Harvard Business School Professor and six-time author, Frank Cespedes knows a thing or two about sales. On the latest Walker Webcast, he and Willy discussed topics from his most recent book, Sales Management That Works, including the importance of culture, how to hire the right talent, aligning sales with strategy, and so much more.
Willy begins by introducing his guest, Frank Cespedes, Senior Lecturer of Business Administration at Harvard Business School (HBS). He holds a BA, MS, and PhD, and he teaches entrepreneurial sales and marketing in the HBS MBA program. Frank also heads the Aligning Strategy and Sales executive education program at HBS. He is the co-author and author of many Harvard Business Review articles and HBS case studies and has written six books. Frank's most recent work is entitled Sales Management That Works.
Willy draws on this book for his first question in the discussion, asking about where Home Depot’s sales management (considered in an early example in the book) went wrong. Robert Nardelli, a former executive at GE, took over as CEO of Home Depot in 2000. The changes he brought to Home Depot's sales approach played out poorly, raising not only the question of where he went wrong, but also how GE could have had people like Nardelli, so close to holding its highest leadership role, who turned out to be abject failures.
Frank first explains that marketing and sales (and business development in general) in most companies is currently managed how it should have been five to ten years ago, since that's when people making the really important decisions had regular, ongoing contact with customers. Looking more closely at Home Depot, Frank comments on the need for a strategy to be linked with sales and business development, and details that the value proposition of Home Depot included knowledgeable workers, but in part, given an overblown emphasis on e-commerce, this part of the value proposition saw systematic under-investment.
After sharing why he chose to write yet another book on sales, Frank offers more insight on the over-emphasis on e-commerce that is common in the market today. Offering numbers to demonstrate his point, Frank explains that the market is not as e-commerce driven as many think and that brick-and-mortar operations are not becoming obsolete. There is, however, a shift toward multi-channel and multi-media sales models. One example of this change is the process of buying cars; commonly today, consumers spend time learning online before going to a dealership, but make their final purchases in person. This reality makes specific demands of sales leaders; they are expected to offer transparency with data on pricing and should move toward value-based pricing. Fortunately, there are many tools available to help company leaders adapt to new sales trends and the changes they demand!
Another area in which change is needed is that of sales incentivizing. The traditional incentive model has encouraged workers to sell as much as possible without having an eye on margin. The message this sends, though, is that any sale is a good sale, and ultimately, this approach disconnects sales from strategy. To bring positive change, sales leaders should consider what behavior they want to encourage in their sales team and work on adaptation. Change like this is difficult, but certainly not insurmountable.
The change required within sales divisions involves the need to hire the right people. It is a well-established reality that finding strong sales talent is difficult. Leaders looking to hire cannot rely on education programs or interviews to direct them to the right people, but rather need to augment the interview aspects of their recruitment strategy with other processes. These additional processes will ideally help leaders gauge important behaviors like persistence and tenacity. It will be helpful, Frank says, for sales leaders to settle on a narrower profile for what they want from a sales candidate.
Moving forward, Willy and Frank discuss the fact that three times as much money is spent on sales versus advertising. Advertising, especially in the digital space, has value, but not as much as people often think. Digital media is expensive and high maintenance, and it is a deep-pocket, big company game without democratized access. Companies also have to navigate the realities of the social media megaphone effect (and often individuals only talking to themselves), as well as of changing and accumulating buyer power.
As they begin to wrap up, Willy asks Frank about lead generation and lead qualification, turning to questions on talent retention. Frank explains the need for personnel (rather than a mechanized process) to perform the complex judgments of sales qualification, and comments on the fact that talent is crucial in sales but not easily portable. Culture and interpersonal relationships matter and this reality should shape the way sales leaders think about training and retaining sales team members.
0:48 - Willy introduces Frank Cedpedes.
3:50 - The interview starts with a question about Home Depot and sales.
9:55 - Why did Frank write his book, and what's the deal with e-commerce?
14:57 - Frank comments on car buying and multi-channel sales models.
21:20 - Conversation shifts to sales incentive structuring.
26:04 - How can a company find good salespeople?
38:30 - Frank explains the difference in money spent on sales and advertising.
46:44 - Willy next asks about lead generation and lead qualification.
49:20 - Questions remain regarding hiring and retention.
58:16 - Willy wraps up the episode.
Willy Walker: Welcome to this week's Walker Webcast. Our episode last week with Jim Courier, live from the Australian Open, was a wonderful discussion about Jim's career, what it took to win and how he lived his life both before, during and after being the world's number one tennis player.
Two nights ago, I watched a webinar with Dr. Jim Loehr, famed sports psychologist who both worked with Jim Courier and was a guest on the Walker Webcast last year. Loehr was asked in Q&A about Courier's comment last week that his parents gave him the ability to take risks and fail, and Loehr said that comment by Jim is the greatest compliment he could ever give his parents. The ability to take risks and fail or succeed is at the center of American capitalism. And as negative comments on social media abound with regard to politicians, CEOs and even NFL referees, when anything goes wrong, I think it's important to remember that unless we have risk takers who seek success but can deal with failure, we won't continue to grow as a nation and a society. And my guest tonight, today we'll talk a lot about social media and its impact on sales. With that in mind, let me make a couple of comments on what we're seeing in the markets, and then I'll jump to my guest.
• All eyes are on the FOMC meeting today. We shall see what comes out of that. Hopefully no great surprises, I will say. Jerome Powell in December seemed to have thread that needle perfectly. So hopefully Chairman Powell has the same ability today.
• Commercial real estate property sales hit an all-time high last year that was on the cover of The Wall Street Journal today. That's not new news to those of us in the industry, but it's good to see the data. And after I attended the National Multifamily Housing Council meeting in Orlando last week, which I will note was attended by 4,100 people and there was barely a mask in the hotels or conference areas, I've yet to hear of any great super spreader event. There is a ton of institutional capital looking to be deployed in commercial real estate in 2022.
So on to my guest, Frank Cespedes is the MBA class of 1973 Senior Lecturer of Business Administration at the Harvard Business School. Dr. Cespedes has earned a B.A. from City College in New York, an MS from Massachusetts Institute of Technology, and a Ph.D. from Cornell University. He teaches entrepreneurial sales and marketing in the MBA program and heads the Aligning Strategy and Sales Executive Education Program at HBS. He is the author or coauthor of numerous Harvard Business Review articles and HBS case studies, along with six books including Aligning Strategy and Sales: The Choices, Systems and Behaviors That Drive Effective Selling, and his most recent book Sales Management that Works: How to Sell in a World That Never Stops Changing.
So, Dr. Cespedes, first of all, welcome to Walker Webcast and thank you for joining me. I want to start with an example at the beginning of your book about Bob Nardelli and Home Depot. But before I ask you to describe what Nardelli got wrong about sales, I've got another question about leadership.
As you recall, and I will remind viewers who may not. Jack Welch over 20 years took General Electric (GE) from a billion dollars of annual profits to $10 billion a year of annual profits. Market cap got to half a trillion dollars at the time, was the most valuable corporation on Earth, and he had three of his senior executives who were in a horse race to see who would replace him. One was Jeff Immelt, the other was Bob Nardelli, and the third was James McNerney. Immelt gets the job, McNerney leaves and goes to Boeing, and Nardelli leaves and goes to Home Depot. Now we all know what Immelt did, which was destroy over $400 billion of shareholder value over the last twenty years at GE. Nardelli goes to Home Depot and almost drives it into the ground, and only McNerney, who went to Boeing, had basically created any shareholder value, and McNerney did a really good job at Boeing.
We're going to talk about how hard it is to find sales talent, but how could it be that America's greatest corporation had a horse race to replace one of the great CEOs and two of the three were abject failures?
Dr. Frank Cespedes: First of all, Willy, thank you very, very much for inviting me to the podcast. I've admired it. It's an absolute pleasure to be here. Now, in answer to your question, let me go back to a couple of things.
First, your introductory comments about failure. You're exactly right. It's at the heart of capitalism. Let's hope that our risk tolerance hasn't disappeared as a society – people fail and people succeed.
Number two, I like the quote from an investment banker I heard early in my career, he said, “Look, when you look at people in our business, everybody's smart until they're not.” Let's hope Jerome Powell does thread the needle again. He doesn't call me up, he doesn't call you up about what he should do. Let's hope he can get it.
Next comment I'd make is, I do think of one of the achievements that Welch had at GE. Welch didn't build that shareholder value by himself. Jeff Immelt didn't destroy it by himself. Nardelli didn't destroy it by himself at Home Depot. It's a lot of other things, including exogenous factors. But one of Welch's achievements is that he did have a horse race. He did have three people who sure look good on paper to succeed him. That, I think, is part of what any CEO has to do.
The third thing, allow me to quote another person from early in my career one of the smartest things that I heard, and I think it does point to the two out of three issue you’re drawing attention to, he said “Frank, what you're going to see in your career is that marketing and sales, business development in general, in most companies is managed the way it should have been managed five to 10 years in the past. Why? Because that's the last time the people making the really important decisions. For example, CEOs who set the foundational conditions for business development in their company, that's the last time they were having regular ongoing contact with customers. Once they become CEOs, the rest of the organization conspires to “protect” them against customers. As a result, they're often making decisions based on an obsolete vision of what's really going on out there. And that's been my experience that when companies fail or when they fail, you know, in terms of tens and hundreds of billions in shareholder value, it's no one thing. You just can't point to one person. It's a variety of other factors. That's the best I can do with that question.
Willy Walker: So when Nardelli got into Home Depot, though, he arrives and he hadn't been protected because he's the new CEO, and one would expect that he went out with customers, visited Home Depot stores, et cetera, et cetera. What did he miss in his change to the way that Home Depot sold?
Dr. Frank Cespedes: Two things – this is really about the important link between strategy and sales, and strategy and business development. You know, at the heart of Home Depot's value proposition with customers wasn't just our price and our merchandising, but those people who walk the aisles and actually know what they're talking about and providing that service to their customers. And my understanding of what happened at Home Depot is they systematically underinvested in that. So that's number one and number two, the reasons that Home Depot underinvested under his regime was this notion that somehow e-commerce is where everything is going and the brick and mortar store is obsolete. Wasn't true then, and it is not true now at almost 15-20 years later.
Willy Walker: If I go on to Amazon today and I put in “sales” or “sales management”, I get back 80,000 books that I could go on and buy. The only topic I could put in and get more books back that I could buy is leadership, and we just talked a little bit about leadership. But I guess my question to you, Frank, is why did you write the 80,000th and first book on sales?
Dr. Frank Cespedes: That's a fair question. (Laughs) Two motivations. First, it is fundamentally an intellectual professional motivation. Sales is by far the most context specific activity (I'm going to use business school jargon, Willy) in the so-called value chain. In other words, all those processes, any company has to engage in, selling software is different than selling financial services, different than selling consumer durables, etc. Selling in the US is different from selling in many other parts of the world. And yet sales is also that area where people feel most comfortable making huge generalizations, usually unsupported by any data whatsoever beyond what in academia we would call “N equals 1”. “When I sold for Google we did it this way, so should you.” “When we invested in PayPal…” that kind of thing. So, after 30 years of running a business and doing what I think is some reasonable research about the topic, I wanted to write a book that says this is what research does and doesn't tell you about this core activity in business.
My second motivation is that it's a good time for a book like this. There's no doubt that digital technology is the data revolution that will continue throughout our lifetimes. No doubt whatsoever that they're changing, buying, and selling. But my reading of what people say about this is they, for the most part, don't understand the managerial issues embedded in business development for most firms. So, I wanted to write a book about that as well.
Willy Walker: So, as we sort through the data as it relates to this digital transformation, one of the data points that you bring up in your book is that people's impression as it relates to media online sales versus brick and mortar is completely distorted. Why don't you just run through the numbers there so that people can understand that what many of us think is an Amazon UPS driven economy is nowhere close to it today?
Dr. Frank Cespedes: This is Department of Commerce data. When you look at the way they tabulate so-called e-commerce, it's a very liberal definition. In other words, you go to a website, you may order something there but actually pick it up in the store they tabulate, that as e-commerce, not brick and mortar. All right. So very liberal. But if you look at their data and ask yourself, what is e-commerce as a percentage of total U.S. retail sales just before the pandemic hit? The number is about 11.2%. When I ask executives, “What do you think that number was?” I typically get estimates from 30 to 60%. In other words, you're not a little bit off but magnitudes off. Now what happens during the pandemic, obviously, when stores are closed or, limited to 25 to 50% of their capacity, more buying and selling is going to occur online. But the height of the second quarter of 2020 that so far was maximum lockdown conditions in the US; e-commerce as a percentage of sales, even in those conditions, was about 15.5% In other words, it went up 5%. and it's been declining every quarter since then. Latest results for the third quarter of 2020 is about 13%.
By the way, the same is true for work from home. Real estate people should understand that. It reached its height in the second quarter of 2020 at 38%, according to the Bureau of Labor Statistics, now down to about 18%. Teen percent includes a number of gig workers who always have worked from home. So, these are numbers. This is a real issue, technology is a real issue. Because (a) it's overhyped and (b) misunderstood in its implications for companies.
Willy Walker: You spend a lot of time in the book, which by the way to anyone listening is a fascinating read, about a number of different areas of sales and how the sales funnel and sales channel has changed significantly. One very interesting examples you use is car dealerships and how people shop for cars and make their purchasing decision. I think Frank, the numbers that you put there is that people on average spend 12 to 13 hours researching online and then somewhere between three and four hours actually in the dealership. Fascinating to see that actual data on how much media has allowed people to take information from many, many different sources, like Consumer Reports, reference from a friend, online media, et cetera. But at the end of the day, they still have to go to a dealership, and at the end of the day, they're still interacting with a salesperson in that dealership to make the actual buying decision. And it's bringing up this issue of multichannel and multi-media, which from my reading of your book is really what people have to keep in mind is that as much as those statistics say, you still have a lot going on in bricks and mortar. It's really the multichannel, multimedia world that we're living in that is influencing the way people buy.
Dr. Frank Cespedes: If I can say so, is a good example because it does illustrate where the technology is and is not having an impact. The most important thing about sales always, still and in the future, is the buyer, not the seller, but the buyer who buys why and how, that's where technology's having its impact. And in fact, auto sales are a good example. The vast majority of auto sales, more than 96%, still occur in the dealership.
And by the way, that was true and has been true during the pandemic as well. Now, does this mean that going to Edmunds.com or AutoTrader.com doesn't make a difference? No, because now this is the data you're citing. Now the buyer walks in already knowing about product, price, price comparisons, etc. You can get all this information online, and in turn, that affects what salespeople have to be good at. And I think anyone who's bought a car in the United States, or at least anyone as old as I am that's bought a car over the last 20 or 25 years, I think will tell you that buying a car in this nation now is a much more pleasant experience than it was 20 years ago. Not because car dealers have somehow taken some vow of customer service, but because of what technology has done to empower buyers. It is an omnichannel buying journey. And as a result, the days of most salespeople essentially being organic, walking, talking versions of product and price literature – those days are disappearing in a hurry. And by the way, the same is true in a whole variety of financial services, real estate services, etc.
Willy Walker: You give some really interesting data in your book about what happens if you're not transparent with your data as it relates to pricing. The number of people who will walk into a dealership, and if you don't have the price of the car on the car, they'll turn around and walk out the door. It's so interesting in that context, Frank, to think about it as it relates to the old experience where we were reliant on the car salesman or woman to be the holder of all the information and that they were the market maker. And that's why we all felt like to some degree, they kind of were ripping you off. But in today's world, if you're not out there and fully transparent on your data, you're basically saying consumers bolt immediately.
Dr. Frank Cespedes: I think you've described accurately exactly what goes on in car buying and for that matter, in a bunch of industries. But I think you've got to interpret transparency when it comes to pricing by the third decade of the 21st century, in a couple of ways:
(1) Whether you like it or not, in most businesses, and this includes all, you know, most B2B businesses, as well as a direct to consumer, comparative pricing information is available to buyers, right?
(2) Inertia about that is usually not the profit maximizing option. Here again, I'll go back to Amazon on consumer goods. You know, you may love or loathe Jeff Bezos, but he knows what he’s doing at Amazon – if you go there and you buy consumer packaged goods, you'll notice Amazon reduces every good to a price per ounce comparison. Again, inertia is not the profit maximizing option.
(3) What I think makes transparency complicated, as well as a reality in the current market. Most companies when it comes to pricing simply adopt cost plus price. “These are our costs. Let's see if we can get 10 percent margin, 20 percent margin, 30 percent margin.” Yet if you read virtually any book about pricing, including my books, by the way, what they'll tell you to do is value-based pricing. The reality is because of the data that's now available today, there are more opportunities to do that in a whole variety of industries, but it's an area of business, despite the enormous changes taking place in buyer availability of data. It's an area of business where there is a surprising amount of inertia, and yet there's more and more tools available. And my advice to executives, including CEOs, if you're not taking advantage of those tools, shame on you. Shame on you.
Willy Walker: 70 percent of salespeople are incented to just sell as much as they possibly can and not products that have margin. You say inertia as it relates to pricing models on goods. There's also the issue as it relates to salespeople of going back and redoing sales contracts, and saying rather than having you just try and go and sell as much as you can, and I’ll figure out the margin side of it by managing the business. I want you to do this and I’m going to give you more incentive to sell that and less incentive to sell that. That’s very difficult as it relates to holding on to salespeople who have been incented in a certain way in the past. And now you’re asking me to go do something else. Have you seen examples of companies that have been able to shift those sales incentives to get people to sell margin rather than just top line?
Dr. Frank Cespedes: Yeah, I think there are a number. What I would say about this issue Willy, which is an important one, but a perennial one, always important. First, understand what the message is to salespeople when the majority, if not all, of their variable compensation is simply tied to volume. The message is there is no such thing as a bad sale. Just bring it in and we'll worry about that. That is one of the most efficient ways to disconnect sales from strategy. Strategy is always about who you're not selling to, as well as to whom you're selling. And in a comp system that's purely about volume, you're severing that important connection. The second comment that I'll make is, change is always difficult in business, but let's not exaggerate the nature of change in this area. You know, one of the things I've heard throughout my career about sales comp is keep it simple, right? I mean, you'll see advice on good sales comp systems that can fit on a business card, stuff like that. That has not been my experience with sales forces and salespeople. And again, once upon a time I had a full head of hair. I've had a fair amount of experience here.
I have yet to see the sales compensation system that the vast majority of salespeople don't understand in detail within two weeks. If this is how you eat, you will prepare the case, you will do your homework. So, I don't think the issue is simplicity because their little brains can't cover it. They'll understand it very often more than the managers do, which is why managers also complain about gaming.
I think the third thing to understand here is where the companies that I think have been successful have been able to do that. Volume is important in some businesses and in other businesses, it’s less important. So, you have to ask yourself when you're changing the sales comp system, not will my salespeople understand, BUT will they adapt? The good ones will in my experience. The issue is what behavior am I trying to change? And if that behavior is in the direction of profitability, make the change. On the other hand, if what you're really looking for in your sales force is in fact just keep the top of the so-called funnel percolating and we don't care what kind of beings they are, that's a different story. Your business is a good example. You do need to care about what kind of beans get into your funnel because once they are there, that's not an inexpensive process. False positives are not a good thing in your business and many, many other businesses. But a comp system purely geared to volume is not going to deal with false positives.
Willy Walker: So, you talk in your book a lot about how difficult it is to find sales talent. And one of the stats that I just couldn't believe was that there are over 4,000 colleges and universities in the United States, and by your search, there are 135 of them that have a course with sales in the title. So back to your previous point, you said sales is so specific to companies and product and location that teaching other skills around sales is very, very difficult. But you also talk about how in interviewing people for sales jobs, that the people who do well in interviews, the correlation between answering all the questions coming out of the interview with a really, really good response by the people interviewing you has almost no correlation to your success and sales jobs. So, if we can't rely on interviews, Frank, and we can't rely on the education system, how can we find good salespeople?
Dr. Frank Cespedes: A couple of things. (1) What's the bottom-line implication of what you're citing? You've got to grow your own culture, but it really, really counts. At the end of the day, hiring and training and development and sales have to be linked because it's just darn tough to develop someone who's a poor fit for the job in the first place. (2) The data about interviewing and the lack of correlation for the most part of between the evaluations people get in their interviews and their subsequent actual on the job performance – that's supported by 60 years of consistent research. It is as close to an established fact as anything you will ever hear from a business school professor. Now I've got colleagues at Harvard and other places who know that research and their advice to companies is: therefore, don't interview. Well, my own feeling is only someone who's never run a business can seriously suggest that, of course you interview. People work with people, people hire people. Of course, you have to do that, but you have to augment interviews with other processes because we know that they are not that reliable. And in sales in particular, it's about behaviors. It's not about how well they do in the interview process, it's about actual behavior. What you want to do is always put in place processes that give you a look at those behaviors, including internship type hiring scenarios. Now, when I suggest that to companies, especially in the current labor market where it's obviously a buyer's market, they say, well, we can't possibly do that. We couldn't get good sales talent on that basis. And I say the same thing. Look, you know, and I know what you're going to do with someone you hire in business development that doesn't work out over the next six, nine, 12 months. You can use whatever euphemism you want, but you're probably going to let that person go. Why not be upfront about that in some kind of internship hiring scenario? And by the way, you can put in place compensation and hiring processes that actually give you an advantage in that scenario and make the social contract that we're establishing transparent.
So again, the issue about interviewing is very, very real. Most executives think they're the exception, that somehow they are the horse whisperer and can peer into people's souls. Research says that's very, very unlikely. But it doesn't mean you obliterate interviews. It means you augment them with a whole variety of other processes.
Willy Walker: Are there any companies that you've looked at, Frank, that have to some degree systematized or standardized their sales recruiting and sales training process that has produced outsized returns? I remember distinctly when I interviewed for a job at Capital One, and Richard Fairbank, who is one of the great CEOs in America, had always set up that he wanted to hire really smart people. And so, I went for my interview and I just graduated from HBS and I was an honor student at HBS, and they made me take an aptitude test. And to be honest with you, I was a little offended that I had to take an aptitude test to get a job at Capital One after having been an honor student at HBS. And I kind of actually had fun with the test and didn't take it that seriously. They ended up actually not giving me the job, and it may have been because I did really poorly on the aptitude test. But the point being is they had a certain set of criteria and a way that they were going about recruiting executives and it clearly has created a fantastic bank at Capital One.
Are there other examples of either aptitude or other skills that some firm that has been able to outsize grow sales from a human standpoint? Not that they created the greatest product, but they created the greatest salespeople that you've studied that you could share with us?
Dr. Frank Cespedes: If you look at a number of the currently very successful tech firms, you're going to find something very similar to Capital One in the mid-1990s. And Willy, I think you'd agree with me, Capital One did well without you and you did very well without Capital One. You know, there is a good trade.
Willy Walker: You make a good point. But nonetheless, I think it's very interesting in the sense that you're really saying schools aren't training people to be salespeople, interviews don't tell you a lot about people's sales success, and so the question then would be what should we be looking for? And you talk about things such as persistence, tenacity, giving people tests to see whether they come back and really want the job. But then in today's world, as you rightly point out, people are trying to hold on to talent. They're trying to attract talent. And you said to me before, if you lower your standards, you're bringing on your own future problems. So don't just lower your standards today to be able to fill the seat because you're going to end up paying the price in the future. And so, I guess what I'm looking for is, what's the cheat sheet in hiring good people in today's market?
Dr. Frank Cespedes: I think where you begin. You begin with the buyer. What do I know about their current buying journey in whatever product market segment I'm hiring this salesperson for? Make sure that what we know about that is relevant today, not just yesterday. Then next thing you do, I think what I am about to say is especially relevant in the current market environment: What is it that I expect my business development people to do to exert influence when and where it counts in that buying journey? And here I want to step back for a second. When I ask most people hiring in sales, “What are you looking for? Tell me about the talent you're looking for?” What I get most of the time, about 80%, is that either (a) some succession of platitudes like must be curious, good listener, you know that sort of thing. Or (b)a set of traits that quite honestly, only Michelangelo or Michael Jordan could fulfill. And my advice is when you can hire Michelangelo or Michael Jordan. I'm pretty sure they're going to add value, but there aren't that many out there in any market environment, certainly this one. So, then you go back to asking yourselves, what is it I want sales to do versus what my marketing people can do, or my customer service people, or my product people. And I think when most companies do that, what they find is they're (a) able to focus more on what they're looking for, the way Capital One did, the way Google does today, and (b) that increases their talent pool because they're not, they don't need Michelangelo. They could work with someone who's reasonably smart but not a genius. So, that would be my advice about how to go about doing that.
Willy Walker: You, you talk in the book and you just mentioned a little bit about how sales has gone from being you use the term, a “selfie”, a one image, you've made the sale, you move on to the next one, to being sort of more of a continuum in the omni channel world we live in and how engaging with the clients to begin with and putting them into that funnel you talked about previously is not just getting them down to that sales point, but it's actually an ongoing relationship in many, many industries because of the way that clients are interacting with companies.
How is that evolution of both the buying cycle and then also the resale cycle changing the skills that salespeople need to have?
Dr. Frank Cespedes: Well, first, you're exactly right. That is what I mean by omni channel. The fact that the vast majority of both consumer and B2B categories, the fact that buyers are online and offline multiple times during their buying journey, again, buying a car is a good example. The buyers spend three to four times more online researching the purchase than they do in brick-and-mortar dealerships, but more than nine out of 10 cars are still bought in the dealership. Now, this affects skills in a number of ways, and the most important thing to understand is that this is what you should expect in any competitive activity, whether it's sports, business and frankly, to use your comments earlier in this webinar, it's part of the magic and value add of capitalism. Let's not forget it. You should expect in any competitive activity that competitive advantage is being a little bit better than the next person. Right? The bar is always rising, and that's exactly what we see going on in sales. Persistence, active listening, all those basics still remain, very very important. But they're now table stakes. They're the price of entry and the ability to do other things. For example, data analytics. Sales is becoming a much more data intensive activity in most businesses because the buyer has data. The ability to work with others in the organization, it's more of a cross-functional activity than it was. All of those things are becoming important, layered on top of the basics. So that's sort of the way I think about the issue that you're quite rightly raising. And by the way, every indication is this will only continue and accelerate throughout our lifetimes and careers.
Willy Walker: I love that reminder of the competitive landscape, and I heard you in a previous speech say that you have to remember that “in business, the failures go out of business and you're only going against the winners.” And a lot of people forget about that. You sort of think that the landscape is filled with winners and losers. Losers go away. It's only the winners who you go head-to-head with every single day. And you've also said that in business, a lot of it is sort of like two people in the woods who all of a sudden the bear comes out and it doesn't matter how fast you can run, you've just got to be able to run faster than the person next to you.
Dr. Frank Cespedes: Yeah, you're right. Let me get into the reality of business is you don't compete with people who've gone out of business and in order to stay in business, continuous improvement. The adoption of best practices is exactly what companies do. That's why that bar is always rising. Doesn't make the job of a CEO like you any easier. But, you know, I always quote that wonderful line from the gangster movies. “You chose this life”, right? That's just what it means to run a business in a competitive market.
Willy Walker: So, you have a great stat in your book, which says that U.S. corporations spend almost a trillion dollars over $900 billion a year on sales, and that's sales commission, sales, training, sales trips, P&E, etc., which is 3x the $300 billion they spend on advertising. And I think it's a really interesting stat, Frank, in the sense that this digital media world that we're all interacting with, whether it's on Facebook, LinkedIn or however we get our various media streams seems to be inundating and impacting all of our lives. But you're very direct in saying it has an influence, but not as much as you think.
Dr. Frank Cespedes: Yeah, I think that's right. And I think there are at least two big implications in the data comparison that you're drawing. That $900 billion plus figure is everything you've said, plus attributed back-office expenses from CRM systems, etc. That $300 billion figure is not only traditional advertising, but digital advertising and all the other things that we hear so much about now. Two things are going on. One is on the digital side, the ability to get customers through that medium is becoming increasingly expensive. You know, there's a joke among tech CMO's these days. “Where's the best place to bury a body? Page two of Amazon or Google? Because nobody goes there!” That's probably where we're going to find Jimmy Hoffa. All right.
So, in order to get on page one, you've got to pay more and more and more. And not only that, it's a very, very high maintenance route as well as an expensive route. Right, the platforms come and go. Ask yourself how many CMOs could even spell TikTok accurately as recently as two or three years ago? There will be more privacy regulations which are certainly going to increase. Make that medium again, not only increasingly expensive, and high maintenance, but what was the promise of using those digital marketing media? The promise was to be able to target precisely. But that's exactly what the privacy regulations make tougher. You go to The Wall Street Journal today; you'll see a good article about Google changing its data that they're giving the customers. All of that, I think, makes the digital media in the aggregate a great example of the law of diminishing returns.
It's the responsibility of companies to ask themselves, 'Where do I get the biggest bang for the buck?' Right? And for some years, it was digital. But that's decreasingly so. Now the $900 billion figure, and this is the other implication that still remains the lion's share of those allocations. That's where most of the people are. And that gets us back to the good questions you were asking earlier. I always like to quote Mark Twain, Mark Twain in one of his books says, you know,” if you’re going to put a lot of eggs in one basket, keep your eye on that damn basket.” And that's still that $900 billion area. How do we hire? What do we do for training and development? How do we get the most out of where so much of that money is going?
Willy Walker: Two interesting points that you make as it relates to digital media. The first is you talk about Facebook and the fact that as much as their user base went up by, I believe, 30 percent a year between 2016 and 2020 that the cost of advertising on Facebook actually went down during that period of time. And so, the efficacy of those ads hitting people wasn't what it was in 2020, as it was back in 2016. And then the second point that you just made, I think is worth underscoring is the fact that the cost of playing and getting onto the front page of, whether it's Amazon or Google or Facebook, requires huge checks. And so that there are actually those mediums, just like advertising in the Wall Street Journal and taking out a full page ad is restricted to those people who can stroke a very large check to have that kind of an impact that, if you will, the advertising world is not become more egalitarian as digital media has grown.
Dr. Frank Cespedes: That’s right. Increasingly online digital media is a deep pocket, big company gate. It is not an area for entrepreneurs emerging. You've got to have big budgets. And in addition, and again, this is what I think a lot of people misunderstand. One of the things that historically, by the last decade or two, that attracted people to that media was the notion of virality. Now, you know, the way this works, tech industries love to reinvent the wheel. What we used to call word of mouth; we now call virality. And what was the notion? You post something? Somehow it goes viral. Millions of people watch it. You haven't paid much for it. That is not easy to do. I mean, I've got a colleague here at HBS, Sunil Gupta in the marketing unit. He looks at this in some detail and what Sunil finds on the platforms he looked at, which is all the major ones. Something like 90 plus percent of messages post on social media go nowhere. No one reads them. Only about seven percent get read at least by more than four people. And the remainder are, you know, what goes viral. There's a notion sociologists call this the “megaphone effect”. There's a notion which I think is true is that one of the things that social media does is people talk to people that already agree with them. Right, that's the megaphone effect that contributes to political polarization, etc. I think there's a lot of truth to that. But what Sunil's data tells you is that the vast majority of these people are just talking to themselves. Nowhere. So again, this is also, I think, one of the myths that's built into a lot of the ways that people think about this aspect. Doesn't mean we ignore digital. It is an omni channel buying world, but it has to pay its freight the way any other investment in a company has to.
Willy Walker: It's really interesting on two fronts. One, what's happening in college sports is a way to name, image and likeness and all the branding that's going around that and how that will change the landscape of college football as major media market stars can go and go to USC or UCLA and be in a major market where the car dealerships will pay huge amounts of money for someone to endorse their product. Whereas, you know, if you happen to be in Tuscaloosa, Alabama, there are only so many car dealerships going to gig for a fork over millions of dollars to get a local player to promote their brand.
The other one, as you said, Frank, about how much this costs. I have a friend of mine who's in the venture capital world and he has a huge global brand star as his partner. And I asked him last week how much of the business he had to give that star to be his partner in it? And I thought it was going to be three to five percent of the business, but it was actually 50 percent! He's a 50-50 partner with this global brand to promote this product. And I was shocked that 50 percent of the equity had to go into it. And I think at those mega brands on individuals, that's sort of where the market is today. It's not like you pay them a couple of million bucks to endorse the product anymore. They're actually equity owners in those businesses.
Dr. Frank Cespedes: Yeah, you learned this at Harvard Business School x years ago. The reality of buyer power hasn't disappeared. How buyer power is now accumulated, the means are different. But you know, I've been hearing this all my life. “Oh boy, look, you know, I work with Disney, but Disney is demanding.” Well, yes, Disney is demanding they get their 50 percent for exactly that reason. You're buying for that access. The point I'm making about digital media, however, is that it's not democratizing access. It's making it a big number, deep pockets game.
Willy Walker: You also talk about lead generation and lead qualification. And in this world, that's filled with data points that say, oh, you've got that many clicks on that ad that one out. You're very insightful in saying, don't let the big data, the big numbers make you think that you're actually getting sales qualified leads. You're just getting sales leads that are going nowhere.
Dr. Frank Cespedes: The best example of this is so-called CRM systems in companies and, you know, reality for the majority of companies, the data in the CRM system is notoriously noisy. Why? Because I'm a salesperson and anyone who clicks on a link for my company or anyone that I may send an email to, I call that a qualified lead. You're my colleague in the next cubicle. NO. For you, a qualified lead is someone who actually has a budget and does all that. But the system in its data simply gives us the aggregate of all those diverse assumptions that are happening. The reality and this is the point I want our listeners to take away. The reality is that ultimately, lead qualification in any business beyond very, very simple businesses. Lead qualification is done by human beings, not by machines. It's done by the algorithms we give them. And in businesses like yours, it's done by people with judgment and experience who sort of say this is in our market space. This is not that aspect of sales I don't think is going away. And the data, if anything is, is making it a more complex judgment in most businesses.
Willy Walker: You focus on sales superstars. And I have plenty of them at Walker & Dunlop. And you go to the old 80-20 rule where 80 percent of sales typically come from 20 percent of the sales force. One of the interesting things you do is you do the coefficient on that, which says that you're at a three coefficient on that 20 percent doing 60, you do 60-40 rather than 80-20, but you basically say 60 percent of sales for 20 percent of the sales force, that's a three. The other 40 percent of sales come from the other 80 percent, that's a point five. So, your big salespeople are 6X as valuable to you as your underperformers. Talk about that for a moment, if you would as it relates, you've looked at lots and lots of companies that have both tried to import big talent and how transferable those skills are from one platform to the next and then from a retention standpoint of how valuable is that top salesperson who walks into your office and says, the competition's offering me X plus I'm walking out the door, what should all of us do to either hold on to that person or say, you know what, market wins – I got to let them go?
Dr. Frank Cespedes: This is as close to an established fact as you're going to see the research about this is pretty consistent: talent matters in sales. That top 20 percent, what you referred to as the 80-20 rule (and you got a doctorate, you say Pareto Optimality, sounds better, it’s how you get your fees up.
Willy Walker: Did you get that at MIT or at Cornell? I'm just trying to figure out which one of those great institutions taught you that.
Dr. Frank Cespedes: I got that at HBS. That's how I learned to raise prices. But that's real in sales. The top quintile. If most sales forces are not just a little bit better than the average, I'm not talking about the laggards, I'm talking about the average. They're usually a couple of orders of magnitude better. So, when in fact those people want to walk, especially in a relationship business, you will pay market rates. That's reality.
Now the second element here, however, is what most companies do. They chase those stars. But stardom, while it's real in sales, is not easily portable. It's just not. Most companies, most managers have the experience of hiring X and she was a star at this company. But somehow when she gets to our company, it's not the same. Now, you know, think about that. Why did that happen? It's not as though that person suddenly got stupid, or she lost her individual capabilities. Stardom in sales depends very much not only on that person's ability in the external market with clients, with customers, but on what they do internally. Again, culture matters. It matters, it depends on the relationships that they establish with others in their companies that are important for lead generation, service, order fulfillment. And when a salesperson leaves Company X and comes to Company Y, they leave all of that behind, they have to recreate it. Part of the job of the company they're joining, part of the job of the CEO, is to accelerate that necessary learning and internal relationship development process. That's the important thing.
And then the third comment I'd make, and again, a big issue in the current environment where, you know, talent has more options right now than it had certainly two years ago. You've got to ask yourself I think, when that happens and it is happening with increasing frequency, what do I lose when this person leaves? And how much of that can be reproduced? In some circumstances, the math is very, very definitive, and you've got to pay to retain the talent. In others the so-called hunter has already become a farmer. And guess what? Because of digital technology or because of other things, there are ways that I retain that relationship.
Willy Walker: Two quick things on that one. You reference in your book a colleague of yours at HBS who studied the impact of star salespeople and that I think they quantified it down to 50 percent of their success was not, if you will, based on his or her talents, but on the overall platform, brand, or team that they were amongst. It was surprising to be able to, to some degree, quantify the other elements of what brought value to that individual.
Dr. Frank Cespedes: My colleague's name is Boris Groysberg, a wonderful bit of research he did and a very good book published a couple of years ago called Chasing Stars. He fundamentally looked at people in financial services. You would think that's transactions, it's not. A large part of that success in Boris's estimate, more than 50 percent is based on those internal relationships that those people established with others: the chemistry, the teamwork, what we call culture. You know, there's that old phrase ‘culture eats strategy for breakfast’. It's not true culture eats strategy for breakfast, lunch, and dinner. It does matter where you work and with whom you work and how you work with them. And sales is, frankly, Exhibit A for that truism about business.
Willy Walker: I went back and looked, and since we're a public company, this is all public information, but our commission expense at Walker & Dunlop in 2010 was a whopping $26 million. And today it is over $350 million a year in commission expense. And I think about that in the sense of Walker & Dunlop being a great place for salespeople to work. And you just think about the growth in commission payments from twenty-five million a year to over three hundred and fifty million a year over an 11 year period. It is reflective of the overall platform and culture that makes salespeople successful at a firm like ours. It's an interesting one for salespeople to go and look at that line item, particularly if they're going to a publicly traded company. You can get that information quite easily. And look at how much growth there is in that commission expense line versus some others that might be flat or going backwards as it relates to the growth of their sales force and the products that they’re selling.
Dr. Frank Cespedes: And I would add two other things. You've got to look at that number, as I know you do, not only as you are paying a lot more in commission but at what's happened to the value of Walker & Dunlop as you've gone from $26 million to $300 million plus. A very, very good, positive return on the money you're paying out in commissions.
The other thing that's important here and again, I think it gets back to the talent issues that we were describing earlier. A lot of companies when it comes to sales and the reason they chase stars (to use my colleagues' wonderful title), they see a trade-off that research demonstrates as a false trade-off between hiring an experienced person and the amount of work I've got to do to make them productive in my company.
In business, there's no such thing as performance in the abstract; that platonic ideal does not exist. There's only performance in our company, with our product, in our market. And that's what one has to invest in. You know, a lot of companies, I often hear this in sales, well if we spend all this time and effort and money with this talent, they're going to get options and go somewhere else. And I always say the same thing. How long would you like to work with a really talented person as opposed to a mediocre one? Five years, five months. The answer is five minutes! You know you want to be a talent magnet as a company. And yes, people are going to poach that talent, but that's a heck of a lot better place to be in than the alternative. Right. This gets us back to your first comment, Welch. Again, the good news is we had a horse race. We had a group of people at least perceived as very valuable, and they all went somewhere else after Jeff Immelt got the job. But that's better than not having the talent.
Willy Walker: I could go on for another two hours. I've got three more pages of notes on your book that I wanted to get through, and I'm now at the bottom of the hour and I try and hold these to a full hour. Frank, your book is fantastic. Your insight into how to get sales talent, manage sales talent, manage data, it's all in your book and it's a fantastic read.
I'm deeply thankful of you spending an hour with me to talk about your book and all the research you've done, and I look forward to seeing you when I'm back in Boston next.
Dr. Frank Cespedes: I look forward to that as well. And again, I want to thank you very, very much for hosting me. I do appreciate it.
Willy Walker: It's great. I hope everyone had a great day. I got the new U.S. Women's Marathon record holder on the webcast last week to talk about how Keira D'Amato both set that record in Houston last weekend.
How she did it as a 38-year-old mother of two, full-time, single family housing broker. And I cannot wait to talk to her about both how she trains, how she manages her life, and what got her to be the fastest woman ever to run a marathon. And she's off to the Olympics, hopefully sometime soon to represent the United States of America.
So anyway, Frank, great to see you this week. Look forward to seeing everyone again next week.
Dr. Frank Cespedes: Thank you.
Willy Walker: Take care.