Consultative Selling: What is It?

Consultative Selling: What is It?

Partnering with Customers to Improve Profits and Competitive Advantage

If you ask sales managers how their teams engage with customers, many say: “We practice consultative selling,” “We sell solutions” or “We sell value.” However, when you hear and see their sales teams in action, many sellers lead customer conversations with products and features. The result: To win the business, customers pressure sellers to discount deals because they did not differentiate themselves from the competition. The customer perceives the products as similar with price being the primary difference. Discounted deals mean reduced margin.

Consultative selling is partnering with customers to improve their profits and competitive advantage. Improved profits mean increasing revenue and reducing costs. Improved competitive advantage means strengthening the customer’s position in the market. The primary measure of customer improvement is dollars, including a positive return and fast payback, not features or benefits. The customer’s performance then is the competition, not other vendors. Delivering results greater than the industry average is the consultative seller’s competitive advantage.

In contrast, vendor selling occurs when sellers push products and features to customers without knowing their business or the critical issues that they are working to solve. Customers interpret product sellers as “vendors,” not partners. Thus, the customer’s primary goal with vendors is to minimize price. In fact, customers see the price of products as a “cost” and costs are negative. As a result, customers compare competitive products feature-by-feature, often cancelling out the similarities and devaluing the differences when negotiating for discounts.

Instead of pushing products, consultative sellers partner with business managers concerned with making positive contributions to profits (in contrast, vendors target purchasing departments). These business managers can be from either profit centers or cost centers. If profit centers (e.g., services), consultative sellers focus on increasing revenue. If cost centers (e.g., IT), they focus on reducing costs. A consultative seller must always compare the customer’s current performance with a future improvement. The future improvement is their value add.

To improve profits and competitive advantage (i.e., add value), consultative sellers must know the customer’s critical business issues (CBIs). CBIs are 20% of the organization’s challenges or opportunities that impact 80% of its immediate future. When the business manager’s CBIs have been identified and quantified, consultative sellers position a profit improvement proposal (PIP) to address issues and solve problems. PIPs also sets forth the customer’s expected return in dollar values. Price is always positioned as an “investment” to customers, not a cost.

ROI, Payback and Certainty of the Customer’s Investment

Consultative sellers position the price of products as an investment. Investments return money to customers while costs take it from them. When evaluating PIPs, business managers ask three questions to determine if they will make an investment. First, what is the value add in actual dollars (i.e., what is the ROI)? Second, how soon will value be added (i.e., what is the payback period for profits to exceed the investment)? Third, how certain is the value add to occur (i.e., what is the length or payback and the success rate with similar companies/issues)?

ROI. ROI is the ratio of the customer’s total profit improvement to the total investment required to generate it.  A successful ROI must equal or exceed the customer’s internal hurdle rate for incremental investments. Example: If a customer invests $250K in a CRM solution and increases its profits by $200K per year for five years, their ROI is 300%  or 32% compounded annually (i.e., $1M – $250K = $750K; $750K / $250K = 300%). If a return of 32% is equal or greater than the company’s internal hurdle rate (e.g., 15%), the investment is acceptable.

Payback. Payback is the ratio customers use to determine how soon they will recover their investment. Payback is calculated by dividing the total amount of the investment by the cash flows that it is creating. Once payback occurs, business managers are relieved of investment risk. Example: The customer invests $250K in a CRM solution. If the CRM solution generates $200K per year in cash flow, the payback period is 1.6 years (i.e., $400K / $250K = 1.6). It will take one year and six months for incremental profits to exceed the initial investment.

Certainty. Investment involves risk. The sooner the payback period, the more certain the customer becomes about making the investment outlined in the PIP. Because the future is unknown, an investment with a 1.6 year payback period is more certain (less risky) than the same investment with a 3.2 year payback period. Consultative sellers also use their past success rate to convey certainty to customers. For example, their current performance benchmarks for ROI and payback for similar companies with similar issues.

Again, the consultative seller’s value add must be greater than the customer’s current performance and the industry average to warrant an investment. While helping the customer achieve the industry average may improve their overall performance, it does not create market leadership or competitive advantage.  Delivering results higher than the industry average is the consultative seller’s benchmark for success. Higher results also position the customer for improved profits, which can be shared with the consultative seller in other projects.

Creating A Sense of Urgency for Customers with Opportunity Cost

Opportunity Cost. When positioning ROI, payback and certainty, consultative sellers increase the customer’s sense of urgency by making time their enemy. That is, based on improved profits, what is the customer’s opportunity cost for not increasing revenue right now? The longer the customer delays their decision to move forward, the greater their opportunity cost. Example: Every delay in deciding whether or not to implement the CRM solution above delays the $750K in incremental profits the customer could realize over the five year period.

Building Relationships with Customers for Continuous Profit Enhancement Opportunities

Customer Partner. To improve profits and competitive advantage, both customers and sellers must be in the same business (true business partners, not transactional acquaintances). They must be partners and have the same goals. Good customer partners: want to grow, they want you to grow them and the growth needed is within your capabilities and performance benchmarks. By improving the customers’ business and profits, the consultative seller proves their value add and is paid for performance through full margin sales.

Customer’s Business. To grow the customer’s business, you must know it. Knowing the customer means understanding their critical business issues (CBIs). CBIs are 20% of the organization’s challenges or opportunities that impact 80% of its immediate future. Challenges include better positioning the customer against their competition. Opportunities include understanding the customer’s customers and improving profits by increasing revenue or reducing costs. You are not selling products, you are solving business problems.

Continuous Engagement. Consultative sellers earn the right to be the customers’ trusted advisor when they consistently improve their profits and competitive advantage in the marketplace (add value). When that happens, customers will continually provide consultative sellers with new opportunities to improve their business and secure dollars to fund subsequent PIPs. Instead of transactions, consultative sellers create a portfolio of ongoing projects, which locks-in their partnership with the customer and locks out the competition.

All contents copyright © 2013, Josh Lowry. All rights reserved.

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One Response to Consultative Selling: What is It?

  1. Lakshminarayana Reddy says:

    I am MBA student in Bangalore, India. I had questions about a lot of marketing and sales concepts. After reading your blog, they become clear to me. Now I understand them very well. Thank you for writing such wonderful articles.

    Like

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