By Karen E. Klein Q: My small business makes and sells orthopedic devices to hospitals, rehab centers, nursing homes, and medical-supply distributors. We would like to begin selling under contract to smooth out the peaks and valleys in our production cycle, cut costs, and reduce our reliance on distributors. How does one go about contract sales, and what should we be doing to get the effort off the ground?
-- F.T., West Newton, Mass.
A: Anytime you propose a shift in the way you do business -- in this case, from sporadic sales via distributors to long-term contracts with regular customers -- you should be prepared to show your clients a benefit. After all, if this change doesn't improve their situation, why should they agree to it? Your competitors will no doubt be more than willing to continue doing business the old way if it keeps the customers happy. So while you have already identified several valid benefits to your company from contract sales -- consistency in production and billing, reduced costs, and eliminating the middleman -- you'll want to offer an incentive to your clients as well.
Take a close look at how you bring your products to your key accounts, suggests Joe Sperry, a partner in S4 Consulting, based in Powell, Ohio. "Are you aware of ways in which you might use your delivery, packaging, billing, or training in different ways to deliver more value to your customers?" he asks. "If your immediate answer is no, you may have an overly transactional relationship with some of your customers...and it might certainly be to your benefit to get to know some of your customers better."
TAILOR YOUR OFFERINGS. Forging a higher level of relationship with your customers is key to nailing down the long-term contracts you seek, Sperry says. Your sales staff and customer-relations department may have to pick up new skills to manage major accounts. Consider hiring a relationship manager with industry knowledge, business acumen, and patience. This person could help you learn about the unknown needs your customers may have and how you can tailor your offerings -- products and surrounding services -- accordingly.
A customer-relationship manager could be promoted from within -- if you have someone in your sales department who's willing to learn new skills and is up to the task of passing along that knowledge. Otherwise, look to bring someone in from outside your organization who's familiar with this type of work.
A key educational resource for you and your relationship manager could be the Strategic Account Management Assn. says David Cichelli, senior vice-president of The Alexander Group, a Scottsdale (Ariz.)-based sales and marketing consultancy. "This is a nonprofit resource group that will help you learn about how to manage major accounts," he says.
CUSTOMER TRIAGE. Cichelli also recommends reading Key Account Management and Planning by Noel Capon, published in 2001 by Simon & Schuster. The book lays out a framework for managing key accounts, Cichelli says, information that's invaluable for your business since those clients will eventually -- with the right relationship development -- produce the major share of your long-term sales revenue.
A caution: As you embark on the task of developing major accounts, be mindful that not all your clients will be willing to move beyond the transactional sales you have carried out up until now. If you have customers "who are the sort to accept the new values you're offering and then ask for the lowest bid, don't bother offering them the new value -- it's a waste of your time," Sperry says. "Serve those transactional customers with the lowest price you can, and when your margins disappear, fob them off on competitors. Use this customer triage approach to determine which of your customers are value bleeders and which offer the opportunity to add new forms of value to both firms. Then focus your resources on those opportunity accounts."
Making the shift from sporadic transactions to developing key accounts, understanding your value-oriented key customers, and managing relationships with them will take time. Plan on making the transition over one to two years. "When your firm isolates those [key accounts], you'll be playing a different game than that of your competitors, offering value in ways the customer hasn't seen it offered before," Sperry says.
"The first-mover rewards are high for relationship management, and often include contractual relationships. You won't be rewarded quickly, but you will be rewarded." Patience, it seems, remains a virtue. Have a question about your business? Ask our small-business experts. Send us an e-mail at Smart Answers, or write to Smart Answers, BW Online, 45th Floor, 1221 Avenue of the Americas, New York, N.Y. 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.