The
Full Contact Sport of Creating Business Customers
by Tim Smith, PhD, 9 July 2003
<back
| |
next>
Janice & Mike’s Quandary at
XYZ Corp.
Janice, Salesperson at XYZ Corp: “I
have been cold-calling these prospects, but they don’t
want to talk to me. When we do talk, they always say ‘XYZ
who?’ Can we try a different method?”
Mike, Sales Manager at XYZ Corp: “That’s
the nature of the game. It’s a number’s game.
You have to go through ten contacts to make one meaningful
conversation. That is just the way it is. You’re doing
a good job. Keep it up.”
Janice: “I understand that it is a numbers
game, but the success ratio that I am getting is closer to
one in a hundred than one in ten. Can we try warming up our
calls with a letter?”
Mike: “Janice, thanks for coming to me
with this problem. Have you tried working on your telephone
presence? Why don’t you try role playing with a tape
recorder. Record your pitch, listen to it, and find ways to
improve your telephone presence. I am sure you can improve
your ratio.”
Janice: “Thanks for the suggestion. I
will be glad to work on my telephone presence if you feel
it needs improvement. But the other salespeople aren’t
hitting one in ten either. I would like to try warming up
my calls with a letter, then calling them.”
Mike: “Janice, if we were to mail every
prospect, it would cost too much and put us out of budget.
Plus, people don’t read junk mail, they just put it
in the recycling bin. It’s a waste of money. Just work
on you telephone presence and give me better results next
month.”
Janice and Mike’s conversation ends here,
but will the situation at XYZ improve?
Constantly Improving the
Challenged Area
Prospecting the target market to find potential customers
in business markets is an arduous task. If there was a simple
effective method that efficiently sifted through the universe
defined by the target market and found qualified prospects,
the people that could execute that method would be sought
by every company. Until we develop that perfect approach,
continual improvement is the goal.
Conversations similar to Janice and Mike’s
have been held several times in several businesses. At issue
is whether the approach should be improved or if the people
executing the approach should be improved. While we can’t
resolve Janice & Mike’s quandary, we must solve
our own.
Determining whether a business should practice
cold-calling or warming the call with direct mail can be a
low-cost experimental and analytical effort. The value of
the effort can be measured by the increased effectiveness
of creating customers within a given sales and marketing budget.
As with scientific experiments, the business can formulate
a hypothesis, test the hypothesis, collect results, analyze
the results, and determine the best approach. Unlike a scientific
experiment, the effort doesn’t just produce an answer,
it produces an implementable business development effort that
drives revenue cost efficiently. The result is a route to
the constant improvement of the business.
Getting in Contact
In the situation of Janice and Mike, XYZ Corp. has the opportunity
to explore alternative methods of getting in contact with
their target market. XYZ Corp. can continue with cold-calling
only or expand the effort to include direct mail to warm the
call. Which method XYZ Corp. selects shouldn’t be based
on managerial bravado, but rather on that which produces the
most revenue at the lowest cost.
Producing revenue at the lowest cost is a quantifiable
issue. Business managers can leave the measurement up to the
end result of dollars spent compared to dollars captured.
This is a broad stroke approach. Broad strokes leave many
undefined and unanswered questions along the way. By clarifying
the intermediate questions and uncovering the answers, the
business can improve its performance at every level of operations.
An intermediate measure of the effectiveness
of cold-calling versus direct mail and warm-calling can be
as simple as counting the number of meaningful conversations
held with prospects. The term “meaningful conversations”
should be interpreted as a conversation with a prospect that
moves the sale forward by converting a prospect that is aware
of the company to a prospect that will investigate the offerings
of the company. Signs of prospect interest in investigating
the offerings of the company include the unprompted request
for marketing literature, the request for a call back at a
later date, the request to contact a business associate within
the same firm, or any other prospect request that provides
the opportunity to increase the strength of the business relationship.
Cost effectiveness between different contact
methods should be compared in dollar terms. The dollar cost
metric of interest is the full cost expended per meaningful
conversation created. Full cost expenditures include not only
the cost of letterhead and stamps or the telephone bill, but
also the fully loaded cost of employees’ time. Often,
the indirect cost of employees’ time is far greater
than the direct cost of telephone bills and office supplies.
Once the cost effectiveness has been quantified
by the dollars expended per meaningful conversation created,
the most efficient contact channel can be selected. The business
can then implement the contact methodology with confidence
that this is the best solution for the time given the current
options. The results should show up in future earnings reports.
Quantified
Comparisons for Selecting the Contact Channel of XYZ Corp.
For an example of how a business can implement the metrics,
comparisons, and decisions for selecting the contact method,
we provide the following calculations for XYZ Corp. These
calculations are based upon a real business serving a business
market, but we strongly encourage interested business managers
to conduct their calculations using their own numbers, costs,
and measured results.
Costs
The cost of direct mail is calculated by totaling the cost
of drafting, producing, and mailing the letter. A company
can utilize a mail service, produce post cards, or take other
actions. We have selected to consider the simple posting of
letters because this is usually the first approach accessible
to growing businesses. While office supply costs vary according
to business operations and scales of economies, the total
cost for letterhead, envelopes, business card stuffers, and
stamps for XYZ Corp. is $0.75. Using standard office equipment
of a computer mail merge and printer, a reasonably diligent
person can produce, sign, and stuff 20 letters an hour. If
the fully loaded labor cost of a salesperson is $40 per hour,
then simple division implies the cost to stuff the letters
is at $2.00 per letter. Summing of the office supply costs
and labor costs, the total cost of directly mailing letters
for XYZ Corp. is $2.75 per prospect. (We have excluded the
cost to draft the letter and prepare addresses for a mail
merge.)
The cost of cold-calling prospects is calculated
by totaling the telecommunications cost and the labor costs
in making the phone calls. XYZ Corp. estimated the average
telecommunications cost per prospect at $1.00. Based upon
past performance, XYZ Corp. knew that their salespeople could
manage up to 100 new prospects per week. Given that the salespeople
also participated in other activities, XYZ Corp. estimated
that on the average salespeople spent four days per week cold-calling.
Using the same fully loaded labor cost of $40 per hour, simple
arithmetic implied an average labor cost of $12.80 per prospect.
Summing telecommunications cost and labor cost, the total
cost for cold-calling for XYZ Corp. is $13.80 per prospect.
Using direct mail to warm the calls, XYZ Corp.
expects its salespeople would be more effective in creating
“meaningful conversation”. This comes at an added
cost. Summing the cost per direct mail letter with the cost
per cold-call, the cost of the combined effort is $16.55 per
prospect for XYZ Corp.
Value
Costs compose half of the metric necessary for sound business
decisions. The other half is the value. In comparing contact
methods, the value is assessed by measuring the effectiveness
in generating meaningful conversations. This can be quantified
as the number of conversations held per number of prospects
contacted within a given sales protocol.
For example, if 1000 cold-calls only produce
10 meaningful conversations, then creating each meaningful
conversation costs XYZ Corp. $1380. If, however, the combination
of 1000 letters and 1000 warm-calls produce 15 conversations,
then the cost to create those conversations is reduced to
$1103. In this numeric example, direct mail for “warming”
the calls is more cost efficient than simply cold-calling.
These cost efficiencies are calculated by dividing the cost
per contact by the number of conversations held per number
of prospects contacted.
Similar calculations can be completed for other
contact methods under consideration. By calculating the cost
efficiency of each contact method, decision-makers can compare
the effectiveness across methods and select the most efficient
means.
To provide some insight into this approach,
we calculated cost efficiencies for XYZ Corp. under the two
different scenarios given different effectiveness at generating
meaningful conversations. See Exhibit 1: Tradeoff Scenarios.
Exhibit 1: Tradeoff Scenarios
|
