Peter Colman presents the fourth article in his series on behavioural economics in sales management – reacting to biases to grow profits. Here, he explains that understanding value from a customer’s perspective is the key to selling new products or services
Seventy two percent! Yes, 72% of new products and services fail to hit their profit targets. That’s what our research uncovered, and it’s a sobering thought for management teams. (Further reading and case studies can be found at www.monetizinginnovation.com).
Businesses know that innovation is vital for growth and therefore invest large sums of money inventing new products and services, and yet most of these struggle to hit their financial targets. Something is not quite right with their value propositions. Clearly, there is more to launching a new product than just building it and waiting passively for the phone to ring and the orders to roll in.
We’ve nicknamed one of the most common types of product flop seen as “feature shock”. These offerings are over-engineered by development teams. They suffer a form of confirmation bias and assume that what they would want from the product/service is also true for their customers. They add too many or the wrong features, without understanding if customers want them or, more importantly, if they are willing to pay for them.
When sales volumes fail to land, sales leadership comes under pressure for discounts, which eat into profits. Unfortunately the sales teams carries the can, when really it is a number of poor decisions through the new product development (NPD) process that has caused the problem. In the best companies, the sales function would be involved throughout this process rather than having the product thrown over the wall to them at launch.
As a top line focused consultancy, we at Simon-Kucher conduct thousands of commercial excellence programmes every year. In previous articles we’ve covered topics such as incentives, sales strategy and tooling. This time we’ll turn our attention to introducing new offerings and, in particular, creating convincing value propositions for sales teams that use behavioural nudges to help persuade customers to buy.
1. “READY FOR LAUNCH… OR READY FOR SELLING” (LOSS AVERSION)
Just because the development work has finished, it doesn’t mean your team is fully ready to sell. Your sales force will be very
familiar and comfortable selling existing products/services. The new offering therefore presents a new opportunity, but will also be a risk to the reputation of the salesperson (even for top performers) if it is unproven. It takes them out of their comfort zone by raising a lot of new questions for them. For example: how should they position it? What do customers value most? How do we stack up against competitors? How will they react to it? Is there any guarantee of success for my customer etc?
People typically prefer to avoid losses more than acquiring gains (we can consider this too for reputational losses/gains). If you are going to persuade the salesforce to stake their reputation on pitching the new offering, a quick product overview isn’t going to cut it. You need to invest a lot more time arming your sales teams with information, argumentation and building confidence through role-playing rehearsals.
Role-playing practice is particularly important where you need your salesforce to change its selling approach. A few examples of these changes could be: moving from transactional to solution sales, migrating from product sales to subscription-based services or selling into a new vertical market (industry sector).
Lots of useful information and statistics are typically captured during the development process, but we often find this is not brought to the surface later in the process and wrapped up for the salesforce to help them sell (we’re not referring to marketing brochures etc). Without this valuable sales collateral, the path of least resistance is to default to the existing products/ services, even if there is a “sales of new products” incentive in place.
2. “COST OF THE PROBLEM V PRICE OF THE SOLUTION” (FRAMING)
If you don’t understand the product’s/service’s value for the customer, you don’t have a value proposition, you just have a proposition. This makes it difficult for your salespeople to talk about performance rather than just the price of the solution they’re offering.
The conversation needs reframing. In our experience too few firms focus on the monetary value (pounds sterling) that they create for their customers. You need to analyse how much it is worth to customers to solve their problem (ie. cost of the problem) and make it specific to them. For example, “Our solution reduces energy costs by around 8%, which for a customer with a similar sized business to yours amounted to £500,000 per year.”
Once this is understood, you can decide what share of that reward you deserve in return. One client in the power and automation sector aspired to capture at least 15% of any additional value created. This number directly informed the value-selling messages used by the salesforce.
3. “THREE IS THE MAGIC NUMBER” (COMPROMISE EFFECT)
De La Soul, the New York hip hop trio, were right in their hit The Magic Number: it is three. This is so true when it comes to customer choice and product tiering (such as Good-Better-Best). Offer a customer one product and the answer is a simple yes/no. If you give them a choice of two products they’ll typically take the cheaper one. With a choice of three, the compromise effect kicks in and they’ll typically pick the middle one. Give them a choice of 10 or more and you’ll confuse the hell out of them, to the extent that they probably won’t buy anything.
A useful test to see if you have designed your Good-Better-Best offer well is to look at the number of customers on Good. If the majority of customers are on this, what you actually have is really “Too Good” and in need of redesign if you want to persuade people to trade up to the Better or Best offers. The “Power of Packaging” case study on the opposite page gives you an example of how this can be done.
4. “NO ONE WILL PAY MORE THAN X” (ANCHORING)
One of our many examples of “X” was £10 – and the case in question was a company about to launch its next iteration of an existing product. The management team had a problem as higher than expected production costs meant that margins were going to be so tight that the team was considering whether it should even launch.
So where had the £10 threshold come from? After a bit of probing we found that this had been a “gut feel” decision made by the management team (based on its extensive industry experience). While on the surface it seemed sensible (£10 would be a natural threshold), there was no research available to back the figure up. A quick survey of the salesforce showed it viewed £15 as the preferred threshold (we kept the management team’s view secret so that didn’t influence them). This extra headroom created the case for conducting some customer research. In the end, a launch price of £12.95 was selected, resulting in a much better margin for the firm.
5. “WE’RE KILLIN’ IT” (CONFIRMATION BIAS)
This salesforce loved the fact that volumes (sales) were going through the roof, confirming what the salespeople had said all along – the firm needed a “fighting brand”. All the volume growth was just in their fighting brand though and unfortunately, unknown to them, the category margins were nose-diving as this cannibalised their premium product. How did they get there? Let’s roll back a couple of years.
Originally, this market leader had a market share of 60% in this product category with its main competitor making up the rest. Then a low priced attacker entered the market, which picked off price sensitive customers and quickly established a market share of around 10%, mainly at the expense of the market leader. Knowing that it couldn’t discount to match the attacker, the salesforce petitioned for a “fighting brand” and within a further 12 months this was ready for launch.
Once the fighting brand was available, the highly motivated salesforce went to work selling it to recover lost market share… and sell it they did! The mistake that sales leadership made was not throttling the volumes. Within a year the fighting brand had a market share of 40%. Unfortunately, the market share of their premium product had plummeted to only 15%, so the resulting product mix was proving far less profitable for the firm. Interestingly, during that time, the attacker’s market share had stayed pretty constant at around 10%, even if it didn’t feel like it to the market leader.
6. “TIME TO PULL THE PLUG?” (SUNK COST FALLACY)
What about those offerings that should never have been launched? We call these the “undead” and they either came to market dead on arrival or are offerings that still exist but shouldn’t. While it is easy to say with hindsight (another bias), once a firm has invested large sums of time, money and energy inventing something, the sunk-cost fallacy means that it is a very difficult decision for management to pull the plug. And if this happens to be a vanity project of a senior executive, then it can be highly politically charged too. Even with these pressures, canning the offering remains the right thing to do, though such a decision needs to be carefully positioned and presented.
THE KEY TO PROFITABLE GROWTH
While launching new products and services will come with some risk (72%! 72%! 72%!), not launching anything new will be a bigger risk. The key to getting profitable growth from new product development is understanding value from the customer’s perspective, and then arming your sales force so that it is well prepared for those conversations.
Customer conversations should have some clear, logical arguments for sure. They should, however, also have some behavioural nudges (for example, trial periods that use the endowment effect or “best seller”/“recommended option” signposting that leverages the selling power of social conformity) to help persuade the customer to buy into the new offering.
This article was originally published in the Institute of Sales Management Winning Edge Magazine.
Read more from our series:
Part 4: If You Build It They Will Come!
Part 5: Can You Sell a Price Rise?
Part 8: Leading Through the Crisis