As revenues drop, cost cutting is an obvious strategy that businesses employ to maintain profitability.
In fact, shares of Gap (GPS) jumped 27% in November 2008 even as the retailer’s sales fell 8%, due to successful cost-cutting that improved profitability.
Cutting costs is a precautionary measure, best done earlier rather than later.
A fundamental step is an in-depth analysis of your business and the economic environment to understand which areas are performing and which aren’t, and what are the external influencers and trends . For example, what is your business performance by geography and region; by product line; against plan; by channel, by month, quarter… – and what are the recent trends that highlight how the downturn is a ecting your business?
Perform “outlier” analysis, such as reports on the least profitable product lines and geographies.
Typical candidates for cost cutting within sales and marketing include:
Reducing headcount across sales and marketing is more complex today than in previous downturns, argues David Court from The McKinsey Quarterly who states that because today’s sales organizations are much more diverse and sophisticated than in previous times – with roles including product specialists,
telemarketers, industry experts, and competitor analysts – managers must be more careful when forced to make cuts:
“Instead of making across-the-board overhead cuts, a company can rationalize its sales programs while maintaining performance in a variety of ways. Assessing the current sales-coverage model helps the company determine which selling and sales-support formulas are most effective for which types of customers and sales situations and then to rebalance resources as needed. In practice, this approach might mean handling reorders online, covering basic sales and account-management tasks through telesales representatives, and using larger response teams to address major requests for proposals. Another important step is to analyze win–loss ratios in difficult customer negotiations with an eye to determining which sales support groups are most effective and which contribute less and can therefore be trimmed. Streamlining the after-sales process and establishing the appropriate level of customer support can shrink costs as well. Critical to all these moves is an understanding of what customers expect and of the importance of after-sales support to their overall experience.”
Few businesses these days slash marketing budgets in a random manner. Tthe challenges during a downturn is not enough revenue, and it is marketing in combination with sales that are expected to drive more revenue. The
basic principle is for marketing budgets to focus on those activities most likely to deliver cash and profit.
The McKinsey Quarterly’s David Court asserts that the previous approach to a downturn of focusing marketing budgets only on traditional, tried-and-true media is no longer the best approach.
“New communications vehicles such as the Internet, social networking, and mobile devices are gaining scale and delivering results. Meanwhile, classic media such as television have become, at a minimum, much more costly.” He goes on to say that assessing marketing media only by reach and cost to determine their effectiveness is too limited – quality must also be determined. For instance, you may be able to analyze the response of previous
campaigns such as quantity and quality of leads coming in from email campaigns vs direct mail.Analysis of marketing campaign performance is critical to determine what has worked, what hasn’t, and which campaigns
are performing in a changing economic environment. It is also necessary to justify budgets and resource allocations, and to ensure you take a disciplined approach during diffcult timse. USe analytics to closely monitor campaign spending, and to highlight immediately any overruns in budget, or those campaigns that are performing well and should have their budgets increased.
As businesses adjust their marketing message or product offerings during a downturn, ongoing measurement and adjustment is required to tweak performance and to respond to changing market conditions.Once a lead comes through the door, who is responsible for converting and tracking that lead? Sales or marketing? When times are tough, your company’s ability to qualify, close, and convert sales leads into revenue is crucial. You need to
squeeze the most value possible out of each lead.
Whether a lead originates from direct marketing, trade shows, or online advertising, it is well known that the more quickly you follow-up on leads, the better your chances of closing the sales. However, in the current economic climate, it is also just as critical to ensure you are chasing the right leads and not wasting vast
amounts of sales energy and resources on leads that go nowhere.
Often it can be a struggle between quickly following-up the leads you have, and the need to carefully qualify those leads to identify those that pose a true sales opportunity. While the amount of information required to qualify leads varies between organizations, analytics can help to identify, by campaign, which leads are qualified and which are cold leads. Analytics pinpoint those opportunities with the highest probability of conversion to sales, determine lead conversion rates, identify stale leads, and ensure well-qualified leads further along in the cycle are given sufficient attention to close the deal.
In a downturn, sales cycles are often longer. Buying decisions are either delayed, or customers are increasingly choosy. This means that more attention needs to be given to nurturing existing leads. A study by the Aberdeen Group found that 56 per cent of businesses do not have a formal lead nurturing scheme in place and the majority of those that do are driven by productivity and fianncial reasons. “The goal of lead nurturing is to solidify your
company as a trusted adviser and a source of thought leadership for your prospects and customers,” commented Ian Michiels of The Aberdeen Group. Just one example of a lead nurturing strategy is to produce more campaigns and material that show prospects how to put forward a solid business case and justify the return on an investment in your product
Without closely monitoring marketing campaigns – by tracking sales leads back to their source, measuring lead conversion rates, and recording campaign costs – measuring your marketing return on investment (ROI) becomes impossible. This information is critical to make decisions about ongoing marketing investments, particularly in a changing economy.As an example, if your company distributed 10,000 direct mail flyers, it is simply not enough to identify that you received 30 responses. Considerably more information is required to
successfully analyze the campaign’s e ectiveness and ROI. Say for example, those 30 responses returned twice as much revenue as the entire campaign cost. Without proper analysis, a cursory glance at the campaign may have noted a low response rate to the flyer, and the campaign could have been shelved.Analytics can be used to highlight the cost to your organization in capturing each lead. By improving analysis of lead costs versus lead revenue, you will gain a greater visibility into what works best for your organization in terms of engaging and generating revenue
from prospects and opportunities.
Pricing comes under intense pressure in a downturn. Competition heats up, and existing market positions may become vulnerable. Market leaders may use their position and deeper pockets to pressure market followers, or alternatively, market followers can sometimes turn a downturn to their advantage and leapfrog ahead of the market leader9.
Tony Cram of Britain’s Ashridge Business School also agrees that a downturn provides opportunities: “What you have in a recession is an opportunity to learn faster about changing customers than your competitors and use that insight to gain advantage.” He recommends researching the likely behavior of your most price-sensitive customers rst, and then extrapolating that out to your broader customer base when determining where to make price cuts.
In The McKinsey Quarterly, analysis and research are highlighted as top priorities to setting pricing strategies in a downturn. “…Companies need to manage the pro tability of individual customers and transactions with greater precision, develop richer insights into their customers’ changing needs and price sensitivities, and understand more clearly the microeconomics that shape their own industries and those of their suppliers.”
Some recommended approaches include:
Using transaction-level data to measure the profibility of each customer and to ect where customers are becoming more costly to serve or falling below target profibility. “One industrial company found that more than 20 percent of its customers had fallen below breakeven pro tability, forcing it to raise prices selectively and, where possible, lower cost-to-serve by decreasing delivery frequency, reducing sales support, or fulfiing orders through alternate channels.”
For consumer markets, micromarket analysis may highlight pockets of potential profibility. “One beverage company recently conducted surveys that identi ed staggering dfferences in the potential profibility of customers within individual markets and micromarkets. The price sensitivity of the respondents varied
by as much as a factor of 13 across regional markets, a factor of 5 across cities within them, and a factor of 3 across zip codes within individual cities. Armed with this level of detail, a company can maximize its profitability by focusing on micromarkets less sensitive to prices while also offering discounts or preferential pricing elsewhere to drive sales volumes.
Identify how the changing market is impacting customer needs and the benefits they value. “One plastic resins supplier that had developed a fast-curing resin (to enhance capacity of injection molders when the economy was strong) has now developed a less costly resin that doesn’t cure as quickly. The new resin helps the supplier’s customers decrease costs, because molders are not running at full capacity during the downturn.”
Starwood’s Director of Revenue advises against across-the-board price cuts. He says that from his experience in the hotel industry, in-depth analysis often shows that decreases in demand are confined to a certain area of the business, such as weekend bookings, or corporate bookings from a particular industry sector.
“Don’t give in to the desperation of dropping your rates and crossing your fingers; generating business is hard work,” he states. Instead, he advocates value-adding to stimulate demand, such as offering free breakfasts or internet access
In times of economic slowdown, directors and investors demand more frequent and accurate forecasts and reports. Long-standing assumptions are questioned, and the business is dissected from every way, searching for problem areas and new opportunities. This puts immense pressure on sales and marketing
managers to provide views of data from multiple sources at more granular levels and more frequent time intervals. If this entails manual processes and endless hours in spreadsheets, managers will struggle with the extra reporting demands, and are likely to produce reports that are prone to errors. An investment in the
right tools can be far more valuable than sidelining resources for endless manual reporting, and is also an investment in the longer term that will ensure that the business is agile and responsive to any future change.
Conclusions
For sales and marketing managers, it is normally analytics from the Customer Relationship Management (CRM) system that provides the most useful insight. Some of the reasons these managers must have analytics capabilities in an economic downturn include:
- The volume of reporting and forecasting required increases.
- Relying on manual tools and processes will mean delays and inaccuracies in providing information back to business decision makers.
- When sales and marketing managers are buried in producing reports, less time can be spent in the field, interpreting data, and helping the business to act on opportunities.
Managersneed to reduce manual processes and to provide strategic advice and market condition feedback to their teams and business directors as one of the most valuable parts of their job. Formal, structured reports are not enough. Many established businesses have long-standing reports in place. However a downturn requires ad-hoc, instant questioning of the latest data to determine trends, answer questions and challenge assumptions. This requires far more speed, agility and exibility than is necessary for “standard” management reporting.Data must be communicated accurately and easily. For example, providing decision-makers with dashboards, scorecards and charts help to convey performance metrics instantly, rather than using tabular reports. If formal report
packs need to be generated, it is much more effective to use an online reporting tool that enables multiple types of data to be pulled together and for sales and marketing teams to collaborate, rather than using multiple oine, unsecured tools.
The past few years have seen an increased investment in the use of analytics technology, and case studies show that users are seeing a return on those investments. In a tougher market, purchasing new technology can often be delayed until times are more certain. Contrary to this, slower times of economic growth can actually be the best time to invest in technology that helps to maximize performance and enhance decision-making, and secure
a company’s future.Decision-makers who embrace business analytics applications find that the initial investments in such tools are a low cost way to gain a competitive edge. Slow business periods are the best time to launch new initiatives, for example, implementation times are shortened when business is slowest. This is due to excess capacity in the times of business slowdowns, whereby acceptance of new systems is higher and implementations are more thorough. Th bened for change is also more evidetn when times ae tough
Often organizations are reluctant to change, preferring the devil they know such as spreadsheets, even when they realize the inaccuracies and operational ine ciencies of remaining stagnant. Smart organizations understand that the real question is not whether your company can afford an investment in business analytics, but in such lean markets, what are your competitors doing with analytics, and how can you best target limtied resources.?
Understanding that business analytics is your organization’s greatest shield against a market downturn is a significant advantage to all decision-makers. By transforming raw data into business intelligence and undergoing rigorous questioning and ongoing measurement, your business will be better placed to make accurate and informed strategic decisions, ensuring your organization emerges from a downturn leaner, and
in a strong competitive position.
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