Evolution from Volume to Value
By Guy Amisano, President & CEO Salient Management Company
It was October of 1983. Our accountant had just arrived from New York to deliver third quarter financials for our soda business (quarterly reviews were standard at the time). His name was Sam Becker.
That year had been special, I thought. I had hired a new VP of Sales in January, and he promptly boosted performance, especially during the summer months when we saw a better than 8% volume increase over the previous year. We were number one among the bottlers in our region.
Sam handed me a copy across the table as he slowly removed his overcoat and hat (Sam had been our family’s accountant for 40 years. He was more like a respected uncle than an accountant). I remember a look of deep disappointment that crossed his face as he looked up from the P&L. He said the words that, in effect, started Salient: “You call this a profit?” The P&L showed that, while indeed volume was up for the period, profits were dead flat. I saw that prices had been heavily discounted and the gain in sales was not enough to offset the reduction in margin.
The problem, I divined after two sleepless nights, was the sales culture. From time immemorial in the soft drink business (and, as we soon discovered, everywhere else in CPG), the singular measure of sales success – the basis for compensation, bonus, and most of all, status – was sales volume. Profitability – or margin, was strictly-for-accountants (or “bean counters,” as they were not-so-affectionately called). Until I could change this culture, I could never expect different results.
I needed a way to change the sales culture from “volume” to “value added” or, “profitable volume growth.” In particular, our Sales VP – and eventually all of our sales decision makers – had to understand the likely impact of discount promotion on profit before the fact, when they might exercise some control, rather than afterwards, when no amount of information would change the fact.
In short, I needed a new measure of sales success and a new kind of accountability. Today we call this accountability for value, or achieving the optimum balance of growth and profit. This was draconian change, a never-before-contemplated readjustment of values and rewards for sales managers, a never-before-tried shift from a patently simple sales objective: “sell more cases” to a complex objective: “create customer value.”
There were several hurdles to overcome: the first was measurement itself. In order to establish profit accountability, it would be necessary to capture discounts, net revenue and margin, as well as sales volume, from sales invoices, the documents of sales activity. The second hurdle was dealing with the unique mentality of sales managers. Famously busy “working with customers,” they were highly resistant to commit to any other work activity, especially analytics. Studying reports meant being in the office and away from their customers. Any insistence on analytical work would almost always draw the question: “I haven’t got time for this. Do you want me to do my job or sit here in the office playing with numbers all day?
Finally, there was the hurdle of tradition. Both training and performance incentives had always been focused on volume growth. We would have to create incentives significant enough to shift focus to value added.
The Solution: Margin Minder®, the necessary tool to change culture from volume to value.
Capturing the metrics: almost all of the data we required was captured on invoices, and they were generally accurate because we used electronic (hand held) transaction recorders (which were much less prone to error than paper invoice documents). Margin was easily derived by subtracting cost-of-goods (COGS) from the invoice net price (the actual price after discounts). At this point we had all the data necessary to measure sales value added: unit sales volume, discounted sales volume, net price and margin. As well, we drew from our traditional attributes of customers and products, such as territory, channel, key account groups, account responsibilities (sales rep and sales manager), brand and package size to create a representative computer model of our marketplace.
Knowing we had to defeat the “I haven’t got time for this” argument, we set out to build a sales analytics program that would collapse sales managers’ analysis time requirement to near zero. The user experience would have to be super fast and easy, graphical and flexible (no imposed structures or procedures to limit intuition). Because most sales managers were utterly uninterested in analysis for its own sake, we also knew that the end-point of investigation had to be an action point, where the insight gained from the analysis could be instantly deployed in the next transaction.
So, we built into Margin Minder a point-and-click investigative technique that would allow a typical non-technical sales manager to narrow down his or her view of the marketplace from “everything” to the few out-of-line customers, where a quick adjustment to sales levers (such as price, service levels, store inventory, product mix, etc.) could improve performance in the next transaction cycle.
Finally, in order to gain quick and deep adoption of both the change and the enabling tool, I shifted sales incentives to reflect the new objective. The new incentive rewarded every new dollar of margin above both sales and margin budgets for the year, to be precise; the amount was seven cents on every dollar of margin. With an opportunity to add 10 – 30% to annual pay, this proved to be a strong incentive for most managers to use the software both to guide decision making and to monitor their profit performance.
Margin Minder took three years and many experiments to build, but the results achieved after implementation were immediate and dramatic. By eliminating wasteful promotions (where volume gain didn’t offset invested margin), our soft drink business increased bottom line profit by 20% in the first year, and for 15 years thereafter, never slipped backwards.
Over the past quarter century, Margin Minder has evolved in many ways but the same principals still obtain: speed, simplicity, flexibility and root cause detail are the necessary characteristics of a successful sales analysis system. A radical change in sales culture can and will occur when the reasons not to change are removed and the tools devised fit neatly into the hands of the people who participate in the process.