Think Smaller, Grow Bigger!
By Vistage speaker Bill Hodgdon
A Right Size Market For Every B2B Strategy
What's your current market share?
Every business owner or CEO has a guess. However, most would admit they don't really know.
All businesses are resource-limited. The purpose of a growth strategy is to concentrate those limited resources on market segments where the business can most easily win the number-one market-share position. As the business grows, it becomes capable of pursuing larger and larger markets. At any point in time, however, a business is limited in its ability to earn the number-one market-share position by its current resources. These limits necessarily limit the size of the market the growth strategy should target.
In any business-to-business market, growth is primarily caused by salespeople. In order to grow, a business must have the capacity to meet the expected increase in demand. This means the business has excess capacity. Without excess capacity, growth is not possible unless you can continuously increase your selling prices (don't we wish!). Accordingly, the only resource that limits market size is the number of salespeople the business can deploy. Growth strategies that pursue markets that are too large for the salespeople to effectively manage will fail to produce the desired growth.
The Measure Of Market Size
There are two measures of market size:
- Money being spent. Because growth is measured in sales, one measure of market size must be the amount of money the market is projected to spend buying products or services that could be purchased from your business. This is not some big number from a trade association or national database. Rather it is gleaned from an analysis of the actual spending from selected accounts representing the targeted market.
Suppose a business selling pumps into paper mills estimates the market at $1.3 billion, and their sales goal for the coming year is $30 million. They don't have enough salespeople to call on all paper mills, so which ones should they target? The $1.3 billion number does not help to narrow the focus. Instead, the business must have a measure of market size that can be used to estimate the spending on an account basis. For example, for every ton of paper produced, $1 is spent on pumps. A mill that produces 500,000 tons of paper per year is estimated to spend $500,000 per year on pumps.
- Number of accounts. The second measure of market size is the number of accounts within the market. It is this number that consumes the capacity of the salesperson. There is a limit to the number of accounts that can be managed for growth.
Currently, there are more than 2,000 paper mills in North America. Our hypothetical pump business has only eight salespeople, so how many mills can each salesperson manage to produce the desired growth? This assumption must be stated in the strategy. The implementation of the strategy must concentrate the contacting activity of the salespeople on the mills that must be grown in order to meet the growth goals of the business. If the salespeople have too many mills to manage, growth will be constrained.
The strategy must clearly define the kinds of accounts to be targeted so that each salesperson can choose accounts consistent with the strategy. This makes it crystal clear which accounts are in the targeted market and which are not.
The Right Size Market In Money Being Spent
The suggested planning horizon for a strategy is three years. To determine the right size market based on money being spent, target market segments where your business can realistically achieve at least a 25 percent share by the third year (50 percent if already at 25 percent).
For example, let's say your strategy is based on generating $30M in revenue in the first year, $33M in the second year, and $37M in the third year. A market projected to spend between $111M and $148M in that third year is just right. The $37M goal will represent at least a 25 percent share position (of the $111M – $148M market) in the third year. A market that is projected to spend more than $148MM is too big! The business plan must narrow the focus further until it gets to the right-sized market.
The Right Size Market In Number Of Accounts
Markets must be large enough in money spent to meet the revenue goals of the business, but small enough in number of accounts that the salespeople can contact the targeted accounts much more frequently than all competitors. The goal of achieving at least a 25 percent market share in the third year determines the right sized market in dollars being spent, but ignores the number of accounts that are included in that market definition.
If the offerings are perceived (by the account) to be relatively equal and one competitor does not already own the account (75+ percent account share), then your salespeople must contact the buying influences within that account two to three times more frequently than all competitors. The salespeople must call on the right accounts with the right frequency so that they grow account share in each targeted account. This means each salesperson uses the strategy to develop a written list of accounts that are being targeted for growth over the next three years.
In general, once a business has achieved 75+ percent of the account's business, growth is no longer likely unless the account is growing. These accounts are no longer growable and must be replaced with accounts where growth is more likely. Other resources, such as customer service people, inside sales, distributors, reps or dealers, will still contact the accounts on a regular basis. But the key to causing growth is the contacts of the outside salespeople, and it is these contacts that must be concentrated on the right accounts.
In my experience, the outside limit for the number of accounts where a salesperson can deploy many more contacts than all competitors on all accounts for a sustained period of time is 40. The implementation of the strategy must alter the touch pattern of the sales force so that they spend more time with more people in fewer accounts. The strategy provides the right guidance for the sales force, and then management must manage the sales force to ensure the contacts stay concentrated until the number-one account share position has been achieved in every account on the list.
Choosing The Right Accounts
The ability to gain account share against any competitor is a function of three objective measures of strength:
- Your current account share
- Your current offerings
- How often the account is being contacted
Accounts most easily grown are those where your business already has a current position -- anywhere from 10 to 25 percent account share -- and the account is satisfied with the performance of your offerings. The most important strength component is offerings that produce better business results for the account than competing offerings. Every account that has applications where better business results can be produced should be on the list. Add to this the accounts that can be grown from your current position, and most of the time you already have enough accounts.
Adding Salespeople
The number of salespeople determines the size of the markets a business can serve and win. Therefore, the strategy must include assumptions about when a salesperson should be added to continue the growth.
Most businesses wait until they achieve a high level of sales before adding salespeople. This inevitably constrains growth because they wait too long. The business case for adding a salesperson requires knowing three things:
- The annual cash cost to add a salesperson
- Accurate gross margin figures
- An estimate of the amount of sales growth that can be produced from a territory each year for the next three years
If this analysis exceeds your desired rate of return for investment in other assets of the business, hire the salesperson. Since it is the only resource that causes growth, it is the most important resource to invest in if the business wants continuous growth.
Narrow the focus of your business to smaller markets, manage your sales resources to concentrate their contacts on the right people in the right accounts, and you will be rewarded with unexpected growth. Think smaller to grow bigger!
Vistage expert resource speaker Bill Hodgdon is head of Hodgdon Consulting Services, which specializes in helping companies improve their top-line performance.