We’re noticing 3 major business trends in Canadian large and mid-sized industrial companies, and our clients’ board meetings are abuzz with the ‘Strategy Big 3.’ What are they talking about?
1. Shifting from selling products to selling recurring revenue services. Technology companies made the big shift from installed software to SaaS over the last 15 years. Now all B2Bs are getting into recurring revenue.
2. Embracing eCommerce. In the next 5 years, business-to-business (B2B) companies will make a major shift to online selling (the same way consumer companies have done over the last 5 years). This is a hot topic and a lot of industrials are at the beginning of the journey.
3. Moving to digital marketing and selling. The pandemic ended trade shows and in-person sales. A lot of companies have had to quickly learn how to move all of their lead generation and sales activities online. Time will tell what the future has in store for trade shows and in-person sales.
A recent article in Harvard Business Review focuses on the first of these trends. Written by experienced sales force consultant and Associate Professor in the Marketing unit at Harvard Business School, Doug J. Chung, the article shares how many B2B companies are changing their business model from selling products to selling services. It’s a move that requires more thought than just changing pricing models.
We agree. Based on a number of difficult transitions that we have witnessed among mid-sized and large industrial companies, shifting a business model, isn’t a short, easy or guaranteed transition.
The reason for wanting to make the shift is clear. Recurring or usage-based revenue has become the business model du jour. It’s a favourite of private equity (PE), so B2B leadership teams thinking about moving to PE, must also think about growing their recurring revenue. This means selling services, not just products. This isn’t only happening in tech companies. Any B2B - from software to manufacturing to services – can apply this model. Chung’s article highlights Daimler Trucks as an example of this change. Their move from the traditional model of leasing trucks for set periods of time is changing to charging customers for miles driven.
The range of new possibilities for B2B companies is exciting. The challenge for many won’t be deciding what to shift their business model to, but rather how to get their customers and sales force onboard.
Chung outlines 3 steps that B2B companies need to undertake to successfully transition from selling products to selling services:
Step One – Reimagine Customer Segmentation
Typically, B2B companies structure their go-to-market strategy based on company segments - which are usually based on business location and size. In this model, a company in Ontario with 1000+ employees, often works with a different salesperson and sales process than a smaller Quebec company with less than 100 employees. This worked well in the past, because it was easy to get information on the market and prospective customers.
Selling on the newer usage-based model upends that logic and the simplicity of segmentation. Today, the number of employees in an organization does not necessarily indicate how much usage they get for a particular service. Consider Netflix, which has just 8,600 employees (tiny, compared with major industrials and businesses). Netflix represents over 12% of all internet traffic. This means for a company selling, say, cloud services – Netflix represents the ultimate whale client. If the cloud services company did its market segmentation based on employees alone, it would completely miss the mark on which companies presented the best sales opportunities.
The lesson: changing your revenue model means changing not only ‘what’ you are selling, but also ‘who’ you are selling it to. ‘How’ you sell it is also becoming increasingly more important. (see Step 2).
Step Two – Restructuring the Sales Organization
The typical B2B sales process used to begin with lead generation, move to qualifying prospects and demonstrating products, resulting in deal closures. It was a tried and true model with countless variations based on buying behaviour in a given industry. In the new world of recurring revenues, this model doesn’t work.
In the usage model, ‘closing a deal’ is only a midway point, and isn’t even the most important part or final part of the process. Today’s sales people need to get customers actively using the service. The more they use, the better it is for the seller.
Have you noticed the boom in ‘customer success’ representatives in software companies in recent years? If so, you understand what’s happening and why. The customer success team makes sure customers actually use the service - which is the key to ongoing revenues. A sales person who ‘closes the deal,’ but doesn’t get the customer successfully onboarded and actively using the software / tool / service / whatever, has in fact, failed at the sale.
Step Three - Use Sales Force Management Tools to get the Right Behaviour
According to the article, the third step in transitioning to a recurring revenue business model is to manage new tools and setting the right goals for the sales team. Chung argues that a key element here is compensation. Historically, sales people were compensated on closing a deal. In the new model, compensation shifts to what the company needs now – i.e. use of the tool / service / solution / software. Salespeople today, must be compensated on delivering usage, not just making the initial sale.
B2B companies today have every reason to shift to recurring revenue models. They will be stronger and more highly valued businesses if they do. Making the shift involves more than just changing sell-sheets and price lists. It involves rethinking what you’re selling and who you’re selling to, how your sales team is structured, how they sell, and how you compensate (read: motivate) them for effective selling.
If you’re thinking about making a shift from selling a product to selling a service, we encourage you to read the article. It can be a complex process with lots to consider to make a successful transition. When you’re ready for your B2B business to make the switch, contact us to help.