A cautionary tale from the battery industry, where misplaced confidence in conventional sales tactics nearly cost a company its future.
Many business sectors have specialist positions within companies that are specific to a particular industry or market sector. For instance, a clown in a circus. There are, however, some roles that are more generalised, where personnel skills are transferable to other industries and markets – for example, accountants and electrical engineers. However, this generality can break down for some industries that have highly specific elements within their business operations.
One such sector is the battery industry. Apart from the specifics of the technology, the marketing of batteries is very different from that of other commodities such as clothing or automobiles. A good clothing salesman can convince a customer looking for a pair of shoes to also purchase a pair of trainers, specialist cleaning tools, and perhaps a shirt and belt in addition to their original purchase. Not so in the battery industry. A battery is a grudge purchase made only on a necessity basis. Nobody could be persuaded to buy two batteries to start a car when their existing battery fails.
This edition’s parable demonstrates how typical sales and marketing methods neither increase nor even maintain sales levels for a normal battery manufacturing business. The story begins with a medium sized European lead-acid battery manufacturer in the early 1990s. The MD, Rolf, was newly appointed and charged with the task of increasing sales by steady growth. After several months in the position, he decided to appoint a new sales director to replace the existing incumbent Jean-Michel, who was nearing retirement age. The new sales director, Claudio, was recruited from the automotive industry and was given the simple brief to “boost the company’s flagging sales”.
Claudio’s first action was to check the ratio of sales versus enquiries. This turned out to be low, around 5% – he would expect at least 20% and the target should be 35%. From his experience in the automotive industry and others, he knew that this should be a perfectly achievable goal for any business. And so, this was the target that was set. Within the first month he had analysed all the enquiries based on product type, delivery date, price and warranty terms. He looked very closely at the sales from these enquiries, and also analysed these according to the same criteria as the enquiries. According to his analysis, there were three key criteria for a successful conversion of an enquiry into sale that stood out. These were the price, the battery type and the delivery time. With the statistical evidence giving him more than 70% confidence in the result, he decided to make his pitch to the board.
Claudio called an unscheduled board meeting. Those present were Rolf, the production director, Josef, the technical and engineering director, Filip, and the finance director, Anna. Claudio started the meeting by presenting the sales and profitability of the company over the last five years. Whilst not disastrous, it was lacklustre, above break-even but in gradual decline rather than growth. His projections showed the company making a loss by the next year. With only minor corrections from Anna, the financial forecast based on projected sales was accepted by the board. The controversy began when he proposed his measures to reverse the decline. Notably price reductions, new battery types and increase in stock.
What was novel with his approach was the use of enquiry data rather than sales records to make the forecasts. This, he argued, gave a better understanding of the market requirements and the sectors where the greatest demand lay. Very convincingly he laid out a roadmap to show the required prices (8% lower), the new types (three new battery models) and the required stock level (an increase of 40% over the current level). He then produced a new set of financial forecasts based on the new sales figures. Whilst the margins were lower, the sales levels were nearly double the current value, with profits raised from impending loss to +5% of turnover.
There was a somewhat muted reception to the proposals and during the questions some areas of dissent began to emerge. The first was the production director, Tomas, who wanted to know how the additional stock would be funded and was the cost of producing it fully reported? Within an hour the figures were thrashed out by Anna and the new projections showed a reduced 3.5% profit, but nonetheless it was a profit. It was at this point that Filip played his hand. His concerns were two-fold: firstly, how was the 8% price reduction calculated and how could it be profitable when margins were already wafer thin? Secondly, if the prices matched those of the competition, why should the customer buy from us rather than the other companies? The figures showed a doubling of the sales in two months. The additional production and sales support would require recruitment and training. This would take time – product output was not at the end of a tap.
Claudio’s answer was to pass the challenge back to the production, engineering and technical staff. He argued that this was not a wish list, it was the market reality and they had to respond and do their job by achieving these goals or closing the company. That was the reality. Filip spoke up again. He pointed out that much of competition had lead recycling facilities attached to their factories, and that their lead costs were at least 10% less than that of Average Batteries. This gave them at least a 7% price advantage. The point about stock was not missed – in the secondary battery market the highest seller by type was less than 4% of the product range. The stocking levels required to promise delivery from stock would be beyond their means.
Claudio was not listening; this was what was required and the stock levels by type would be carefully selected using the software he had brought from the more advanced automotive industry. His advice at this stage was simple: “This company has no alternative. You people have run this company your way and it is dying. There is now only one solution – follow this plan or be bankrupt by the end of the year.”
One last point however, was made by the production manager: “Claudio, I see your marketing strategy but I’m not sure it will work. Batteries are sold to a customer, they are supplied. The customer does not want batteries; they want what the battery powers. A forklift truck, a scissor lift, a computer network in a power outage, and all the other devices that are electrically powered. What they need is a reason to buy from us, not from the competition. It is not all about price and delivery, although a small percentage will sell on that basis.”
Claudio was having none of it – he came from a more sophisticated market environment, with highly developed tools to enable market trends and opportunities to be recognised. He had the experience to convert enquires into sales. The company was in a poor state and he was offering a fully costed viable solution. There was no option in this matter.
The MD Rolf intervened at this point. He accepted Tomas’s argument that batteries were a grudge purchase and for this reason alone the price and delivery took on an increased relevance for a selling strategy. Siding with Claudio he gave the go ahead and took on the responsibility for price and stock increases. He outlined the company’s position with a dire warning that drastic measures were needed and the only other option was closure. In fact, he went further and reduced the price by a another 2% in order to give customers further incentive to purchase from them. Anna spoke up at this point explaining that there was no sensitivity in the figures and if sales were just 5% lower, the losses would be unsustainable.
This time Filip interjected again, claiming that the margins would be almost zero with no net contribution to the bottom line. He was firmly put in his place and given two weeks to present the new lower cost designs to provide a 5% net margin. Rolf then turned his attention to Anna. He accused her of meddling in matters that she neither understood nor was qualified to comment. He finished by suggesting that she should concentrate on making invoices not meddling in matters beyond her understanding. The meeting was then dismissed.
It took a month to pull the action plan together and report the results to the board. The new designs were presented with only 3% savings in materials. This was rejected by Rolf and following a detailed analysis from Filip it was decided to use smaller plates and drop the capacity of several types by 5%. This was based on Rolf’s own research (suggested by Claudio) that showed the batteries had slightly higher capacities than the catalogue ratings, plus the demands on the batteries in the targeted markets were fairly gentle. All objections were swept aside on the premise that it was this solution or closure.
Fast forward six months and sales value showed a significant improvement but, unfortunately, well short of the profitable target levels for this initial period. The results presented by Claudio were examined in detail. Rolf spoke up during the discussions and asked Claudio if he could furnish the original data for the enquiries that were the basis for this whole project. Anna kept these records and was able to show the summary consisting of the price, the delivery required, the customer’s name and the battery type. The sales manager Jens, (reporting to Claudio), who had been noticeably quiet during the meeting, interjected. He addressed Rolf directly, informing him of his own experience and knowledge of the customer and enquiry relationships that he had observed over the years.
In his experience, many of the customers listed in the analysis would never buy from Average Batteries. They usually stuck with their existing suppliers due to the personal service they needed to ensure trouble free operation of the businesses. In fact, the only reason for the enquiries was to pressurise their existing supplier into maintaining their existing prices or to obtain a higher discount. He also showed that since Average Batteries had reduced its prices, the competition had made further reductions which had further lowered the market sales price, and again were undercutting Average Battery’s prices.
This development made Claudio’s plan unworkable, no further price reductions were possible and already losses were rapidly mounting. The higher stock levels had removed all financial reserves to enable further trading at current prices. Only one question was left to Rolf: “What do we do now?”
It was Anna who spoke up. She explained that she had compiled a list of regular, loyal companies along with their average monthly sales. They had reduced their spending over the last six months due to concerns over the lack of interaction and support they had experienced. According to Anna, the accounts showed that after-sales care had dropped and personnel had been diverted to creating new business. On her own initiative she had contacted many of these customers for feedback. It turned out that they were end users who were more concerned about ensuring their batteries were serviced and maintained properly than the price. Advice on maintaining and operating their batteries as well as visits to their sites had also dried up. It also turned out that they would pay a premium to re-establish those services. They were even amenable to paying for annual site visits to maintain their battery installations as long as they had an increased warranty guarantee.
In a nutshell, Anna had prepared a recovery plan. This consisted of a new pricelist, service contracts fully costed, an upgraded warranty plan and a sales forecast based on LOIs from the customers. The projections showed steady sales with a 10% net margin. This plan would put the company into profit within a few months, and eradicate the present loss within a year.
Once finished, Anna sat back in her chair leaving a stone silence within the boardroom. Clearly unhappy with this turn of events Rolf asked why she had not discussed this earlier with him. That was simple – she had been asking for a meeting over the last two months to make these proposals and he had neither read her submissions nor acknowledged her competence to comment on the present sales crisis. Before he could respond she added that, instead, she had discussed it with the chairman and shareholders who had approved this the day before, and they would be contacting Rolf immediately after the meeting.
Time seemed to stand still as Rolf stared at Anna for several seconds. It seemed more like minutes before Rolf finally spoke: “I see. In that case I am closing this meeting now.”
He stood to leave the room, but first turned to address the accountant: “I would not wish to delay the next steps in your plan Anna.”
Without looking back, he left. Within seconds there was uproar. All board members were firing questions at Anna, who remained calm and waited for the tumult to subside. Once things were calm, she held up her hand to signal silence and spoke quietly. First, she addressed Claudio who was sat rigidly staring at her. He was asked to leave the meeting and join the MD in his office where all would be explained. Once he had left, she addressed the remaining directors.
“I will issue a written statement from the board of governors and shareholders in a few minutes. Before that, I have an announcement to read to you on behalf of the chairman, Paulo.”
The upshot was that in view of the deterioration in the company’s sales and profits and the decisions taken leading to the downturn, the MD and sales directors had been immediately suspended. There was a new directive for the company based on the recovery plan already circulated at the meeting. This was the approved direction for the company and all directors would be required to devise their own departmental plan to facilitate these changes. Anna would take responsibility for its execution and all directors would report to her until further notice.
After many seconds of silence, it was Filip who broke the silence: “I like the new direction, it makes a lot of sense. Selling batteries is futile, we need to sell the company.”
Anna nodded and said, “Well then, let’s get started.”
