Here are some sobering statistics for entrepreneurs. In 2011, more than 400,000 new business entities were launched in the United States, but 34% of those companies are now out of business. Two years from now, less than half will still be around. By 2018 only 30% will have survived.
What’s behind these failure rates? In many cases it’s a lack of salesmanship, says Waverly Deutsch, clinical professor of entrepreneurship at Chicago Booth. Each year, as coach for Booth’s annual business plan competition, the Edward L. Kaplan, ’71, New Venture Challenge, she watches students create new businesses, many of which fail to thrive or quickly close. These entrepreneurs all think they have something unique to offer the market, but they often fail to grasp that selling is the heart of any commercial enterprise, she says. It’s simple: without sales, there is no income and no way to keep a company alive.
“Let’s be honest,” Deutsch says. “Many entrepreneurs are inventors, engineers, or numbers people, and they are just more comfortable working alone in an environment they can control.” Entrepreneurs often believe their new product or service is so exceptional that their customers will seek them out to acquire it. And like most people, entrepreneurs are uncomfortable with ambiguity, and selling involves a lot of it.
Instead of selling, entrepreneurs turn their energies to every other aspect of running their new companies. They conduct surveys, design prototypes, and tinker with their products until they are perfect, following the advice of Ralph Waldo Emerson, who said, “Build a better mousetrap and the world will beat a path to your door.”
“With all due deference to one of America’s greatest thinkers, that is absolutely the worst advice ever given to entrepreneurs,” Deutsch warns.
When entrepreneurs do tackle sales, they often do so indirectly, by investing time and money into activities they believe will be enough to bring in customers and profits. They create a trade show exhibit, for example, or put money into key-word advertising, or they might spend late nights perfecting a press release. Those activities may make potential customers aware of the product, but they do not constitute selling.
To survive, entrepreneurs need to sell, says Deutsch. For the sales shy, she has some definitions, and a plan.
But wait, there’s more!
Say “sales,” and many people think of used car salesmen, the Home Shopping Network, and television infomercials, where theatrical advertising pitchmen say things like, “But wait, there’s more!” Deutsch, who earned a PhD in theater history with a focus on 19th-century productions, knows more than the average person about theatrics. But she also knows that there’s more to sales than pitching products on the Atlantic City boardwalk.
Selling, says Deutsch, is the process of building a relationship with the customer. It’s the opportunity to understand the needs of the marketplace in order to improve merchandise, programs, and services to meet those needs. Selling establishes and extends an entrepreneur’s network of people and contacts, laying the groundwork for early orders and trial customers.
Selling is different than marketing, she emphasizes. Marketing is what you do to get potential clients to notice you. Selling, by contrast, is the one-to-one conversation a business has with a potential customer that determines whether the business has a product that solves a problem for the client. It’s also what a company does to move a prospective customer to make a purchase. You cross the line that separates marketing from sales the moment you engage with an individual potential customer, says Deutsch.
The right ratio
How much time, budget, and energy to devote to selling depends on the way a business goes to market. Deutsch asserts that there are five go-to-market models: relationship, retail, internet, channel, and embedded. Each requires a different sales-to-marketing investment ratio, defined as the amount of resources that should be devoted to each.
Businesses that use the relationship model include firms in consulting and enterprise software, as well as providers of heavy equipment, such as airplanes and tractors. For these companies, each contract is unique and results from intensive ongoing communication directly between a seller and client. Because of that, the sales-to-marketing investment ratio will be as high as 80:20.
Retail businesses, on the other hand, typically deal in products that don’t require customization or extensive training. When a person walks into a store or restaurant, or surfs a website, she has self-identified as a potential customer already primed for a sale. The hard part for a retailer is getting that potential buyer to come to that particular shop or website in the first place. For this reason, Deutsch puts the sales-to-marketing ratio for retail establishments anywhere from 40:60 for more involved purchases like appliances or cars to as little as 10:90 for grocers and restaurateurs.
Internet businesses—such as ecommerce, content, and gaming sites—tend to use social media and searches to raise their profiles. But they face a lot of competition, and a huge geographic area in which to sell, which requires intense efforts to get prospective customers to their websites. High marketing budgets drive traffic, but website design and product offerings have to do a lot of the selling once a customer arrives. A typical sales-to-marketing ratio for internet businesses is 20:80, says Deutsch.
Businesses using relationship, retail, or internet go-to-market models are interacting directly with their customers. That’s not the case for channel companies, which sell their products through wholesalers, manufacturers’ reps, distributors, or retail partners. Think Sony, Kraft, and Whirlpool, which have dual sales jobs. They use marketing tactics such as advertising and promotions to drive awareness and demand among consumers, but their direct sales force also has to convince distributors and retailers to buy their products and give them maximum shelf exposure. Channel-reliant businesses could use a 40:60 or 30:70 sales-to-marketing investment ratio, according to Deutsch.
Lastly, there are some companies in industries such as contract manufacturing, service subcontracting, and parts supply that operate completely behind the scenes, whose brand names are rarely known to end consumers. These firms’ offerings become part of other companies’ solutions so they go to market in what Deutsch calls the embedded model. Embedded selling typically leads to long-term, customized contracts. An automotive glass supplier may spend years developing relationships with key decision-makers at Honda, Ford, and Volvo, putting money into research and development to meet the specific needs of each car company, and only closing a sale when a car company is confident in the supplier’s reliability. For embedded firms, selling is paramount, and the sales-to-marketing ratio can be as high as 90:10.
The four-step process
Some large, established companies use several go-to-market models. Apple, for example, uses a retail model to sell to consumers, an internet model to deliver software and music, and a channel model to sell through partners such as Best Buy. It also has a large, professional sales force; the budget to promote products and services at high-profile events; and money to spend on broad-scale advertising efforts. Entrepreneurs, of course, have none of that, making it critical that they focus on one go-to-market model to start with. To help them, Deutsch and Craig Wortmann, clinical professor of entrepreneurship at Chicago Booth, devised a four-step method to teach entrepreneurs, regardless of their go-to-market models, how to sell.
First, select the right group of people to target. However obvious this may seem—after all, how can you sell without knowing your audience?—having a large number of potential market segments can paralyze or confuse a new business-owner. Most entrepreneurs believe that every person on the planet could benefit from his or her products or services, says Deutsch, but this lack of focus can be fatal. When a business attempts to cater to a diverse group, it could end up trying to tailor its product to each potential customer, which in turn will make the whole business unprofitable.
Deutsch and Wortmann cite the example of a company that sold integration technology, used to enable disparate computer systems to work together. The owner pitched the software to a food producer, as well as to a printing company, high-tech firm, and insurance giant. Consequently the company got bogged down customizing the technology for each client.
An entrepreneur should first define a target group of customers, say the researchers. To do that, the business-owner should identify the specific problem a product solves, then list a group of potential customers that have some common buying habits and needs. According to Deutsch, successful entrepreneurs must be able to deliver value quickly to this first group of customers, while considering the spin-off possibilities. Professors Deutsch and Wortmann point to a start-up that sold technology used to predict equipment failure on airplanes. That company focused on the airline industry at first, then, once it had established credibility with sensor monitoring, the owner turned his attention to selling that same technology to utilities firms to monitor equipment in their plants.
Second, engage a prospective customer by talking directly with the potential buyer. An entrepreneur should start with her own network, which includes people most likely to listen, provide feedback, and ultimately buy. While many entrepreneurs stop there, cold calling makes them stronger and smarter, say Deutsch and Wortmann, as the feedback teaches them about their own products. While learning about what needs they are or aren’t meeting, they can also begin to gather data about the types of cold calls that result in potential clients.
Once engaged, potential clients need to be “qualified,” which is how an entrepreneur determines the seriousness of a prospective customer while politely holding his or her interest. However daunting it may seem to ask probing questions, Deutsch says, a seller needs to find out who the decision-maker is, how long it can take for him or her to make that decision, and what kind of budget is available. Identify as quickly as possible if there is a potential fit, says Deutsch. If there isn’t, move on.
“High-performance selling is a proper combination of knowledge, skill, and discipline,” Wortmann adds. “Skills like handling objections and qualifying prospects, and disciplines like getting into and out of conversations efficiently and effectively, are critical but often neglected lessons that entrepreneurs must learn.”
Third, make a match between the seller’s value proposition and the needs of the client. Before having a conversation, research the prospective customer. Allow that potential client to articulate her needs, budget, timeframe, and goals. Then determine if the needs match up with what you, the seller, have to offer.
Many entrepreneurs find it difficult to begin such conversations, to ask the open-ended questions needed to get helpful answers, and to give the prospective client time to analyze her business needs. Entrepreneurs often get excited and overpromise, or are willing to make too many changes to make a sale, says Deutsch. But bad news travels fast, and if you fail to meet an early customer’s needs, that will hurt your reputation and be far worse for the future than failing to make a deal. (See "Relationship advice for suppliers" for more about this issue.)
Ultimately, the information you garner from a good conversation should find its way into any business proposal you submit to the prospective customer. Make a proposal concise, and use language that the customer used in conversation. The proposal should include the key points that were established in the conversation along with an already-agreed-upon price.
Finally, close the deal. It’s surprising how many new business-owners miss this critical step, assuming that a conversation that went well will automatically produce a sale, Deutsch says. If a proposal has been well-researched and carefully constructed, politely ask whether the prospect is ready to move forward. If the answer is no, don’t get discouraged, says Deutsch. Instead, ask more questions, and leave the door open for a later conversation.
Success not guaranteed
If these steps don’t bring success, it may be that a seller’s value proposition isn’t as great as she thought it was, say the professors. Or it may be that the start-up is pushing into an oversaturated area of the economy. According to The Illusions of Entrepreneurship by Scott Shane of Case Western Reserve University in Ohio, nearly 20% of new businesses started in the United States in 2004 were in retail, although retail only represents 6% of the economy. That mismatch continues, and produces high failure rates.
The next most popular sector for start-ups is professional and technical services, followed by accommodation and food services (hotels, motels, and restaurants), financial and real estate services, arts and entertainment, and construction. All of these are overrepresented compared with each industry’s share of the economy. But budding entrepreneurs, take note: the four most underserved industries in the United States are manufacturing, wholesale trade, health care/social assistance, and transportation/warehousing.
Deutsch is using Shane’s findings in her current research, which looks at the failure and success rates of start-ups using each of the five go-to-market models. Using data from a survey conducted annually by the Kauffman Foundation for Entrepreneurship, she finds that the odds of becoming the next Facebook are pretty low, as only 15% of new internet businesses survive past six years. By contrast, nearly half of start-ups using the embedded model are still open six years after launch. Companies using the channel model are also doing well, with 43% still around after six years. The data suggests that once these companies get their products on store shelves, they seem to be past the danger stage and tend to survive.
Deutsch is still gathering data, looking at how the 2008 economic crash and more recent recovery has affected failure and success rates. But entrepreneurs shouldn’t wait for her to conclude her research before they begin implementing her findings. A business-owner needs to think more about sales in all respects, she says. Selling is as important as having a great idea in the first place.
Waverly Deutsch and Craig Wortmann, “Entrepreneurial Selling,” Scribd, February 2011.
Scott Shane, The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live by, Yale University Press: 2008.