ADVERTISEMENT

The Full Contact Sport of Creating Business Customers

July 2003 Marketing, Selling

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

Efficiency Analysis

The most cost efficient approach isn’t a constant. Rather, the most efficient approach is dependent upon that which produces the greatest results at the lowest cost. In some cases, cold-calling is the most cost efficient; in others, the combination of the direct mail and warm-calling is required.

The cost of the contact approach alone can’t determine the method to be used. Judgments based upon cost metric only will guide decision-makers towards the least cost method. This may drive the business to poor achievement and ultimately failure.

Contrawise, the most effective approach at creating meaningful conversations may not be the most cost efficient and productive. Although the most intense and consequently expensive sales and marketing campaign will most likely produce the greatest achievement of awareness and investigation, the business may find that achieving these results comes at a cost too high for sustained operations.

By combining both the cost metric and the effectiveness metric into a single cost efficiency metric, XYZ Corp. is able to create a common metric that compares productivity across contact channels. The cost efficiency metric is the ratio of costs to effectiveness.

Optimal Selection

The optimal business decision is to select the most cost efficient contact method. If Janice’s proposed contact method effectiveness is made relative to cold-calling, the cost efficiencies can be easily compared. Exhibit 2: Select the Most Cost Efficient Method provides a graphical comparison of the cost savings of direct-mail and warm-calling relative to cold-calling as contact effectiveness increases.

XYZ Corp.’s current quandary is whether to seize the opportunity to use direct mail to warm the call or continue with cold-calling. In conducting their analysis, XYZ Corp. realized that the combination had to be 22% more effective than cold-calling alone to be cost justified. This too is demonstrated in Exhibit 2: Select the Most Cost Efficient Method. The Savings/Loss blue curve shows that if the combination of direct mail and warm-calls delivers 22% or more conversations than cold-calling alone, the use of direct mail to warm the calls produces cost savings. Alternatively, if the direct mail and warm-calls can’t increase effectiveness by 22%, then direct mail should be dropped to avoid cost efficiency losses.

Exhibit 2: Select the Most Cost Efficient Method

Making the Decision

Janice and Mike of XYZ Corp. will most likely debate this issue further. As outsiders, we can use the analysis presented to make informed inferences.

If Janice is reporting that only one contact out of hundred will convert from a cold-call to a genuine conversation, then Janice might be better served warming her calls with direct mail. If her hit-ratio merely improves to two out of a hundred, the extra cost will be more than justified. And, as with other efforts, an experiment to determine her improved hit ratio will reveal the facts of effectiveness and costs and enable clear managerial decisions based upon overall cost efficiency.

As for Mike’s concern of the overall budget, selecting to expend the business’s money in a less than fully effective manner is simply irresponsible. The budget should constrain the scope of the operation, not determine the outcome of efficiency and productivity tradeoffs. If the combination of direct mail and cold-calling is more efficient than cold-calling alone, it is his responsibility to convert the operational plan. As for the extra expense of mailing the letters, he should adjust his budget within the overall constraint to make room for improving productivity and delivering better results. If direct mail does not improve the cost efficiency, he must stick to his guns and perhaps provide sales training to his staff.

____________

As a bonus, a downloadable Excell spreadsheet is provided to enable you to conduct your own mini analysis.

Download spreadsheet



About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
More by Tim J. Smith, PhD