Healthy Sales Force Strategy

Volume 12 Letter 3

Revenue growth was slowing, new product line extensions weren’t bringing in the desired growth, competition was increasing and customers were applying strong pressure to reduce costs…sound familiar? That’s the situation that was facing a medical equipment supplier. The challenge they faced was how to demonstrate that their premium products delivered superior value through lower hospital labor costs, improved patient outcomes and superior caregiver safety.

To turn this company around Hill-Rom concluded they needed more innovation and product differentiation. They increased R&D investments but the real story is in how they realigned the sales force. Hill-Rom felt the sales force wasn’t properly delivering the “superior value” message to their customers and they needed to address this. The normal response is to re-jig the sales compensation plan to hi-light the appropriate messaging but when Hill-Rom executives looked a little deeper they questioned if their actual market approach made sense.

Like many companies Hill-Rom determined sales team allocation by the size of the facilities they served. On the face of it the segmentation seemed sound – larger facilities meant more beds and equipment and more beds and equipment meant more beds and equipment needed replacing. However, digging a little deeper revealed that capital equipment budgets aren’t very well correlated to facility size. Other factors like occupancy rates, profit margins and mix of insurance plans turned out to be much better predictors of capital spending.

More importantly, Hill-Rom discovered two distinct buying groups within the hospitals and nursing homes-hospital administrators and medical professionals. Hospital administrators, (labeled Prime Customers), were focused on reducing costs and patient liability. Conversely, when doctors and nurses were the decision makers they were obsessed with caregiver safety and patient outcomes. When the medical professionals, (labeled Key Customers), made the purchase decisions they replaced equipment 40% sooner than when administrators made the replacement decision. Furthermore, Key Customers clearly got the message that superior equipment could save millions in both patient care and caregiver injuries.

Re-segmenting customers into Key Customers and Prime Customers revealed some big gaps in how Hill-Rom was going to market. Because they allocated their time by the size of facility they discovered they were spending way too much time with Prime Customers and not enough time with Key Customers. As well, when the numbers were crunched, the cost to make a sale to Prime Customers was 4x to 5x higher than for Key Customers. Turns out that treating all customers the same was making Hill-Rom sick.

Needless to say Hill-Rom split their sales team to focus on Key Customers and Prime Customers. For Key Customers Hill-Rom further segmented by therapy, hiring therapeutic area specialists as sales people and further tailoring the sales strategy to the needs of the customer.

Hill-Rom, with their new customer segmentation, was able to attack real industry problems. For example, by redesigning beds they were able to save one facility $1 million / year by reducing back injuries. Results in other facilities were equally impressive in improved patient outcomes and increased staff and patient safety. Hill-Rom continued to service Prime Customers with low cost products.

Demand for products in operations run by Key Customers tripled as facilities recognized the value that came from investing in superior products. Revenues increased, margins increased, customer satisfaction increased ….all because someone took the time to properly segment the market and align the sales teams accordingly.

Companies too often take the easy road and segment the market by customer size. Its time to ask yourself:

  • Do we allocate our time solely based on the size of the account?
  • Do all our customers receive the same level of service?
  • Do we pro-actively provide technical support to selected customers?
  • Do we offer different product variations for different customer groups?

If you answered “Yes” to the first two bullets and / or “No” to last two bullets its likely time to rethink your customer segmentation strategy!

For the full story see “Smarter Segmentation for your Sales Force” Ernest Waaser et al; HBR March 2004 pp105-111

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