques to achieve sales targets. Gross margins have been squeezed to the point that some deals make virtually no profit at all.

Buying the sales for a quick turnover fix won't help the cash flow, and the short-term gain will almost certainly lead to long-term pain.

I'm sure you've heard it all before: "Get the sale, no matter the cost" and "If a client's on my books, he's not paying my competitors".

But what about "Win the client's trust first, we'll make a profit later"? That's not so common, yet customer lifetime value is a simple philosophy that can help recession-proof your business.

Customer lifetime value is defined as the net present value of the profit an organisation expects to realise from a customer for the duration of their relationship. Put simply it's the opposite of the current sales model, it means considering short-term pain for longer term gain.

Dave McConachie has spent many years in sales and appreciates that lots of people either don't have the time to consider customer lifetime value or look at it from a strategic point of view. The former IT entrepreneur has seen it all; salesmen running around trying to acquire clients, in many cases not making much money on the sale and failing to consider that they might not be able to sell them much more beyond the initial deal.

In the short term that's fine, says McConachie, the sales are there, but in the long term the client isn't necessarily one that will deliver much more over the rest of the lifetime cycle.

Any company aiming for a sustainable sales model has got to be looking at customer equity (the total combined customer lifetime values of all of a company's customers) and customer brand equity.

To grow a business of value, McConachie believes you need to align yourself with people and businesses that have the same goals and growth ambitions as you do. The equity of the customer is not in the short term but looking three to five years ahead and beyond.

Consider the creative sector, agencies hoping to win a pitch for a new logo, a new brand, or an advertising campaign. A huge amount of effort goes into the creative preparation; time and money that isn't necessarily recouped in the first invoice. And that's assuming they actually win the contract.

Alan Ramsay of Connect Communications admits it's tough to put in those unbilled hours only to miss out on a contract by the smallest of margins. But, he says, taking the short-term benefit over lifetime value is a shortsighted strategy for a shortlived business. The foot in the door tends to lead to bigger things.

Just like any personal relationship, you have to give to receive. Ramsay says Connect gives by innovating, adding value, doing what they do very well and being mindful of the budget. This builds loyalty and when you consistently maintain such a high level of service you'll build trust – and that's priceless.

"We're not denying that trading has been tougher this year," says Ramsay. "But good relationships have helped us weather the worst of the storm. We're under no illusion that relationship management ring fences a client's budget."

The IT sector is different. Selling PCs and IT equipment is traditionally low-margin, little more than box-shifting for buttons. But Kevin Ashcroft of IT business OCD takes a different approach. He appreciates that the difference in cost of getting a new customer, as opposed to retaining one, is significant, particularly for IT companies. OCD's team invests a lot of time and money up front; sales people as well as technical people work together to investigate, audit and then scope the project, engaging with the client to ensure the right proposal for the customer is created and agreed.

This builds trust in the early stages and investing that time is really important, says managing director Ashcroft. It means that in the first year OCD generally doesn't make much money, or very little, from a new client.

But that's where OCD benefits from lifetime value, and some of their clients have been with them since the firm began 15 years ago. OCD customers are now looking to renew on two or three-year contracts, when one year is the norm.

Says Ashcroft: "The longer contracts strengthen our business, our customers are bound to us for longer and that gives us better market protection."

Building customer equity through understanding and leveraging the customer lifetime value leads to higher profits and the powerful impact of word-of-mouth referral, so why continue to compete on price and convenience? I suggest it should be top of every salesman's list of New Year's Resolutions.