Every day, in industrial B2B businesses everywhere, salespeople are having conversations intended to produce current and future revenue and profitability. For the vast majority of these sellers, whom they spend their time with on any given day is largely an unplanned or reactive outcome. Most sellers don’t have clear insight into which customers produce the greatest sales growth or net profitability, so their sales and profit outcomes result from a roulette wheel of variability. These are indiscriminate order takers.
In addition, many businesses suffer from the “Plague of Sameness,” where they copy each other and fail to differentiate from each other meaningfully. In mature markets, businesses are ultimately fighting over finite revenue, raising their costs and invested capital while lowering their pricing and profitability. Think of these as “red oceans” (where the color is the unsavory outcome of bloody competition), whereas “blue oceans” are those markets defined by high growth, value-stream innovation, and capabilities-based competition.
Prioritizing sales efforts into “blue oceans” and away from “red oceans” enables you to become a strategic market maker, rather than simply a market taker or order taker. But which markets are red and which are blue? You may be surprised by the answers.
The Red Oceans vs. Blue Oceans Market Strategy
Red oceans and blue oceans represent the market space (as in an oceanic landscape) in terms of existing and emerging market segments. In blue oceans, winners create – and capture – distinctive value. They achieve faster growth and higher margins. Many executives have instincts about where their blue-ocean opportunities may lie. Still, they lack the deeper analytics to understand the true vitality and profitability of the diverse markets they serve – to sharpen their priorities, commitments, and focus.
Red oceans markets are those where companies vie for a limited share of demand at low margins and high cost-to-serve. This is where you don’t want to be. These markets are saturated and highly competitive. You want to migrate away from these cutthroat waters where profits and growth are low and declining. Your overall growth and profitability depend crucially on the portfolio mix of your sellers’ blue-oceans versus red-oceans customer mix. If sellers strategically and systematically overweight their blue customer calls and under weight their red customer calls, their revenue and profitability will accelerate versus competitors. That requires data-driven call planning, a core discipline in sales effectiveness. That requires data-driven call planning, a core discipline in sales effectiveness.
When you understand the market through this lens, you start to ask – and answer – profound questions for your business:
- Which markets should we serve (Ideal Customer Profile)?
- Which markets should we avoid?
- What capabilities do we have, and do we need to build, to serve blue oceans customers?
- What should our approach to talent selection and development be to align to the blue oceans markets of the future?
As we implement blue-oceans analytics, we begin to understand which markets we can profitably invest in versus those we should under-weight or avoid. Red oceans usually result from market conditions that produce adverse or inconsistent performance on cost-to-serve, COGS, pricing, and sales performance (the four Profit Diamond levers). We also learn which customer segments show the greatest growth and profit potential and, over time, the degree of difficulty in reconciling actual profitability with optimized profitability.
The Journey to Peak Optimized Profitability
As geographic and technological boundaries have shifted to create a more competitive marketplace, the fundamental operational challenge for manufacturers and distributors today is how to navigate the market strategically and allocate resources accordingly. Doing so requires deep insights into where profit is coming from today (pre-optimization) and where it could or could not come from in a world where all profit variables are optimized.
Some customer or product segments could be extremely profitable if all their underlying levers (cost of goods, cost-to-serve, price, share-of-wallet, etc.) were optimized. These are ideal customers and products. Other customer or product segments may not be “Profit Makers,” even if all their underlying levers were optimized. While it’s not always easy, it’s important to flag and recognize these as inherently unprofitable, defective market segments – and to dial down and phase them out of sales call plans.
As we gain insights into the clustering or common characteristics of these groups, we can overlay business strategy to identify how to align capabilities, assets, and sales resources to pivot toward the markets of the future.
Here, we look beyond profitability as the key metric and focus our vision to the markets of the future. What are the prospects for segment growth rates? How resistant are they to disintermediation by competitors or disrupters? The best of these become target blue-oceans markets. The remaining markets can be considered core (who we are today), or non-core (markets we have served unintentionally or peripherally). Effective target selection then feeds into sales call planning to shift conversations (and future revenues) into the blue-oceans segments.
As we gain insights into the clustering or common characteristics of these groups, we can overlay business strategy to identify how to align capabilities, assets, and sales resources to pivot toward the markets of the future. Here, we look beyond profitability as the key metric and focus our vision to the markets of the future. What are the prospects for segment growth rates? How resistant are they to disintermediation by competitors or disrupters? The best of these become target blue-oceans markets. The remaining markets can be considered core (who we are today), or non-core (markets we have served unintentionally or peripherally). Effective target selection then feeds into sales call planning to shift conversations (and future revenues) into the blue-oceans segments.
How to Segment and Manage Your Core and Non-Core Groups of Customers and Products
We need to identify major customer types and product families as target, core, or non-core. Combining our strategic dimension with our profitability dimension, we can develop specific operational plans to manage each group. Manage the following core groups of target and core customers and products by optimizing prices and drop ship versus traditional inventory, lowering COGS and CTS, improving your mix and share of wallet (SOW).
These customers or products are the key to extraordinary future profitability and growth. The key is to identify their common traits and find more of them, as well as to align assets (such as inventory), capabilities, service and sales resources to provide superior customer service and share of wallet (SOW).
These are customers or products that accelerate defensible growth, but they need to be nurtured to become “profit makers.”
These are customers or products that are strategically valuable (due to growth potential, alignment with a company’s distinctive capabilities, or barriers to disintermediation, but have economic structure that is unprofitable. These are important customers or products to remediate, as they can create defensible, accelerated growth.
These customers or products are the bread and butter of the business. In the short run, optimize the price, COGS, CTS, and/or mix/SOW.
These are customers or products that sustain the current economic structure, but they need to be nurtured to become “profit makers.”
These customers or products need to be analyzed to identify if they can or cannot be optimized to become “profit makers” or at least Profit Neutrals. The key question is, if each of the levers were optimized, would these customers become “profit makers” or “profit neutrals”? Look for common characteristics that prompt automation or other service-model choices to remediate their losses.
Identify and manage your non-core group of customers and products
These customers and products are the third that need to be shed, and their supporting sales and operational resources aligned to either core or target customer or product acquisition.
These customers and products are the second that need to be shed, and their supporting sales and operational resources aligned to either core or target customer or product acquisition.
In a world of trade-offs, these customers and products are the first that need to be shed, and their supporting sales and operational resources aligned to either core or target customer or product acquisition.
Becoming Strategic Market Makers
Ultimately, today’s industrial B2B market makers need to shift from being indiscriminate order takers (passively pursuing or receiving all revenue and GP dollars as good). Instead, they need to migrate towards strategic market makers (we focus and build up market segments with high profitability, vitality, and strategic fit). In nature, healthy whales migrate to blue oceans… In industrial B2B, the future will belong to those companies with the intention, visibility, and discipline to align with the future markets.
If you’d like to explore how to align your sales efforts according to today’s evolving market-landscape dynamics, feel free to connect. Your sales team will be glad you did!
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Infographic: Master These 4 Profit Levers
Optimize the profitability of your accounts.
Find out how the four profit levers we refer to as The Profit Diamond™ can optimize the profitability of your accounts.