Consultative Selling: The Hanan Formula for High-Margin Sales at High Levels

The number one, which is the smallest whole number, can have enormous power. One more product sold every day, one more percentage point added to current revenues or profits every week, or one more day gained every month in the collection of accounts receivable can yield astonishing amounts of improved profits for a customer. Applying the power of one also appeals to customer comfort. Most managers can deal with increments of that magnitude without incurring a disruption of the business whose costs and inefficiencies can nullify the gains. Furthermore, the number one has the power of credibility. Most customers will readily concede that they can improve performance, productivity, or profits by 1 percent.

The power of one is the basis of PIP power. It is your power base for a customer's profit improvement. If the power of one is powerful enough, it may also be your end point. If you propose to increase an inventory manager's turnover cycle, you need to know the power of improving the number of turns by one a year. If your customer were IBM, with a $10 billion inventory that was turning over 2.8 times a year, each additional turn can save $2 billion in cash that no longer needs to be tied up financing unsold computers. If you propose to decrease an airline manager's operating costs, you need to know the power of reducing costs by each cent. If your customer were Delta, each 1 cent reduction in the cost of flying one seat one mile can earn the equivalent of $600 million a year in new revenues.

The power of one applies equally across the board of customer operations, as the following examples show for information systems:

• If an airline's reservation system goes down for one hour, it can cost a minimum of $1 million in lost sales.

• If a manufacturer's mission-critical network goes down for one hour, it can cost an average of $100,000 in delayed transactions.

• If a Wall Street brokerage's distribution system goes down for one hour, it can cost up to $100 million in lost stock and bond purchases.

When the power of one is applied to reducing inventory overstock by 1 percent, three sources of added value can be created:

1. Interest cost on capital invested in inventory can be reduced.

2. Carrying charges for slow-moving and stationary items in inventory can be saved, often subtracting up to 25 percent of total inventory contribution to distribution costs.

3. Write-offs for obsolete products can be scaled back.

Even more sources of added value can be created by reducing inventory out-of-stock by 1 percent:

1. Same-day order fulfillment and just-in-time deliveries can be increased, keeping billings and collections current.

2. Production downtime from lack of parts can be reduced, along with machine take-down and set-up costs to manufacture small makeup runs.

3. High turnover of the highest profit-contributing products can be ensured, especially important when 1 percent of all products accounts for a disproportionately large percent of receivables.

4. Lost orders and lost customers can be minimized.

For each of these examples, the Consultative Selling opening questions are the same:

"What if we start to reduce downtime one hour at a time? What is the smallest number of hours that can make a significant difference in revenues? What is their dollar value? If one hour is significant, as in the Wall Street brokerage example, what if we start with that?"

Multiple-Sourcing the Power of One

The power of one's value can come from multiple sources. By reducing inventory overstocking by one percent, the value can come from a combination of reduced interest cost on the capital invested in inventory, reduced carrying charges for slow-moving and stationary items that together can add up to 25 percent or more of total inventory contribution to distribution costs, and reduced write-off for obsolete products.

What if the customer's inventory problem is being out of stock, and you can reduce it by 1 percent? The value can come from several sources:

• Higher turnover of the highest profit-contributing products that yield more than 80 percent of annual revenues.

• Accelerated billing and collection cycle from increased same-day order fulfillment.

• Reduced lost orders, reduced lost customers, and increased customer satisfaction.

• Reduced take-down and set-up manufacturing costs for small make-up runs.

The power of one can show up in the added purchasing power of one new customer for your own customer. If you find yourself proposing that your own customer should invest $1 million with you in new equipment, stop before you go any further and ask what you should be consultatively persuading him to buy. It must not be the equipment. What the customer is buying is an extra $1 million in annual sales at a contribution margin of $250,000 that is enabled by the enlarged capacity the equipment can provide. Before you can propose, you must know two things:

1. One million dollars worth of incremental annual demand exists.

2. The return on the customers' investment compensates them for the incremental cost at or above their hurdle rate. This means that you must know that the customers' 25 percent marginal return exceeds their minimum acceptable return of 20 percent on investments of $1 million.

If the demand exists and the investment's return is minimally acceptable, then all it may take to close a PIP is the annual income from one additional customer. This one customer's business is what you are actually proposing.

If General Valve Company sells its Twin Seals at $100,000 and a competitor comes in at $70,000, General must try to justify the extra $30,000. If it is not selling consultatively, it will vend the features and benefits of Twin Seals and end up discounting their value. But with Consultative Selling, General can earn more than its originally proposed $100,000.

When General sells to a petrochemicals refiner, its account managers go looking for leaking valves. When they find a valve that is leaking contaminants into a premium fuel facility, they have a closeable proposal opportunity. The refiner's potential loss on premium fuel that has been downgraded into regular fuel is $.03 per gallon. This can add up to an annual loss of $75,000 in each of the refiner's ten 2.52 million-gallon tanks for a total loss of $750,000 a year, year after year. Capturing this money converts a performance-to-price ratio to investment-to-return, making $100,000 irrelevant against the added value of $750,000 to infinity. If payback of the customer's investment can occur within twelve months, the investment becomes the equivalent of a short-term loan at the ROI's rate of interest.

General's account managers do not have to wait to discover leaks in a refiner's processes. They can anticipate their negative contributions to maintenance cost and revenues according to their norms. Ball valves and gate valves are always cheaper than General's Twin Seals. On initial purchase price alone they would win. But their costs of ownership can be prohibitive. If one of them leaks only 0.01 percent of a pipeline's total throughput, 28.8 barrels of marketable product will be lost. This amounts to 10.5 thousand barrels lost per valve per year. At an average product price of $10 a barrel, the annual cost of a ball valve or gate valve is actually over $100,000. When the price of oil rises, the valve's cost of ownership goes up with it. Refiners who deprive themselves of the benefits of Twin Seals can be shown to end up constructively "buying" them over and over again without ever enjoying their contributions to improved profits.

Codifying the Power of One

Some consultative sellers have codified the power of one in their businesses. For every 1 percent of cost reduction we can help a customer achieve, such a business can say, we can propose a 5 percent improvement in customer profits. For every 1 percent of added sales revenues we can bring to a customer, we can propose a 4 percent improvement in customer profits. For every 1 percent of added margin we can help a customer command, we can propose a 9 percent improvement in customer profits.

If you can help a manufacturing customer eliminate one part from a major product, you can free the business from ten contributions to cost. The customer will not have to:

1. Design it.

2. Assign a part number to it.

3. Inventory it.

4. Shelve it.

5. Inspect it.

6. Assemble it.

7. Repair it.

8. Package it.

9. Handle it.

10. Deliver it.

If you partner with customers to help them expand sales, can you enlarge their market opportunity by a factor of one? If you can start new mothers using a customer's baby foods one month sooner, when their babies are five months old instead of six, you can open your customer to millions of dollars worth of incremental annual sales.

Figures 7-4 and 7-5 are laundry lists of general opportunities to apply the power of one to revenue expansion and cost reduction. Somewhere in these lists may be your own best opportunities, the things you do exceptionally well that help customers improve their profits and that therefore become the definition of "what you do" as a business. These elements of "your game" target the critical success factors in customer businesses and business functions that identify the arenas where you can make the partnership contributions that must become your industry's standards for adding value.

1. Add operational flexibility.

2. Add manufacturing or processing quality.

3. Add volume.

4. Improve effectiveness of sales department.

5. Introduce new sizes, shapes, or materials or new and improved products.

6. Reduce customer returns.

7. Apply creative sales promotion strategies.

8. Speed up production and distribution.

9. Reduce or eliminate unprofitable products, customers, warehouses, or territories.

10. Improve market position.

11. Add brand name value.

12. Add customer benefits.

13. Extend product life.

14. Expand into new markets.

15. Increase distribution.

1. Reduce number of operations.

2. Reduce cost of one or more operations.

3. Combine two or more operations.

4. Automate operations.

5. Reduce labor.

6. Improve production scheduling.

7. Reduce operating time to speed up production.

8. Reduce insurance costs.

9. Reduce materials consumption.

10. Recycle materials.

11. Substitute less expensive materials or otherwise reformulate product.

12. Reduce raw materials inventory.

13. Reduce parts inventory.

14. Improve controls.

15. Simplify product and package design.

The world of costs is changing. Whereas labor has traditionally contributed the major share of a manufacturer's costs, now it rarely exceeds 10 to 20 percent. While the hard-core costs of capital equipment have traditionally been a principal area of customer investment, or at least have been perceived as such, this is no longer the case in businesses in which information-intensive services are natural accompaniments of equipment. In buying computers, for example, a common rule of thumb is to allow $100 for training expenses for every $1 of hardware cost. In networking computers and telecommunications equipment, the support costs of making everything work together as a single coherent system normally outruns the equipment cost by five times. These customer costs for integration and application are more important to reduce, in many cases, than are the costs of the hard goods they add to.