The Sales Team: Driven by Revenue or Profit?
Under increasing competitive pressure, many companies in the Life Sciences industry are struggling to protect margins. One of the major reasons is that historically their sales teams have focused on achieving top-line revenues and have typically not been measured on profit and margin performance.
This was highlighted in a recent Model N survey of senior industry executives, which found that almost three-quarters (71%) of respondents agreed that their sales teams were not well-educated on how to protect margins. An even greater 82% confirmed that sales incentives were similarly not linked to margin performance.
So how is this changing as a new commercial reality emerges, one in which the sales function is recognised as a key, integral component of the price, profit and revenue achievement lifecycle?
As companies increasingly become aware of the importance of tackling this issue, the positive news is that technology is at hand to help. In looking to ensure the sales team plays a more direct role in the achievement of both top and bottom line targets, companies can take advantage of powerful revenue lifecycle management tools. These enable effective cross-functional collaboration, replacing yesterday’s fragmented, siloed and low-priority approach to pricing and margin performance.
Visibility and control
A growing and ageing population, increased product development costs and tighter public sector budgets around the globe are just some of the factors creating a ‘perfect storm’, resulting in a harsh new commercial reality for many providers to the Life Sciences marketplace. Faced with buyers using tools such as tendering and reference pricing to drive down costs, for the first time they are having to respond with a different level of robustness in protecting margin over the lifecycle of the product.
Why is this proving so difficult? Rightly, much is made about the lack of central transparency of deals made at country, team or even individual salesperson level, which can have dramatic longer-term consequences on the broader business. The survey found, for example, that firms are trying to get visibility of what discounts are being applied across multiple geographies and how this impacts profitability. Yet they are starting from a low base, as currently a majority of firms cannot see the effects of any deviation from set discounting guidelines until weeks later.
The sales team typically has very little visibility of the key drivers impacting on margin and profitability
The issue of transparency must work both ways, if the business is to maximise profitability. A sales professional must connect each customer’s needs with the product and service capabilities of the provider, if they are to effectively differentiate their offering as the basis of improving margin performance. Yet the sales team typically has very little visibility of the key drivers impacting on margin and profitability, a damaging disconnect confirmed in another survey finding that many firms do not share margin information with their sales teams.
Within the Life Sciences sector, there are many departments each with segments of responsibility over often large product portfolios and complex bundling deals. As a result, the question of ownership is often unclear, with head office product teams, marketing, pricing departments, sales operations and customer service together with regional and local sales teams all playing separate roles in the pricing and selling process.
These diverse components of the pricing mix must be brought together, if the consequences of any deal are to be fully understood at the point of decision-making and the best possible outcome achieved, in balancing the company’s volume and margin objectives.
A holistic approach
Firstly, a properly-integrated response requires centralised, board-level ownership and management of the price, profit and margin lifecycle. This is essential in order to drive successful change and overcome the organisational hurdles resulting from a previously fragmented, siloed approach.
Closely linked to this, the three pillars of technology, process and people must be considered and any change co-ordinated from the outset in order to manage and measure performance improvement. Best practice software tools are available to provide essential data availability, transparency and insights to enable properly-informed decision-making, together with disciplined and structured processes applied by sales people with the right skills and competencies.
Underpinning all this however, there is a fourth dimension which is essential to maximising price and profit performance, namely governance. Although each element by itself will deliver some level of improvement, governance acts as the essential glue in pulling these together. It enables the business to assess where the organisation is today and how it is being affected by new commercial pressures. This then forms the basis of a roadmap which includes the expertise needed to achieve its price, profit and revenue goals.
Firms should undertake a strategic assessment of where they currently sit on the revenue management maturity curve, identifying their end goals and how to overcome intervening hurdles in a balanced and pragmatic way.
There are an increasing number of examples of how companies are successfully making the transition away from a narrow pricing-only sales approach. The common denominator to-date has been an understanding of how this enterprise-wide, holistic strategy, orchestrated by strong governance and senior-level sponsorship, is the only way to effectively deliver the desired bottom line as well as top line required.
In an increasingly competitive environment, it has become more critical to identify and distinguish between the best interests of the local individual or local sales team and that of the business overall
A common purpose
As part of this, the sales team will increase ownership of key factors driving profit achievement. This is important as, in an increasingly competitive environment, it has become more critical to identify and distinguish between the best interests of the local individual or local sales team and that of the business overall.
In yesterday’s world of blockbuster medicines, sales teams were targeted and incentivised on volume performance. The goal was to drive up awareness and mind-share, with pricing seen as a given and subject to relatively little negotiation. This is in stark contrast to today, where very different skills are required to handle buyers using every tool available to secure price reductions.
Previously, unilateral action taken by individual departments doing the best they could in meeting local objectives was less problematic, as these were typically more in line with broader corporate goals. This is no longer the case, as the advent of tendering and reference pricing, for example, has allowed buyers to push prices down to the lowest common denominator, costing unwary suppliers millions of dollars in revenue leakage.
One final observation. A recent IMB-sponsored CFO Research survey of senior managers across many industries found that, after a long period of downsizing their sales forces, 2013 has seen the tide begin to turn, with 38% of companies planning to ‘beef up sales resources’.
This may be true. Yet the real key to success lies in another finding, which highlighted that success depends more than ever before on high-quality data as the basis of better decision-making in ensuring a profitable sale. No matter how large or small your sales team, the way to ensure healthy margins is to fully understand the customer’s challenges and how your product or service can deliver superior performance against their resulting needs.
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