It is well understood that the cost of generating business from a new customer is much greater than acquiring business from a new customer.  The least costly customer is the one who was referred by a satisfied customer. There are two dimensions to customer referral; 1) selling more to existing customers – perhaps in different business units in the same customer, and 2) delighting existing customers so that they become evangelists for you.  The only difference between these two markets is the definition of the market.  In the former case, the market is the broader market opportunity within the existing customer account, whereas the latter relates to a less structured, but in many cases equally connected market of ‘people like me’, or in other words, similar customers in a similar industry with similar problems.

My hypothesis, as mentioned elsewhere, is that businesses are less in control of the buyer/seller interaction – particularly in the Contact and Control phases of the interaction, between buyer and seller.  Customer Lifetime Value must be coupled with Customer Network Value, the value that accrues to a seller because of the amplifying effect of the recommendation chain.  Remember, customers are almost twice are likely to take a recommendation about a product or solution from ‘someone like them’ than from a company representative.

Network Effect

It is easy to get tired of the hyperbole that seems a requisite ingredient of Internet and Social Media conversations. For any industry you choose, somewhere in a garage in Silicon Valley, there is a group of college friends with an Internet connection and a few Macbooks, and a vision to ‘change forever’ how that industry works.  But we know that we are entering the maturing stage of the Internet economy, characterized by a growing prevalence of ‘cloud-based’ services, online communities discussing and evaluating our products, and subscription-centric business models. Unless you take notice and effective action, you are likely to be left behind.

Recent high-profile market entrants like Groupon, Zynga, Buddy Media, Pinterest, and Instagram have accrued value at a rate we’ve never seen before. That’s before we mention the ‘older’ stalwarts like Facebook or Twitter.  Never in business history have so many companies generated so much value (at least for their shareholders) so quickly.

Each of these companies has a different mission or vision, and some would argue varying degrees of verisimilitude.  In each case; one fact shines through. They all illustrate the amplifying impact of the power of the network, a concept first most uniquely evidenced by Hotmail – the free email service now owned by Microsoft.

In 1999, Fast Company published a story about Hotmail, and the lessons therein are as relevant now as they were then.

In Web circles, the Hotmail story is almost as well-known as the service itself. But, like so many Internet takeoffs, Hotmail almost didn’t get off the ground. Founders Bhatia and Smith had been turned down by something like 21 VC companies before they met Steve Jurvetson. Even he wasn’t all that impressed by the startup team’s big idea for a company called JavaSoft. But one feature of their plan — free Web-based email — did catch his eye. The talks heated up, and JavaSoft became Hotmail.

Then came a meeting with Tim Draper, 41, DFJ’s founding partner. It was the first time that Draper had met with Bhatia and Smith. Draper was enthusiastic about the company, but he was adamant about one small detail: He wanted to put a hot link at the bottom of every email with a message, “P.S. I love you. Get your free Web-based email at Hotmail.” Clicking on the link would bring the message recipient to Hotmail’s site, and let that person sign up for the service immediately. That idea almost blew the deal apart. “The founders thought that it was like Spam,” recalls Jurvetson. “And it’s true: Until Hotmail tried it, the contents of email were always considered completely private.”

Which is why Bhatia and Smith not only hated Draper’s idea but felt it was contrary to the spirit of the Internet. “They fought me for quite a while,” Draper says, remembering that initial meeting. “Then, finally, they came back and said, ‘Okay, we’ll do it. But no ‘P.S. I love you.’ ” Draper’s bemused smile turns into an oversized grin. “Then Hotmail just started to spread.”

And it spread unlike anything DFJ had ever seen. “We had to keep asking ourselves, ‘Is this a fluke, or is it something important to think about?’ ” Jurvetson recalls. “After the Microsoft buyout, the magnitude of the value Hotmail had created hit us in the face. We actually thought that the founders should have held out and not sold. But in the end, they really wanted to sell.”

Around the time of the Hotmail sale, Netscape, another pretty successful Web startup, asked Jurvetson to contribute to its internal newsletter, “The M-Files.” The assignment was twofold: First, to write about new companies in the DFJ portfolio that were using Netscape technology. Second, to examine what those companies were doing that was unique and to draw out some lessons. “That was the first time that I thought to myself, ‘How can I describe why Hotmail is special?’ ” Jurvetson wrote something and passed it to his partners for comments. In a meeting with Draper, the two financiers began trying to coin a phrase that would describe the phenomenon that they had helped create. They tried terms like “pyramid marketing,” “geometric marketing,” and “tornado marketing.”

Then they came up with a term that stuck — “viral marketing.” The email service had spread around the world with the ferocity of an epidemic. By passing along emails with a clear (but inoffensive) marketing message, current users were infecting potential users. And the rate of infection increased rather than decreased as time went on. Forget diminishing returns; Hotmail was enjoying increasing returns.

Jurvetson went home to his wife, Karla, a psychiatrist, and began poring over her medical books. “I read that a sneeze releases 2 million particles,” he says, “and I really started thinking about the idea of infection for the first time. A sneeze is only dangerous when there’s a crowd around. A sneeze on the Internet, however, can infect millions of people scattered across the planet. It’s as if Zeus sneezed: How many people would catch a cold?”

Suddenly, the principle behind viral marketing seemed so easy to understand. In this new world, companies don’t sell to their customers. Current customers sell to future customers. In exchange for a free service, customers agree to proselytize the service. Because recipients of Hotmail messages are almost always friends, relatives, or business acquaintances of the sender, the marketing message is that much more powerful. Each email carries an implied endorsement by someone who the recipient knows. 

Fast Company 1999

 There are two critical and prescient sentences in this last paragraph. “Each email carries an implied endorsement by someone who the recipient knows”  was a great description of the value of viral marketing and “In this new world, companies don’t sell to their customers. Current customers sell to future customers”, a predictor of the transition of power from corporations to individuals.

There is often an argument about the applicability of such examples to the B2B community, but, as mentioned earlier, while not all consumers are B2B buyers, all B2B buyers are consumers.  As if by osmosis, people are conditioned to new ways of thinking by the interactions they have as consumers, and begin to expect similar capability or convenience in their business connections and interplays. And it happens without any one noticing; incremental changes in behavior and expectation, satisfaction and dissatisfaction.

I will say again: The fact remains that all business people – including both sellers and buyers – are consumers, and the lessons they learn in ‘consumer-land’ shape their thinking and expectations in “business-land’.

The problem I foresee is that some companies might fail to see the value of the network effect as an accelerant in both developing business in existing customers as well as in creating awareness, interest and preference in new accounts.

Helping Customers Buy

Traditional business theory would teach a method to understand the Customer Lifetime Value (CLV) – a mechanism to consider how much a business could extract from a customer over the lifetime of that customers interaction with the business.  The thinking goes that because the cost of customer acquisition is high, you’re much better off getting more business from the same customer than acquiring new customers, and of course this is true.  But it doesn’t end there, but it is important to understand how you can be part of the recommendation chain for your existing customers.

I want to be clear that I do not recommend that you should cast aside older approaches to account development just because they are old, but rather learn from the past and enhance or modify to take advantage of the velocity and reach of the Social Universe. There is a risk that proven methodologies that have earned their rightful place as axiomatic principles in account development will be followed religiously without amendment, and without reference to the evolution we’ve witness in the Social Universe.  Even more damaging is the risk that these proven axioms will be seen as too rigid in this new world – and therefore deemed irrelevant rather than modified, throwing the proverbial baby out with the bathwater.  This is one time where evolution, rather than revolution, delivers most value.

In fact the old axiom that promotes the need to become a Trusted Advisor to your customer has never been more relevant.  As you can see from the diagram here, Trusted Advisors are present in the buying cycle throughout the buying cycle, and in fact participate long before the buying cycle begins.  They are an intrinsic link in the recommendation chain.  The difference now is that one could argue that the gap between Trusted Advisor and Vendor, previously occupied by the Credible Source and the Problem Solver, has instead become a narrowing chasm in which failure lives.

In our business, customers use Dealmaker Smart Account Manager to gain a picture of their current status in an account, and identify ‘white space’ areas to explore for potential business. The goal is to identify areas in the customer’s organization where your solutions might solve known business issues for each division or business unit in the customer’s organization, or where you can identify previously unknown opportunities for improvement.

Opportunity Map: Click for bigger image

It focuses however on aligning sales opportunities with the customer’s goals using a strategy map to provide insight to the customer’s business goals. If you want the customer to be satisfied with the product/service you deliver, then you need to ensure that you understand the need the customer has.

You’d be forgiven for thinking that being a customer is easier than being a sales person.  All the customer’s got to do is pick a supplier, right? But when the customer makes that buying decision, the risk shifts from the supplier to the customer – at least in the eye of the customer – and the impact on the customer of a poor buying decision is usually greater that the impact on the salesperson of a lost sale.  That’s important enough to say again:

The impact on the customer of a poor buying decision is usually greater that the impact on the salesperson of a lost sale.

For a customer to be comfortable, she must be really sure that the supplier has a deep comprehension of her (sometimes unstated) needs.  Uncovering or understanding even ones own wants or desires can be an unyielding search. When that quest is filtered through the lens of another, vision is often blurred, and the picture that emerges is uncertain. In a corporate context personal and company motives sometimes collide, or at least bring with them varying nuances of aspiration, and a panoply of potential wants and needs explodes. Customers and suppliers, sometimes unknowingly, share the consequent anxiety when they meet in the un-choreographed buy-sell dance.

Many psychometric studies show that each of us has different approaches to social interaction, leadership, teamwork, and relative strengths or weaknesses when it comes to strategic or tactical bias, detail or big picture orientation, and introspection or engagement. Consider then that over the course of your business life you’re likely to encounter the full spectrum of customers or buyers who will exhibit varying proclivities for action, engagement, or precision.

Each customer will be different. Some will want to lead the buy-sell interaction; others are prepared to follow the direction of a trusted supplier. More are at their most comfortable when working in collaboration with their supplier, and it’s this latter category that is most common, and certainly most productive for both buyer and seller alike.

Whether the customers you’re dealing with are current customers or new prospects, you can be sure that each is active in the Social Universe, learning others in their industry and listening to ‘someone like me’, and looking for people that they can trust – who are part of the recommendation chain.

So, what’s the best model for customer interaction?  Unfortunately there is no one answer that works in all cases, but there is a proven method that we would recommend that you follow. A collaborative approach to fully describing the problem being addressed is always instructive, even when customers exhibit tendencies of leader or follower.

The challenge often faced by a customer when looking to leverage the expertise of an external supplier can be summarized as:

1. No easy or established way for the customer to map out the internal customer issues
2. No mechanism to explain the business challenges to a supplier
3. Uncertainly about whether the supplier understands the specific problem
4. Need to gain alignment between customer and supplier to avoid any current or future misunderstanding

Now customers have the opportunity to look to their online community in the Social Universe to address the first two of these obstacles.

In May 2012, Quora, the question and answer site, raised $50m (at a valuation of $400m).  According to Quora’s own website:

Quora connects you to everything you want to know about. Quora aims to be the easiest place to write new content and share content from the web. We organize people and their interests so you can find, collect and share the information most valuable to you.

Quora is just one example of a crowd-sourced knowledge community, and it is noteworthy because of the depth of expertise exhibited by its members. But there are other places where your customer can go to find solutions to the problems they are experiencing; LinkedIn Groups, when effectively moderated, are a valuable source of experience waiting to be published and frequently are quite deep in very specific industry areas.  If your customer is asking questions in these communities, and you are not there answering the questions, you can be sure that your competitors are.

It is harder than ever to attract new customers early in their buying process.  You need to leverage your current customers by first delighting them, and then making it as easy as possible for them to recommend you to others by building your own on-line community, publishing customer videos on Youtube, and turning your most successful customers into your most powerful advocates.

In the next post, I will relate how Mark Benioff, CEO of salesforce.com, is a master of leveraging the network value of his customers.

I spoke at InsideView’s Insider Summit meeting in March 2012. The topic was about sales metrics that you might measure to calculate your sales velocity – the revenue you can achieve every day – and some ideas about what you might do to improve your sales velocity, and also achieve accurate sales forecasts.

The video has been edited to remove the Q&A and to make some of the slides easier to see. Click play to view the video. It runs about 25 minutes.

This is my first video blog, and I’d welcome any comments on the format, or comments or questions on the content.

It has been a while since the last post in this series.  We’ve been really busy with the launch of the Dealmaker Index global sales benchmark study.  The data that we’ve gathered from that study underlines the need for sales and marketing to be on the same page.  In my post The Actual Cost of Sales and Marketing Misalignment, I draw from the Dealmaker Index data to show that there can be a difference in quota attainment of up to 25% between those organizations where sales and marketing are singing in harmony, versus those where these two interdependent functions are just singing their individual tunes.

You can find the earlier posts here:

• Blueprint for Sales and Marketing Alignment – Part 1
• Select the Customer: Blueprint for Sales and Marketing Alignment – Part 2
• The Buyer’s Perspective: Blueprint for Sales and Marketing Alignment – Part 3

In the last post in this series, I focused on qualification of opportunities, to help both sales and marketing identify which deals you could win. By qualifying opportunities well, you know where to spend your time to meet your quota each month or quarter. But while many companies’ financial cycles force measurement in four financial quarters, it’s rare that a customer’s buying cycle will start and end every three months. Maintaining a strong pipeline, with enough qualified opportunities at each phase in the pipeline, is the only way to avoid the quarter-end crunch that often results in unnecessary discounting.

Pipeline Structure & Management

It is often difficult to decide how many stages you should have in your sales pipeline. At The TAS Group, we have seen different companies with their pipelines segmented into anything between three and 12 stages (we recommend no more than six) in the pipeline. Every week, or month, sales managers then ‘manage’ the sales force by working through each individual’s sales pipeline to determine how many opportunities are at each stage, and what probability to apply to each opportunity. More often than not, this is a fruitless exercise for two main reasons.

First, subjectivity plays a large part. In most cases, the interpretation of how to categorize the opportunity is left to the salesperson’s discretion. The buying cycle is often ignored, and there is usually little linkage between the key qualification questions used, and the stage of the process. Clear ‘customer-evidenced’ deliverables are linked to each stage of the sale, and overall productivity increases.

Second, it is futile to determine the value of a pipeline by multiplying the value of each opportunity by the probability of it closing. You either win the deal or you lose. Having 10 opportunities at 10% probability mathematically may be the equivalent of one full opportunity – but it is not the same as having a signed contract.

Keep the Funnel Full

You mightn’t want to do it, but sometimes, as a sales person, you’re going to have to generate your own leads. You can’t always rely on marketing. Getting appropriately-targeted customers into the top of your sales funnel is the source of your raw material. Without that raw material, you can’t build a pipeline. When there are gaps in your pipeline, pressure builds on the few opportunities you have. You’re tempted to try to progress a specific deal too aggressively.

The likelihood of finding a good opportunity is dependent on the type of activity you undertake. If you’ve got your act together, if you are truly a sales professional, you have a broad network of contacts who are potential customers. They respect you and the value you can bring to their business. Your existing customers can provide you with further business within their company, and referrals to their counterparts in similar companies. Strong relationships with industry consultants and analysts are a good source of recommendations for new business opportunities.

Your own market assessment and development activities will always provide the best quality of sales leads, but be sure that the folks in marketing aren’t working in a vacuum. Make sure they are in lock-step with your needs. Help them understand what’s exciting the customers. Together, you can craft effective seminar programs, social media activity, telesales, or emarketing campaigns for your territory. Marketing often bemoans the fact that they generate leads and the salesforce ignores them. Get them on your side, and help focus their activity by telling them what you need, and then by showing them how you are responding to the good work that they do.

Rocks and Stones and Pebbles

If you want to fill a barrel with rocks and maximize the capacity of the barrel, you have to fill the gaps between the rocks with stones or pebbles. It’s the same with your pipeline. Experienced sales professionals will understand that relying on a small number of big deals is risky, and they will balance their opportunity portfolio with smaller deals. While waiting for the big deal, no one is making any money and desperation levels increase if there isn’t a backup plan. Your negotiation position weakens, and that major opportunity turns into a minor profit deal. Rocks, stones and pebbles make for a full barrel.

The Pipeline Value Factor

There are four factors that determine the health of a sales pipeline:

• Integrity of data
• Deal value
• Number of deals
• Balance across pipeline stages.

The information in the pipeline system must be pristine, continually updated to reflect progress, wins and losses.

How long is your typical sales cycle? How much time passes during each phase of the buying cycle? To keep the pipeline balanced, and maintain a steady deal flow, you need to have an adequate number and value of opportunities at each stage in the pipeline. In Dealmaker we use the Pipeline Value Factor, or PVF, to help gauge the value.

To achieve 100% of, say, a quarterly target, consistently over consecutive quarters, PVF is the measure of what multiple of that target number you would need to have in each stage of the pipeline, at any point in time.

Determining what opportunity value you need to factor into each of the pipeline is best calculated by reference to historical data:

• On average, how long does it take for an opportunity to progress from initial engagement to closure?
• How many of the customers that you had identified this time last year have progressed to further stages of the pipeline?
• How many have closed?
• How many were lost?

An effective pipeline management system, consistently executed, provides clarity and visibility which, together, gives both sales and marketing greater control. A true pipeline provides an early warning system; it shows where you are strong and points to areas that need attention. Use our system or develop your own. Use it well and it will bring you an uncommon freedom to focus on what you have to do today in order to achieve your revenue targets consistently, without the interminable stress that accompanies uncertainty.

It’s the detail that counts, and the packaging matters.

I could just stop there, because if there is anything I’ve learned from watching Apple under Steve Job’s leadership, I think that would be enough.

Whether you are an Apple fan or not is not important. You may prefer Android or Windows. It doesn’t matter. On the day after Steve Jobs announced his resignation, it is hard not to recognize the impact he has had.

I am a fan of Apple products. I buy them for their function, but also for their form. I’m a sucker for great design, and Apple products make me smile by their very simplicity and the compulsive attention to detail that is evident at every turn.

The URL that you need to retrieve a forgotten AppleID password is iForgot.Apple.com.  It’s a little thing, but just one example of an excruciating and uncompromising commitment to every last point.

But, in my opinion, Steve Jobs’ extraordinary vision, and high stakes risk taking, have been equal contributors to Apple’s recent meteoric growth.  Market research would not have predicted the demand for the iPod or iPad. (I wrote about this phenomenon in my post Nobody asked for Twitter or Butterflies.)

With these two products, Apple created two new market categories and it did so by believing completely in the vision, and placing a big bet. Then they got it right first time, repeatedly.

One of my very favorite quotations from Steve Jobs (and there are many) came from his well-known commencement address at Stanford in 2005.

You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something — your gut, destiny, life, karma, whatever.

When we design our Dealmaker software application, we do so on Apple computers. We’re inspired to do better.

And, I can’t think of tougher test that we could set ourselves than asking “Would we be happy to show this to Steve Jobs?”. One of my proudest moments at The TAS Group was the day we added the Apple logo to list of Dealmaker users.

As Seth Godin said today, “Business didn’t used to be personal, now it is.  Computers didn’t used to make us smile, now they do”.  Personal is good, because it just means we care more.

So, next time you’re shipping a product, or pitching a sale, ask yourself “Is this the very best I can do?  What would Steve say?” My guess is that you will make it better.

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One of the most popular blog posts I did last year was a presentation of the results of a survey I did on the factors that motivate a sales person. Some found the results surprising, and you can find the results here.

So, has anything changed over the past 12 months?

Here is your chance to vote.