A Business that is NOT Growing is a Dangerous Place
It’s crystal clear that when a business grows in sales and profitability it implies:
- Customers are receiving “good value”
- Employees have better opportunities to improve productivity and get paid more – not to mention that it creates a healthier climate for job security
- Business owners are reaping benefits from improved “enterprise value.”
It’s equally clear that a business that does not grow in both sales and profitability is a dangerous place – a candidate for extinction.
It seems that most business and managers understand the main reasons it is desirable to increase sales. These reasons include:
The typical business loses 15% of its customers per year. This occurs because:
- They move out of the area.
- They go out of business.
- They are sold or merged with another business.
- They decide they no longer need the service.
- Personnel changes disrupt the flow of business.
- The business is lost to a competitor.
These losses need to offset by sales growth or the business will shrink in size and become unprofitable.
A modestly growing business (2% to 6%) in sales supplies fresh profitability to offset increasing operating costs and wages.
A robustly growing business in sales (10% to 25%) grows in profitability. A good growth record increases total enterprise value and can spin off economic dividends. It makes the business worth significantly more to its stakeholders and/or to potential buyers.
Market share is one key to profitability. If you are not among the leaders at growing sales and profitability in your local area, you won’t control your destiny. Your competitors will.
Market dominance correlates with being the low cost producer or service provider. It stands to reason that cost efficiencies in manufacturing or service are related to the number of units handled and that when overhead is spread over more units, there’s better economies of scale.
So why is it that some business owners and general managers balk at making a commitment to growth? Our research revealed that there are three common obstacles::
Obstacle 1: A desire to reduce expenses – particularly sales and marketing expenses.
In economic terms, an expense is the consumption of something of value (usually dollars) for the purpose of generating sales revenue and profit. Expenses are misunderstood by many. They are necessary to produce a profit. For example, it’s easy to “save expenses” by firing all employees. But then, nothing would happen and there would be no business. A more progressive view is to spend money mainly where the expenditure is highly productive in producing sales and profit.
For example, it’s easy to understand the tangible nature of production labor costs. By spending money on direct labor a specific number of units is produced. It’s harder to grasp expenditures for marketing and sales because the nature of these costs is intangible. This is because it’s generally obscure how a specific sale comes about and harder still to relate it to a specific marketing expenditure. In talking about advertising costs, John Wanamaker, an early retail giant, stated, “I know I am wasting half my money on advertising. The trouble is, I don’t know what half.”
The truth of Wanamaker’s insight is still with us and in those managers who slash sales and marketing costs, it is their mantra. Sales and marketing costs are typically significant and it’s difficult, at best, to defend each component of cost. However, when the dust settles if there’s no way left to create market awareness, sales traffic will suffer and market share will dwindle.
Minimal sales and marketing expenditures inevitably leads to a downward spiral in business and surrenders the marketplace to competitors.
Obstacle 2: A lack of confidence in how to increase sales profitably.
Many general managers are uncomfortable with sales because they are not in control of external factors such as the buying decision. They typically are comfortable with internal factors such as controlling the wage and salary compensation within the company. Sadly, there are no shortcuts to building a great sales program. Essentially there are three components:
Sales People : It takes results-oriented sales management and salespeople to earn the confidence of top management and customers alike. People do business with people. They do not do business with organizations. To build a solid sales force, you must start with the right people.
Existing Customers : The best run companies focus on providing a substantial value to existing customers. By using cross-selling techniques to these customers, they grow sales as their customers grow. Some astute companies go so far as to upgrade select customers to become advocates in promoting their products and services. In this way these select customers almost become an extension of the sales force.
Prospects : To generate customers an effective marketing plan also builds layers of impressions to a “target list” of prospects. Research has shown it takes 8 contacts before a prospect becomes a customer. The best run companies are constantly “prospecting, building a database for future sales, and creating new impressions.
Obstacle 3: A “kamikaze instinct.
Unbelievable as it is, some general managers don’t have the motivation or talent to succeed. They lack the confidence to act and are often indecisive. These people destroy initiative in others and, if the organization is fortunate, their tenure will be short-lived. They are relatively easy to spot because the performance of the company suffers greatly during their tenure.
In conclusion, the advantages of growing sales and profitability help all of the company’s stakeholders. The obstacles to building sales must be identified and overcome. To achieve success takes considerable skills and resources. The alternative is an organization that will, by definition, go nowhere and be on “life support.” The way to determine one organization from the other is “based on results.”