Sales And The CFO Part Iii
Dec 26, 2010
In the prior two newsletters, we explored two of the four basic ways of the increasing your company sales. CFO’s aren’t the “Deal Killers” that Sales Executives seem to perceive them as. CFO’s ask the questions that need to be answered before the company is put at risk. The CFO can provide the CEO the detail they need to boost profits during a time of sales growth.
To reiterate, growing sales is simple really – not easy, just not complex. Besides buying a company and growing through acquisition, there are really only four ways to grow your company:
1. Sell more of the same stuff to the same people
2. Sell the same stuff to different people
3. Sell different stuff to the same people
4. Sell different stuff to different people
Each of these paths to growth is covered with potholes that can pull the axle off your company’s progress. In this Newsletter we will explore the third strategy – Sell Different Stuff to the Same People.
Sell Different Stuff to the Existing Customer base
Development cost – New products cost money. Money to develop, money to market, money to produce, and money to qualify – even with existing customers. New products steal market share from existing products, unless they are complementary to existing products. If you are a tile company and now you sell grout, which may be a new product. Sweet potato fries may also be, but they might steal sales from your regular fries. Developing a new product consists of more than just the idea. Application development to take advantage of new patents is as important as the original patent itself. There are costs to commercialize new products and new ideas. All of the costs must be absorbed prior to any payback. Imagine the costs of developing , and promoting, a “New Coke” and the resulting payback.
A CFO’s contribution to the process is in developing the structure to quantify the costs, to set limits on spending and establish reasonable review points to make sure that the products/services that are being developed match with the targeted customer needs, wants, or goals. A new product which does not satisfy a target customer's needs, wants, or goals will never take off, even if all the other elements of marketing are done properly. A CFO also helps to quantify the product introduction risk. When and how a new product is introduced can impact the return on the new product. Could Apple have improved their profits even more if they had been able to introduce the IPhone 4 on their own timetable – we will never know.
Make versus buy - New products can either add needed volume to your operation, or can stress your existing plant. Your CFO can help assess make versus buy decisions . Commitment to manufacturing the new product is a long term investment – but is the new product a long term product or a fad? Mitigating your risks may mean outsourcing the manufacturing until the demand has been established. Outsourcing production to contract manufacturers can enable your company to scale up quickly without affecting the existing product lines. And can help to control the costs of a new product line.
Outsourcing is also risky. If your product is groundbreaking, has significant IP or a design difference, outsourcing may create new competitors. The key to the determination of a “trade secret” lies in the confidentiality measures that had been taken in connection with this information. But keeping those secrets secure when at the manufacturing plant of a third party is almost impossible, especially when the plant is in a foreign country. Chinese market is like the Wild West – China’s reputation of counterfeiting design or content of patented products such as luxury handbags, watches, electronics, and clothing is legendary. There are even some tragedies that people consumed counterfeit food or drugs and were poisoned. Many foreign companies come to China and have been fully challenged by the culture of deficient IP awareness.
Metrics for payoff – Establishing the measurement of success before embarking on new product development is key to setting the appropriate budget/forecast targets. New products can be complimentary to existing products, so how have those products served to enhance sales of existing products, pre and post introduction. Setting growth targets, setting cost and profit targets and comparing them against actual enables management to make adjustments while the new product sales develop. By introducing to an existing customer base, the company has a channel for enhanced feedback – using those relationships is an advantage to ensure that as adjustments are being made, theReview of assumptions against actual during introduction – is reality what we expected.
Sales terms – Introducing a new product to existing customers may mean enticing them with a change in selling terms. Changing terms enables the customer to finance their own purchase. If this is a sale to a commercial customer, they may want extended terms to make sure that the product sells through – that they are left with bad inventory on the shelves. The CFO is involved in the especially keen need to keep them happy by negotiating flexible contract terms and, sometimes, adjusting the cost of keeping customer happy with old product while purchasing new product.
Selling New Stuff to Existing Customers is a riskier strategy than those discussed in parts I and II. Existing customers provide a ready source for new sales as extensions of existing products or compliments to existing products meet customer needs. But the company bears a risk of alienating the customer base if the products fail to match promises. Proper execution requires answers to key questions. Answers that your CFO can provide you. Answers you need to reach the best possible decisions. If you don’t have a CFO, well, “Every company, regardless of its size, needs a Chief Financial Officer®”