Private equity firms have changed the competitive landscape of every industry. From funding private companies with disruptive technologies (e.g. Uber) to taking legacy public companies private (e.g. Dun & Bradstreet), PE-backed competitors focus on creating breakthrough go-to-market strategies….quickly.
But do PE-backed leadership teams view Sales & Marketing any different than traditional firms? The short answer: YES. They focus on targeted, continuous, short-term revenue improvements. Below, I will describe two powerful concepts that govern the approach of PE-backed Sales & Marketing teams: 1) the “Last Mile” of the selling/buying process, and 2) “Revenue SWAT Teams.”
The PE Sense-of-Urgency
But first, let’s get grounded in why and how PE-back management teams think and operate differently. According to Bain’s 2018 Private Equity Growth Outlook, in 2017 there were 2,200 global private equity deals consummated with a total enterprise value of $440 billion. Perhaps more interesting, there were 150 “take private” deals of public companies totaling $180 billion. In these public-to-private transactions, one core assumption is that radical corporate change is both possible and critical to creating increased shareholder and customer value.
Let’s go deeper. According to Bain, the typical PE deal is done at just over 10X enterprise valuation to EBITDA. In public-to-private deals, that means paying a 25-35% premium over public market value. But to make it even more serious, most of these deals are financed with at least 60% debt. High buyout valuations plus debt leverage means that executives in these companies must find ways to generate cash….fast. In every PE buyout, there are always stories of large cost cuts and business unit spin-offs to generate cash flow. But behind those headline-grabbing actions, PE-backed management teams recognize that creating incremental, repeatable revenue and margin improvements is the secret to long-term cash generation and higher exit multiples.
An Agile Approach to Incremental Revenue Scaling
Over my career, I have worked with many public and private large enterprises. The most successful Sales & Marketing management teams tend to act like they are PE-backed – whether they are or not – and they exhibit two unique best practices: 1) “Last Mile” focus, and 2) cross-functional “Revenue SWAT” teams:
1) Last Mile Focus
The fastest path to accelerating revenue growth and improving margins is to attack the low-hanging-fruit in the last mile of the customer buying process. Simply stated, many companies risk over-investing in new digital demand gen technologies to generate more leads. While more leads are good, they are useless unless a company’s sales channels can convert brand and demand into revenue. The young, sharp-pencil MBAs inside of PE firms run the numbers and they see broad marketing program conversion rates of <1% – that’s investing in high volume, low yield revenue opportunities. Conversely, when they focus on the opportunity to market and sell to the company’s existing, installed customer base, they see 50%+ growth opportunities and >20% conversion rates! Here are the typical focused, last mile revenue growth opportunities the best PE-like companies pursue:
- Improving Retention/Renewal Rates: Year-over-year retention of existing contracts often account for >50% of a company’s revenue plan. The PE/Last Mile mentality sees opportunities to increase YoY 70% renewal rates to 80% as high yield investments.
- Cross-Selling New Products to Existing Buyers: Strong relationships and track records open the door to selling additional products and adjacent services at low incremental cost.
- Cross-selling to New Buyers in Existing accounts: For companies selling to large, global, multi-division enterprises, it always shocks senior executives how many potential buyers in existing accounts are poorly or not covered at all.
- Eliminating the Long Tail of Unprofitable Customers: Not all customers and products are worth the effort. PE-minded product marketing execs find significant opportunities to free up resources by eliminating small customers and low volume products.
- Offering Lost Cost, Low Friction Digital Buying Enablement: In many cases, existing customers neither want or need a sales rep involved at every stage of the process. Determining where to “cut out the middleman” and improve customer experience will drive revenue growth.
- Sales Channel Incentives: Last Mile behavior – what is sold to whom – is often governed by sales channels and their incentive structures. If all dollars are green, there is no profit focus. Examining and redesigning sales incentives to align with growth and profit objectives sounds obvious but is often ignored.
- Pricing: Beyond the feel-good talk of “value pricing”, PE-like leadership teams think in terms of penetration pricing for new products and end-of-life price increases for mature products.
Analytics leaders spend more than 50% of their budget on solving activation issues– that is, using AI and predictive analytics in the last mile of the customer experience journey. Read the blog, “The Last Mile Problem: 7 Steps to Closing the Insights-to-Outcomes Gap” to change your front-line sales and marketing behaviors.
The above set of strategies and tactics is not exhaustive, but a Last Mile focus always generates upside surprises.
2) Revenue SWAT Teams
Beyond just identifying where the “Last Mile opportunities” exist, we see the PE mentality totally changing how these opportunities are attacked. The BIG hurdle these executives recognize is silo’ed areas of Sales & Marketing expertise that don’t work together well (if at all). Let me give you an example:
A newly PE-backed financial services provider sees a big opportunity to cross-sell existing buyers. A basic analysis of how buyers consider new products and new vendors suggests that the buyer/seller journey requires a combination of social media, direct response marketing, web content, and inside sales resources. Add to that customer purchase pattern analytics by data scientists and integration with existing CRM technologies – well, that’s a complex stew of skill sets needed. The challenge is that each of these disciplines has their organization and team, often viewed as “Centers of Excellence (COEs).” The PE-minded exec sees two options: a) move slowly to attack the cross-sell opportunity by tapping into the resources of each COE, or b) move fast by creating a cross-functional revenue SWAT team to monetize each opportunity rapidly, one-at-a-time.
The right approach is obvious – avoid the bureaucracy of separate social media, marketing, sales, and data science teams and create a single SWAT (special weapons and tactics) team and program to define, attack, solve a specific Last Mile opportunity.
What Sales & Marketing Execs can Learn from PE Firms
Bottom line. After many conversations with PE boards and their management teams, two keys to success always emerge: focus and speed. For Sales & Marketing execs, that means defining clear “Last Mile” revenue opportunities against which they can deploy “Revenue SWAT” teams.
PE firms will continue to find opportunities to change the competitive landscape – mirroring their best practices is not a bad idea.