With a decade of research on sales innovation and efficiency in the Nordic countries under his leadership, Professor Parvinen offers insights into the intricacies of distinguishing big customers from average ones.
In this interview, we delve into his perspective on the nature of major customers and the art of managing risk in sales strategies. Professor Parvinen challenges conventional notions and sheds light on the critical role of psychology in estimating customer lifetime value. Furthermore, he explores the delicate balance between reliance on large clients and the potential risks associated with such dependencies. He also addresses the common issue of salespeople not fully grasping product profit margins and offers insights into the ethical and legal aspects of influencing tenders effectively.
Petri is the headline speaker at the upcoming Big Fish sales conference in Tallinn and Riga.
Big deals are often won via tenders. Usually, when the tender is out already, it's too late. How to influence tenders in a way that’s both ethical and legal?
I've done research on the different categories one can use to influence tenders. I found there are 25 aspects you can influence.
When I'm presenting the framework on the aspects in a tender that somebody has influenced – people are always in awe. If you have a look at all of the 25 different aspects, there's no way every single one is going to be illegal. I think everybody should be aware, including the public sector, on what the different parameters are that influence the group of people or companies that will submit a bid for a tender, a proposal for that tender, and the kind of prices they give for that tender.
A construction project is a very good example. What kind of a tender do you need to be able to get any advantage from a construction company or several construction companies offering a fixed price? The only thing that every construction company will do is that they will just count the hours that they expect to spend on it, and then they will put a safety margin on top of that, which means that all of your fixed price tenders will likely be more expensive than tenders based on hourly prices.
If you do the tender preparation really well, you will get companies competing with fixed prices against each other, giving away their certainty and their margin. As a result, you will win as the buying party.
What differentiates a big customer? How would you define a big customer and what's the main difference between big and average?
I think people are quite smart about understanding that it's not necessarily the size that makes a big deal. Instead, it could be the start to something that lasts for a long time, the whole life cycle of the deal will be big.
When you look at the deals in CRM systems, you see that there are no special deal making situations among the largest customers, which means that they're slowly growing and satisfied with you. They are doing repeat purchases of products they already know by having experience of buying from you. Meaning you can have a lot of big deals or big money flow without ever coming across the challenge of making the big sale.
And then when you go into situations where you actually need to have a special means to make the big sale – usually new customer acquisition situations, innovation selling situations where you're selling something that basically nobody's used to buying yet, or you're selling a very long-term relationship where there's a lot of commitment and asset specificity. So it's not necessarily the size of the deal that determines the big deal, if you wish.
Risk is always a huge issue here. When customers know that there's a lot of risk involved, their purchase behaviour changes. More people are involved in the purchase process, and that normally takes a longer time. Your influence strategies as a sales organisation cannot be geared towards winning over a single decision maker by reading that person's mind. You have to start a more complicated team involvement effort.
Does it also mean that the sellers might benefit from redesigning the product? I'll give you an example from the software world. It used to be that you had to buy the software out – it was a bigger decision. Versus the subscription based model, where you pay a relatively small sum of money each month. From the seller's perspective, should they consider redesigning the pricing model to reduce the risk?
Yes. The key word was already opted there. You don't pressurise the customer to make a huge deal, but rather give them a business model related opportunity to get used to the idea of having an opportunity to let go of the relationship.
When people look back at how much money they've been spending on streaming services, for example, they always understand that there is a cost difference compared to the lifetime option. People are willing to pay for the alleviation of the risk.
Sometimes people think it's cheating, but I think it's completely normal. It's hard to talk about it openly, not a lot of salespeople like to tell the customer that if they’re smart then the subscription model has a lot less risk involved. They can always cancel or restart the subscription.
Speaking of a customer lifetime value, it’s very hard to evaluate it beforehand. How would you predict the lifetime value if you don't know how the relationship will go?
There are people who are industrial engineers and then there are people who are economists. Usually, if you've studied economics, you want to understand things very exactly and you shy away from making estimates that really don't have any proof. Whereas, in industrial engineering all things are initially based on people's opinion.
It's not that hard to make life cycle estimates on the back of a cigarette box. It's just a matter of how much money, how many years and the expected margin. And then following it up is not very hard either. You calculate it, divide it by year and after every year you analyse the outcome.
Life cycle estimation is fundamentally about customer psychology – the happiness of the interaction, the fit between the product and the customer need, and all these things that can only be guessed.
It's not difficult mathematics, but there's something in conflict with the CFO type of people's thinking that every estimate needs to be based on perfect facts. It needs to be very rational and they don't play around with estimates. Whereas, this life cycle estimation is fundamentally about customer psychology – the happiness of the interaction, the fit between the product and the customer need, and all these things that can only be guessed.
I personally like to invest in customers who I believe will have the most longevity. I'm willing to have a customer that I make no money on because I think there's probably one customer that deserves it.
Having experience from an advertising agency where over 50 percent of our revenue depended on one big client (who we obviously lost over the years and struggled). When we had this client, everybody was happy, but the risk was also very big. What’s the optimal share of the biggest client in your portfolio and when does it become too risky?
This is an economics question that relates more to the margin and also the asset specificity of your investment. How much of your resources are going to be useless if that customer walks away? If you've built entire factories to serve that customer alone, then you're going to be in a lot of trouble.
A smart company knows that there are big fish out there, but they do come and go. It's not going to be an even ride most probably all throughout the year. So there will be a time when you will lose a customer and there will be a time when you win a big customer. You need to practice something called opportunity management.
Instead of funnel oriented selling, you need to have a practice of soft selling to places, people, markets and opportunities where you know that if you're lucky, then you're going to be winning a big customer. Portfolio opportunity management needs to be maintained while you still have that big customer.
The odds are that at some point you actually get to make the decision of switching over your resources from one customer to another, because your estimate of the longevity of the new big customer is longer than what you expect the old customer to stay.
If there is a customer that makes up a very large share of your business, that means there are more of these customers around.
A famous example from the real estate world. Let's say you are selling your house for 1 million and the agent gets 5% commission. There's not much motivation for the agent to chase a bigger number. An additional hundred thousand would mean 95,000 for the seller, but only 5,000 for the agent. What would be the solution, a higher commission?
I call this the big numbers trap. I think the common solution is to have people who make a living out of doing the add-on sales. If there are people who are compensated based on add-on sales, customer success and the longevity of the relationship, then it's going to be significant.
With industrial deals, for example, you can have people who are responsible for selling the extra software or service package on top of the basics.
These incentive asymmetries are huge in investment banking and mergers acquisition. I even wrote an article almost 20 years ago about all the different incentive asymmetries along the mergers acquisitions process, where some people are selling your company on behalf of you. What do they care about the price? Because as long as they get their two percent, they'll be happy.
So if there's one salesperson responsible, not a team, then they should get higher commission above a certain price range?
Yes. From an economics point of view, that's the only way.
You should make sure that other customers will know whether that salesperson was able to get that extra money. The salesperson's future customer acquisition reference is dependent on whether that person delivered maximum value to the customer and not just the optimal value for themselves.
The way that the investment bankers go around saying that they don’t just make the deal happen and walk away. The big boys at the stock exchange club will tell each other if you did that and then you won't make another deal.
There are many ways in this day and age to make the transparency of the deal better. For example, you can agree to give a customer testimony if the extra price is achieved.
Obviously, the Americans are much harder on these deals. They would talk about their salaries openly to anybody, they would also talk openly about destroying your business in the neighbourhood if any cheating is involved. Whereas, in the Nordic culture we tend to shy away from talking about these money things.
An article on Harvard Business Review quoted Bain & Company claiming 70% of salespeople do not understand the profit margin of the products they're selling. They don't know exactly how much room they have for bargaining. Do you think this is a common problem with salespeople?
Most definitely. There are a number of price transparency or pricing related issues. You have two options and you have to pick one. How much customer specific dynamic pricing do you have? There are companies that are always trying to get the best possible price out of every customer. And they will come across the problem of the customers talking to each other and them getting bad rap about it. If you are really fair to your customers, do that openly and make sure you get some competitive advantage out of it. The other option is to make the most of the demand curve and be discriminating. The same principle applies for your salespeople knowing how much money you make on your products.
Interviewed by Hando Sinisalu
Penned by Ann-Kristin Kruuk