Private equity firms tend to focus on fixing sales when the real problem may be the marketing strategy. We spoke with Clay Spitz of Chief Outsiders about how to better understand what’s behind those disappointing sales numbers.
It’s only natural for GPs to fixate on sales. It’s the quantifiable discipline closest to the top line. It’s also prone to problems. A recent survey of 400 B2B salespeople admitted that only 24.3% beat their quotas in 2018. And no private equity firm raises their next fund if their current portfolio is full of companies with underwhelming sales.
What’s counterintuitive is that often sales problems aren’t about sales, but marketing decisions. And poorly managed marketing insights, strategy or execution might not be evident until sales slump. Which is why GPs should tap a marketing expert to help diagnose the issue.
Clay Spitz, a three time Chief Marketing Officer and now Managing Partner with Chief Outsiders, explains: “You can tap a marketing resource at any time in the investment cycle, but it might be best done during due diligence, when problems can be recognized and remedied early in the investment.”
Before blaming sales…
One of the ways marketing experts like Spitz and his colleagues suss out the root causes is by checking how rigorous the Company’s marketing and sales process is tracked. Do they measure conversion rates of leads throughout the process? Do they know the various stages of the sales and marketing funnel? Can they produce a history of sales, noting when and how often contacts become leads, leads become meetings, meetings become proposals, and proposals turn into sales?
The rigor of these metrics are one place to start diagnosing the problem. Some questions that emerge may include: Does management and the sales team know and understand the positioning and pricing issues for themselves? Do they understand the competition and the market as a whole? And is the process designed and aligned to attract and sell the right customers? Or, are there simple tactical adjustments that can improve the situation very quickly?
For companies in the lower middle market, this level of rigor may be tall order, but it speaks to how well an enterprise understands how sales and marketing work in tandem with one another.
Get an “expert” opinion
“If you bring in a sales consultant, they’ll focus on the sales staff, whether it’s training, sales process or compensation,” says Spitz. It should be noted that in the survey of salespeople we cited earlier, not a single question linked the marketing strategy with sales performance.
Yet, if there’s only a bland, undifferentiated value proposition or a failure to understand the current customers and competition, how likely is it that the sales staff will succeed? “And the right resource, such as veteran CMO, understands how sales and marketing should be aligned,” says Spitz.
So he argues that a CMO could be brought in at the due diligence phase, to apply those insights to the first 100-days’ plan. “This way, the GP doesn’t have to wait and hope that the same management team that’s run the business at 10% growth a year for a decade, will suddenly deliver 25% annually,” says Spitz.
Ensure all the “gears” are working
To better understand how marketing is linked to sales, Spitz often talks about how companies have to ensure that all Growth Gears are working properly. Like any good process, every step has its place and order matters.
The first gear is Insights. This is when the Company takes the time to study its product or service and its place in the market, its customers and its competition. This typically involves more than just talking to internal voices at the Company. This is the time to talk with current customers, shop competitors carefully and look at the market as a whole. A lot of the assumptions a Company may be making about its market might have been true once, but aren’t any longer.
The second gear is Strategy. The insights gathered from the first gear are employed to revamp go-to-market plans, which can range from re-designing or re-aligning the product or service to entering new markets, to creating a customer-centric and clearly differentiated positioning.
Next, there’s Execution, which involves translating the strategy into the concrete tactics of building awareness in the market, and to efficiently and effectively generate qualified leads. Spitz cautions that this is the point where a lot of mid-market companies commit Random Acts of Marketing, like a web site redesign or a new logo or social or digital marketing programs that aren’t connected with how the Company needs to change how its perceived or carefully target the right customer set.
The fourth and final gear is Sales. Marketing can generate leads and the right kind of awareness, so now the sales staff can then translate that into actual growth. Spitz is not arguing that if the three gears are running well, the fourth gear takes care of itself. Reviewing compensation, training and individual performance still matters. Every gear is vital.
And beware of one-gear efforts
As Spitz puts it, “If sales is its own gear spinning without the support of the marketing process, or the only marketing gear is Execution, then these are like a one-speed bike, and there’s only one way to go faster: pedal harder. And after so long, there’s a point of diminishing returns.”
That “pedal harder” approach is what a lot of GPs and portfolio companies end up doing, by fixating on sales and only moving the needle slightly, despite the fact that the asset class demands exponential growth from the portfolio company. But a more holistic approach to the entire sales and marketing discipline might spark the kind of reinvention that generates the returns that keep current LPs happy and might even woo some new investors along the way.
Download this insightful study which identifies seven blind spots evident among private equity firms seeking portfolio company growth.