While working as a professional executive in various companies, both in India and abroad, I found that the companies always found themselves in doldrums while trying to achieve their targets. Even a reasonable 10% increase in sales turns out to be like reaching the moon. Practically every month there was a shortfall, thereby causing panic among the sales and marketing team.
Companies have been known to adopt various methods to tackle this situation. Most of them just extend the month or the year ending by a few days. So dispatches made during the first 4/5 days of the following month or year are recorded as sales for the current month or year respectively. Some companies resort to creative accounting by overstating either their profits or their sales. While a majority just blame it on poor market conditions.
I always thought that getting a reasonable increase of 10% to 20% in one’s business every year should be automatic.
I have really found it difficult to understand as to why companies have trouble achieving very modest levels of growth in sales and profits.
So what do we need to do to achieve consistent higher sales? Based on my experience, we need to build a pipeline of customers in a continuous basis. I call this the Theory of pipeline which suggest that you have to take the following actions to achieve consistent higher sales:
(a) Continuously build a pipeline of customers (b) Retain our customers
Now let us understand how the theory of pipeline works.
Theory of Pipeline
My simple Theory of Pipeline is based on the analogy of a water pipeline. When the pipeline is full of water, water will flow out of the pipeline continuously on a consistent basis. However, when the pipeline does not have enough water, the flow of water will not be consistent and the flow will vary depending upon the amount of water inside the pipeline.
Similarly, a company and its sales people should continuously work towards building a pipeline of customers. If the pipeline is full, sales will increase consistently. This is because some of the customers in the pipeline will buy immediately, some after a few days, some after a few months and some who will even buy after a couple of years. One of my prospective customers started buying from me after 2 years. If the pipeline is full, customers will keep popping out of it continuously to buy your products and services resulting in consistent higher sales.
Usually, the problem is that a continuous effort is not made to fill the pipeline and fires have to be put out at the end of every month and every quarter. We are more concerned about achieving targets rather than taking the correct action to build the pipeline. I have also seen sales people focusing on one or two sales prospects with the hope of getting a big order to achieve their sales target. They don’t realize that the sales people of the competitors are also thinking the same. Finally, one of the salesman will get the order and achieve his target while others will miss the target.
"Theory of Pipeline" suggests that we should focus on taking correct actions which will fill up your pipeline of customers. As mentioned earlier, if the pipeline of customers is full, customers will keep coming out of the pipeline to buy your products and services resulting in consistent higher sales.
Now you may ask how do I know that the Theory of Pipeline works? Fair question. Theory of Pipeline has come about as a result of my experience. I have seen it work and that is why I am sharing the same with you.
Let me discuss two of my experiences on which my theory of pipeline is based.
In 1975, I was working for Escorts Limited, a leading tractor and two-wheeler company at that time, as a management trainee. Escorts was in the process of introducing a new tractor model and as such there was a need to quickly liquidate stocks of the old tractor model. A special sales campaign was organized to assist dealers to liquidate their stock of old model tractors quickly. I was sent to assist 5 dealers in Haryana to liquidate their stocks of old model tractors. I made my base in Sirsa, a small town in Haryana State, where we had a dealer. After about a week, I found that we were not making much progress. We were just following up with about 45 of the so called hot prospects everyday hoping that 30 of them will buy our old model tractors and we will be able to liquidate our stock. Everyday, we were following up with these customers and so was the competition. The situation kept bothering me as we were making no headway. Finally, I decided to analyze the situation more seriously. So I went to the dealer and asked him some questions. Our conversation went as follows:
Question: How many villages in your territory? Answer: 145
Question: How many villages are these 45 hot prospects from? Answer: 5
Question: How many of the balance 140 villages do not have an Escorts tractor or no tractor at all? Answer: Don’t know
From the above simple analysis, I realized that we may not be taking the correct action by just concentrating on 5 villages. 45 hot prospects were being pursued like never before by us as well as the competition. We were ignoring a major part of our market. We were not building our pipeline. We expected to achieve our targets based on the hope that 30 of the 45 hot prospects that we were following up would buy from us and that the competition would let us get these sales easily. This did not seem like a good strategy to me considering that we had 140 villages available for us to build our pipeline of customers. So I convinced the dealer to target what I called virgin villages, that is, villages where there were just 1 or 2 tractors or no tractors at all. We achieved tremendous success when we visited these villages. We were not only able to liquidate our stock of old model tractors but also ended up adding a number of new prospects to our pipeline for the sale of the new model. This incident made me realize that we should always focus of developing our market to fill our pipeline of customers if we want to achieve consistent higher sales.
The other experience I had was in 1980. That year, I was sent by Escorts Limited to sell tractors in the State of Bihar. I along with my boss Mr. Chopra did a lot of work to expand and develop our dealer network. For instance, in 9 months the number of dealers went up by 300%, ineffective dealers were replaced and the resources available with the dealers in terms of salespeople, motorcycle and finance went up tremendously.
Beginning of the tenth month of my stay in Bihar, as usual I went to receive my boss at the airport for our regular monthly sales tour. As soon as he saw me he said without even wishing me, “Avinash, we have been doing a lot of work in Bihar but where are the sales? How are we going to achieve our targets?” He also informed me that the sales had actually come down from 25 tractors to 20 tractors a month during my time.
Till now, I had not worried about sales numbers. I always believed that we should focus on implementing the right actions and sales would be automatic. The logic behind this belief being that the right actions would build a pipeline of customers and sales would be automatic and consistent. But the comments of my boss gave me a jolt. As such, while traveling, we critically reviewed each and every action taken by us. We concluded that not only had we taken all the right actions but also that the progress made in implementing the various actions was fairly good. However, we could not figure out why the sales were not increasing. Even though disappointed, we both went about doing what we had to, that is, take necessary actions to develop the market for Escorts tractors in Bihar and continue to build our pipeline of customers.
On the 30th of the same month, I received frantic messages from various sources that I should contact my boss immediately. To tell you the truth, I was a little scared. I actually thought that I had probably lost my job because of my failure to achieve targets. When I called my boss, I was surprised to note that he was very excited. He told me that we had achieved sales of 49 tractors in Bihar that month and that he wanted to touch 50. Ultimately, we sold 51 tractors that month and never looked back. From third position in the market, we had become leaders in Bihar. It seems that all the actions we had taken started finally bearing fruit. After that day, we never looked back.
Actually, the sales increase should have been gradual instead of the sudden jump that we experienced in Bihar. The sales increase was not the result of some magic or a sales scheme. It was the result of right actions taken by us to build the pipeline of customers.
I would like to add here that the best results can only be achieved by an effective method of working. This is what is in our control. We cannot control the end result, that is, sales. Sales are the result of the actions taken by us.
The above two experiences clearly convinced me that if we want to achieve consistent higher sales, we should make continuous effort to build our pipeline of customers. How can we build a pipeline that is full of prospective customers? Very simple. Take regular actions to develop your market or territory.
Let us see what are some actions that we can take to develop a pipeline. Actually, developing a pipeline of customers is not very difficult. It just requires you to work hard and not take the easy way out. Also, you may have to think a little bit. Lets us see how some of companies have tried to build their pipeline of customers. You can develop new market segments for your products. For instance, insurance companies have started offering insurance cover for weddings and kidnapping. Dena Bank was the first to launch a “no-frills” savings accounts for the underprivileged. Hindware launched sanitaryware for kids. You could also develop a underdeveloped market segment for your products. For instance, Maruti targeted school teachers through a special campaign to convince them to buy their cars and roped in 6500 customers in 6 months. Similarly, Kinetic tried to piggyback on the concept of “rent-a-bike at tourist destinations” on an all India basis. Marketing India as a rain destination to the tourists from middle east is another excellent example of building a pipeline of customers. Some of the actions I have taken while working with a dealer network are appointing new dealers in unrepresented areas, replacing ineffective dealers with new ones and increasing resources with the dealer.
Retaining Existing Customers
However, in 1997, I realized that I had a hole in my pipeline which was adversely affecting my sales. That year I lost a customer and discovered a big hole in my pipeline, that is, a hole created by dissatisfied and lost customers. Every year I was working hard and finding new customers but my pipeline was not getting filled. On investigation of my Customer data, I found that every year I was losing nearly 50% of my existing customers and gaining nearly 50% new customers resulting in status quo. Lost and dissatisfied customers were creating havoc with my sales. I had a big hole in my pipeline.
Let me explain how dissatisfied and lost customers create a hole in your pipeline and how it adversely affects your sales with the help of some mathematics.
You will agree with me when I say that practically all of us lose customers. How many customers do we lose? One of the companies I worked for in the U.S. was losing nearly 50 percent of its customers. Also research shows American companies were losing 50 percent of their customers in a five-year period, and that companies in the wireless industry lose 25 percent of their customers every year. Another study suggests that it is common for businesses to lose 15 to 20 percent of their customers every year. Yet another study claims that customer dissatisfaction causes, on an average, 15 to 30 percent loss of gross annual sales. Analysis of my customer data revealed that I was losing, on an average, nearly 50 percent of my customers. I realized that losing customers was the biggest mistake that any business can make as it adversely affected sales. Taking the above data into consideration, I think we can safely assume that companies on an average lose 25% of their customers every year. It is these lost customers which give sleepless nights to the sales and marketing team as targets become increasingly difficult to meet. Lets find out how?
Let us assume that a company has 100 customers in a given year who purchase in equal amounts from it. If the company wants a 10 percent growth in sales, it will need to have 110 customers next year. As discussed above, the company will lose 25% of its customers, that is, 25 customers. The company will be left with only 75 customers. However, the company requires a total of 110 customers to achieve its target. It is obvious that to meet its target increase of 10 percent, it will have to increase the number of customers from 75 to 110 – a nearly 47 percent jump.
The above suggests that in order to increase sales by 10 percent over that of the previous year, a company has to actually increase sales by 47 percent. This is because, on an average, a company loses 25 percent of its customers annually.
For instance, I lost a customer who was giving me a business of Rs 2 million. To arrive at last year's numbers, I had to first find new customers who would give me business worth Rs 2 million. I had to then find additional customers who would give me new business so that I could achieve the increase in sales that I was looking for.
Some of you may argue that this estimate of companies losing 25 percent of their customers is rather high, while others may say that it is quite low. You can replace the 25 percent with your number and you will arrive at the same conclusion as I have. That is, you actually have to increase sales by a much larger percentage than what you had planned for, because of sales lost due to defecting customers.
Now lets find out how dissatisfying and losing customers makes a much larger hole in our pipeline of customers. Research shows that one dissatisfied customer will talk negatively about you to an average of 12 potential customers. What more. Some of these 12 potential customers could, in turn, talk to their friends and associates. A alarming situation for any business.
Let us again take the example of the company with 100 customers that we have discussed earlier. We had assumed that on an average, we lose 25 percent of our customers. As such, this company would lose 25 out of the 100 customers that it has. These 25 dissatisfied customers will talk negatively about you to 300 potential customers (25 lost customers x12). We have a huge business loss staring at us. Lost customers not only create a hole in the pipeline by deserting you but also make the hole much bigger by taking, on an average, 12 of your potential customers who you might have convinced with your advertising campaign to buy from you. The above suggested to me that I should stop losing my existing customers and plug the hole in my pipeline. I realized that by retaining all my customers, I will continue to keep my existing 100 customers and achieve higher sales than the previous year.
I also realized that by retaining customers, we can not only plug the hole in the pipeline but also fill up the pipeline. How? Very simple.
Research shows that every satisfied customer will speak well about me and my products to at least three of her friends, family members, or co-workers. Once my customers are completely satisfied with what I offer them, they will advertise my products and services by talking positively about them.
Let’s bring in the example of the hypothetical company with 100 customers with which we have been working. Let us suppose, we are keeping our 100 existing customers happy and satisfied. Based on the research results given above, they will promote us to 300 (3x100 satisfied customers) prospective customers who will be added to our pipeline of customers. Some of them will also flow out of the pipeline immediately as our customer. I don’t know if you have realized or not but by retaining customers, we have automatically increased our sales.
Lost customers make a hole in our pipeline which makes achieving targets more and more difficult. Not only do dissatisfied customers escape from our pipeline but they also take with them an average of 12 prospective customers thereby making the hole in our pipeline bigger.
Now I realized that by retaining my customers, I will not only able to plug the hole in my pipeline that dissatisfied and lost customers created but I will also be able to fill the pipeline with the positive word-of-mouth recommendations of satisfied customers.
So if you want to achieve consistent higher sales, you just need to continuously keep taking actions to keep filling your pipeline of customers and focus on retaining customers. Also, needless to say achieving targets becomes automatic. Well, almost.
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