An insightful adage states that while you can cut your way to profitability, you must grow your way to prosperity. However, when restructuring advisors are engaged to stabilize their clients’ operations, they often focus on cutting expenses and controlling disbursements. While these actions are often necessary to mitigate near-term distress, too frequently the restructuring advisor spends relatively little time increasing revenue as a means for generating financial stability.
To stop a client’s cash burn, we use time-proven approaches such as reducing payroll and expenses, controlling disbursements to vendors, improving working capital levels, and negotiating repayment terms with financial constituents. Our experience in managing turnarounds tells us that, in contrast to growing revenue, it is more within our control to pull cost-reduction levers and harvest cash from working capital. Executing these tactics in the short term can provide immediate profit improvements.
While it is appealing to focus on this low-hanging fruit, it may not be enough to place the business on solid footing for long-term recovery. How can we increase our focus on growing our clients’ sales amid a turnaround while also rightsizing the company’s cost structure? Our experience suggests four critical paths to boost sales while managing a turnaround:
- Set Prices Strategically
- Sell Creatively
- Turn Existing Personnel into Better Salespeople
- Lead by Example
You Must Know Who You Are Before You Know Where You Are Going
Before undertaking any sales initiatives, we must understand our client’s products and services. The analysis is generally one of the first things we perform as we begin a turnaround engagement and therefore is not duplicative.
As a normal part of an assignment, we perform a quantitative analysis of the revenue and contribution margin trends by product lines, customers, salesperson, territories, business units, and other measures. We also qualitatively evaluate the business via a SWOT analysis (strengths, weaknesses, opportunities, and threats) on each product line, including marketing, promotion, and pricing. A well-completed SWOT analysis provides an early definition of the client’s competitive advantages and highlights potential improvement areas.
The profitability and SWOT analyses are often critical in defining non-sales areas to address during the turnaround. For example, although we have used it as a basis for expense reductions and product line divestitures, we have also used the profitability and SWOT analyses to develop sales initiatives. In one situation, we developed focused sales programs after executing cost reductions to pursue only those product lines where the client could sell effectively and profitably.
Finally, before starting any customer-facing initiatives within a turnaround, we analyze the client’s customer relationship management (CRM) system. The CRM tracks interactions and results with past, current, and potential customers. If it is fully implemented and managed regularly, the system will identify growth targets within existing and potential customers. Even partially implemented systems or a data repository that contains similar information but without the formal structure of a CRM, can provide valuable insights into strategies that increase revenue.
1. Set Prices Strategically
The pricing of products and services has always been both an art and a science. Even when a company’s pricing models are based on logical assumptions and account for both risks and opportunities, understanding the customer’s acceptance of pricing is very elusive and subject to continual changes in both the market’s and customer’s perception of value. Additionally, increasing prices takes courage and usually requires a combination of salesmanship and fact-based negotiation to present it to the customer. Fortunately, there are frequently pockets of opportunity to improve pricing schemes, and the fact that we are in a turnaround increases the urgency of exploiting those opportunities.
The first and most obvious way to exploit pricing in a turnaround is to sell slow-moving and obsolete inventory and generate excess liquidity. When our clients have excess or obsolete inventory, we have aggressively priced products to create liquidity on the borrowing base. Most products do not get better with age, are often stored in hard-to-reach places (such as when a client held them in the corner of a warehouse), and are not counted in the inventory calculation of the client’s borrowing base. In one previous engagement, we enticed a discount retailer to buy all the stale products at a reduced price. In another client situation, we sourced multiple bids to dispose of discontinued product lines, which optimized the sales price we realized for the aged inventory pool. Because the sold inventory had aged out of the borrowing base, the deal had no negative financing impact, was almost entirely reserved, and generated desperately needed operating cash.
For longer-term revenue generation, we strategically reduced prices at a grocery store client, in which we needed to fight the loss of foot traffic due to a new competitor. To defend against the competition, our client intentionally priced a case of bottled water below cost as a loss leader. Foot traffic went up immediately with new customers buying water and, more important, the average customer purchase increased significantly. The strategic pricing analyses that our client and we performed in this turnaround were the same as those we typically complete for healthy companies.
Taking a deep dive into every type of pricing strategy is beyond this article’s scope, but there are two specific conditions to note. The first is to consider scarcity. In one successful client situation, there was limited availability of the product on the market, and we successfully increased pricing to match the market conditions. A second situation to consider is where the product is unique and sold to captive customers. For example, we increased prices by 100% with an OEM client on certain replacement parts that were only available from our client. Even in the instance of an impending wind-down, we were able on two separate occasions to raise prices by up to 500% in return for building additional safety stock for our soon-to-be former customers. This strategy generated enough cash to wind down the business while minimally impairing other creditors.
2. Sell Creatively
Without product innovations, salespeople lack reasons to reach out to their contacts other than checking in and saying hello. However, creatively refreshing a product with a redesign, new introduction, or line extension can invigorate the calling program. In industries such as fashion, annual product redesigns are critical, and retail stores, including grocery store chains, habitually must refresh the customer-facing areas of their locations. New or redesigned products may have the added benefit of premium pricing that drops directly to the bottom line.
The challenge with redesigned or new products is that there is a risk of product acceptance and sell-through. One effective method to mitigate product failures is to elicit input from customers on designs and features. In one client situation, we asked a significant customer’s buyer to help design a new product. The redesign was well-founded and based on the buyer’s in-depth knowledge of her customers. The insightful buyer embraced the design, bought the entire first lot off the production line, and deservedly enjoyed strong sell-through.
At another client in the food and beverage distribution business, we expected to encounter a significant drop in purchases as the COVID-19 pandemic began due to the client’s preponderance of end customers in the restaurant industry. We worked with the client to mitigate this situation by adding new items that it had previously not carried to sell to customers that were less exposed to the restaurant industry. Additionally, one of our client’s competitors had abruptly gone out of business and, as part of its liquidation, had to sell several containers of imported goods that were waiting to be unloaded at the U.S. ports. Our client took a calculated risk by purchasing many of those containers and added to its inventory items that were destined for the defunct competitor’s customers.
3. Turn Existing Personnel into Better Salespeople
The existing salesforce is potentially an effective weapon waiting to receive the proper coordinates to attack. Usually, the current players know the products, the industry, the competition, and the customers.
As change agents and turnaround leaders, we find one of the best methods to engage the salesforce is our excitement, enthusiasm, and challenge of the status quo. In one client situation, the salesforce was stuck in its existing calling patterns, resulting in stagnant sales and roadblocks to growth. We responded by revising certain sales territories and targets among team members, resulting in increased revenue and contribution margin.
A less obvious way to increase sales with the existing team is to find what we call hidden salespeople. To capitalize on these untapped resources, we reallocate responsibilities among the broader team. In one client situation, we engaged the customer service department as telemarketers and created an enticing spiff incentive program. We wrote a script for them and developed a pricing strategy. After two days of making outbound calls to previous customers, one of the customer service employees leaped in the air and screamed, “I just paid for Christmas!” As expected, the sales initiative caught on quickly and generated additional revenue and profit for our client.
Compensation comes in all shapes and sizes and is a significant driver for salespeople. At its fundamental level, the compensation plan should incentivize positive behavior and the generation of profit in addition to revenue. However, compensation is a very personal matter, and any changes require great care and analysis to ensure the intended results.
The most effective compensation plans contain incentives that are easy to understand, attainable, and have progressive awards. In one client situation, we noted that revenue typically declined in the fourth quarter. We determined that the salespeople had a cap on their commissions because the owner wanted to be the highest-paid employee. The high-performing salespeople would typically hit their cap before the end of the year and stopped selling until the following January. After we changed that aspect of the compensation plan, we saw an immediate fourth-quarter increase in sales.
With another client, salespeople were all on salary and had no commission. We changed the compensation plan to be incentive-based, using a percentage of contribution margin. While the underperforming salespeople quickly resigned, revenue increased as the remaining and replacement salespeople focused on profitable growth.
4. Lead by Example
As turnaround managers, we are in a strong position to energize the salesforce with an aggressive battle cry of growing profitable sales and building the sales pipeline. The turnaround manager can play a vital role in reaching out to potential customers. As a turnaround leader, we take as many sales targets as time reasonably allows and is permitted in the project scope. Frequently, we lead by example and pursue new targets for customers alongside their sales force. We will make cold calls, network into targets, and use our previous experiences to open doors. This approach sets the competitive tone to drive aggressive sales growth while always being collaborative with our client’s salesforce.
When coupled with other profit-improvement initiatives, increasing revenue is a winning strategy and frequently contributes to our clients’ long-term success. The four proven paths of formulating pricing strategies, selling creatively, leveraging existing personnel, and leading by example can provide the foundation for next-level growth. At CR3 Partners, we focus on all the tools in our toolbox to help ensure our clients’ success and long-term prosperity.
About CR3 Partners, LLC
CR3 Partners, LLC is a national turnaround and performance improvement firm that assists, guides, and collaborates with management teams and their constituents facing any sort of transition, stress, or distress. Jeff Hyland is a Partner in CR3’s Chicago office. Barak Tulin, a Partner in CR3’s New York office, contributed additional research for this article.