Aaron Hoos

I hurt my back this fall while playing sports. At first I thought I could just walk it off or ice it, but it persisted: I could barely walk, I could barely sit, and I slept with great discomfort. Fortunately, the doctor gave me some pretty serious meds which, along with some careful exercises, got me to normal.

During the couple of weeks that I was recovering, I noticed something pretty surprising: We use our back for basically everything. Now, maybe that sounds funny to some of you, but it’s something I always took for granted before. I’ve always been in generally good health and only had one minor broken bone, so I never paid much attention to what parts were at work when I was performing various tasks. But once I pulled some muscles all down one side of my back, it became quickly apparent exactly how much my back is involved in everything I do. Even while I sleep, my back is the supporting framework for my body, keeping everything where it should be.

Now, I can stub a toe or get a headache, and I can continue to function without a lot of disruption, and only that part of my body hurts. But when I hurt my back, it was noticeable all the time because of the central role my back plays.

In the same way, your business’ sales funnel should be the “back” of your business! It should be the framework or central element around which your entire business is built. Now, lots of businesses will build their business around an idea or a tagline or a brand. These are important elements, but on their own they do not produce a sale. They are merely tools and resources in a business.

Rather, the one and only part of a business that is as critical to the function of your business as your back is to the function of your body is your sales funnel. Your sales funnel brings in leads and propels people through until they become customers, depositing revenue into your business, which pay the bills and contribute to your profit.

You can take away the idea or the tagline or the brand and you will still have a business. It might not be as attractive or as successful, but you can still operate. However, if you take away your sales funnel, you have nothing. You do not have a business!

So, how should you build your sales business around your sales funnel?

If you are just starting out in business, the answer is easy: With the help of competitive research and strategic planning, you can create a sales funnel that works smoothly and effectively to quickly move contacts through toward a profitable sale. Spend a lot of time and resources up-front to create your sales funnel. Once you have your sales funnel in place, add the other elements in: Tie in marketing across each stage in the sales funnel. Tie in sales activities in the prospects stage of the sales funnel. Tie in customer service activities across each stage in the sales funnel. Tie in purchase fulfillment and accounts receivables at the point where your prospects become customers. Tie in accounts payables and administration to each stage. Tie in Human Resources to all stages, too, so that they are hiring staff according to the activities that need to be performed at each stage.

If you are already running a business and you realize you need to create a sales funnel because you don’t really have one that is strategically designed, you’ll have to retrofit it. That’s okay, I’ll show you how to do it but you’ll have to come back tomorrow to read how!

One of my clients is an automotive insurance company. The other day, while a few of us were working on a positioning document, one of my contacts at the company observed that their company seemed to be held up to higher scrutiny than other organizations (like the power company or water utility).

They were right — that IS the case. They ARE held up to higher scrutiny and the resulting (and often caustic) criticism that comes with it. It’s not that they are doing something bad. The reason is: When people plug something into an electrical outlet, they get a tangible result and they know that the power output will be reflected on their next bill from the power company. And, when people turn on the tap and fill a glass with water, they know that their drink will be reflected on their bill from the water utility. In both cases there was a tangible result for a specific cost… And the more of a result that is needed, the higher the cost. It makes sense.

But that’s not the way it works with automotive insurance. You pay a pre-determined amount, which you might or might get a benefit from. Some people pay and pay and never need it; others need it frequently and get a better benefit. In other words, it doesn’t feel (at least to the consumer) like there is a direct result associated with a specific cost.

Insurance companies have tried to do something about this, including offering rebates to good drivers, but I don’t think any of their efforts are as successful because the end result is still the same: People pay for a service that they may or may not need. As a result, insurance is commoditized and people look for the cheapest insurance, they barely understand what their coverage offers, and they are quick to complain and switch companies.

There is, however, a type of insurance that is growing in popularity in the UK that could be the answer North American insurance companies are looking for: Pay-As-You-Go insurance.

With Pay-As-You-Go insurance, you basically pay for the miles (or kilometers) you drive. Your car is always covered with some basic coverage (in case someone steals it or in case it spontaneously combusts) but when you drive your car, you pay by the mile for additional coverage in case of collision.

By using GPS, insurance companies can see how far you travel and bill you accordingly. If you’re the kind of car owner who only uses your car to go to church on Sundays, you’ll pay less insurance than someone who goes on cross-country drives. That makes sense. And although it doesn’t completely eliminated the commoditization of insurance, it does create a clearer sense of pay-for-use, similar to what people understand when they plug things into their electrical outlets or pour water from the faucet.

I realize that there are other issues that need to be worked out. Privacy issues will need to be addressed. Customers will need to be assured that their car’s GPS information will only be used to determine distance. Speed and destinations cannot become part of the equation. If that issue can be resolved, I think we’ll see this as the Next Big Thing in the automotive insurance industry. Customers will enjoy rates that are more clearly linked to usage and good drivers won’t end up paying higher premiums because there are a lot of bad drivers on the road.

In this BCG On Strategy series, I go chapter-by-chapter through the book: The Boston Consulting Group On Strategy: Classic Concepts and New Perspectives (2nd edition). Join me each week for BCG On Strategy at AaronHoos.com.

OVERVIEW: THE EXPERIENCE CURVE REVIEWED
Bruce Henderson wrote this chapter in 1974. In this chapter he continues with his line of thinking about the experience curve and its potentially positive cost-saving impact on businesses.

HIGHLIGHTS
Henderson writes that there are 4 factors that contribute to the experience curve: Learning, specialization, investment, and scale. Briefly…

• Learning to do the job better (whether it’s a small task or a larger business function) will help to speed up productivity by as much as 10% to 15% every time total output is doubled. This is the well-known learning curve.
• Specialization, which occurs when you narrow your focus on specific tasks, can also improve productivity — increasing output by another 10% to 15% every time total output is doubled. I suspect some of this was also apparent in the earliest studies of learning curves, and it’s one of the reasons why Ford was an early success in automobile manufacturing.
• Investment is a little more difficult to understand and there isn’t a specific percentage that Henderson ties to investment’s impact on the experience curve. He writes, “Return on investment does result in cost reduction. Without investment, capacity increase cannot occur and neither can cost reduction at constant capacity.”
• Scale, the addition of capacity (“scaling up”), is Henderson’s fourth contribution to experience curves. Henderson writes that in process industries, “an increase of 52 percent in capital cost [will] provide a 100 percent increase in capacity.” Here’s an example (adapted from Henderson): If your company spends $100 to produce 100 widgets, you can scale up with a total capital cost investment of $152 (your previous $100 plus another $52) to produce 200 widgets.

MY THOUGHTS
These four factors that contribute to the experience curve are good to know and important to implement in business. Unfortunately, entrepreneurs and small business owners can’t always afford the additional funds required to invest and scale. If they can’t get some additional funds (i.e. through a loan or through investors) those factors may be unavailable to them.

Fortunately, two other factors cost less up-front while still being able to provide dramatic cost savings (which could fund investment and scaling up in the future): Learning and specialization allow the business owner to get better and faster at what he or she does without having to spend more than they are already spending.

So, if you want to reduce costs and improve output, the fastest, cheapest way to do it is by learning everything you can about what you do and then breaking your work down into discrete units and learning to do each one better.

I was reading Alan Weiss’ book Million Dollar Consulting. It’s a pretty good book (although I like his Ultimate Consultant Series better). In the Million Dollar Consultant he mentioned something that I thought was a valuable way to look at gaining a competitive advantage:

Weiss suggested that there were 3 “levels” of value on which you compete: At the competitive level, in which your offerings are similar to your competitors; at the unique level, in which your offerings are – obviously! – the only ones on the market; and at the breakthrough level, in which your offerings are so insanely valuable and insightful that the others aren’t even in the same league.

That makes sense and I think most entrepreneurs would agree that these are the three levels of value a business’ offerings should have if the business is going to survive.

But here is where Weiss takes a surprising turn: He says that your products should be competitive, your services should be unique, and your relationship with your customer should be at the breakthrough level.

Weiss suggests that it is expensive to implement breakthrough characteristics across all three offerings (products, services, and relationships), and that products and even services can easily be copied by competitors. So instead, he says, your products should only be at the level equivalent to compete with your competitors… the real difference is in the relationship, which should be astonishingly value-added.

I’ve spent some time thinking about Weiss’ ideas and am building on them with my own ideas below:

HERE’S WHY THIS IS GOOD NEWS FOR EVERY BUSINESS

• Existing businesses spend a lot of money on product innovation while their relationship-building remains lackluster at best. Investing even half of the money spent on adding innovating product value into adding relationship value can have a huge impact on customer retention and word of mouth.
• Some businesses – especially smaller home-based businesses (Tupperware, Norwex, Avon) and businesses where there is no product differentiation (real estate, investment firms, accounting firms, dentists, freelancers) – simply CAN’T innovate their products or services. So relationship value is going to be the key differentiator.
• It costs money to innovate products (and often services). It doesn’t cost as much money to innovate relationships. Rather, it costs time.
• Start-ups that have a simple product and not a lot of money can still compete in the big leagues with unparalleled relationship building.

HERE’S WHY BUSINESSES WON’T FOLLOW THIS MODEL

• Product innovation is sexy and gets way more funding in budgets than relationship-building
• Linking sales to products is much easier than linking sales to relationships – and when you innovate your product and see sales go up, it’s easier to make the connection between product innovation and sales.

WHAT CAN YOUR BUSINESS DO TO ACHIEVE BREAKTHROUGH RELATIONSHIP BUILDING VALUE?

• Start by analyzing your sales funnel to understand how you market, sell, and build relationships. Understand how specific activities in your sales funnel move contacts forward.
• Implement a CRM system. In other words, stop leaving customer names on sticky notes on your office wall. Tie your CRM system to your sales funnel.
• Keep diligent notes on your clients.
• Market your ass off to load up your list of prospects and build relationships with those contacts. Sales will happen if you do that.
• During a sale, keep your customer informed at every step. Don’t ever let them wonder about what the next step is or whether you’ve forgotten about them. (Note to self: I’m definitely guilty of this).
• Find out what your competitors are doing and go an extra mile. No, wait. Go an extra ten miles. Call your customers more (without bugging them). Email them. Follow them on various social media. Participate in their conversations.
• After the sale, remember that you have a relationship with them. Don’t ignore them. Don’t treat them like a prospect. Build an entire system around the post-sale customer. Send them valuable things (not just coupons for another product, but information that you think they’ll find valuable). Take a personal interest in them. Figure out what they need in their business and connect them with people and information that can help them… even if it means no additional revenue for you.

Good news for entrepreneurs (or, at least for people planning to become entrepreneurs in the next 1-3 years).

During periods of economic growth, consumer spending injects cash into the economy, and free-flowing cash is exactly what makes an economy stronger.

Entrepreneurs and economists are concerned right now because people aren’t spending money at levels needed to bolster the economy. According to the Financial Post article “Fed stuck in zero-rate game” (Paul Vieira, Sept 20, 2010), “consumers are opting to pay down debt instead of spending on goods”.

It’s one of those things that sounds strange even though it’s true — paying down debt isn’t as good as spending… at least when it comes to economic growth. Instead, consumers are a licking their economic wounds and understandably getting credit histories in order. They’re forgoing purchasing in the short-term to fix their personal credit.

Although entrepreneurs and economists are understandably worried, I think it’s good news — for those with a 1-3 year view. Once people have paid off some debt, they’ll start spending again… And I believe they’ll start spending with exubrance. By the time they start spending again, they’ll have long forgotten why they weren’t spending, AND, they’ll have improved credit ratings and credit limits and buying power.

I believe this is a great time to start a business or deepening the positioning of a current business. If you can survive The Great Debt Payoff, I think you’ll reap some serious rewards down the road.