Saturday, August 30, 2008

Salespeople behave predictably irrational...

when they keep opportunities in their pipeline even if there is little chance that they will ever win them or, even worse, they will never end up as a deal because the customer has no intention to buy in the first place. The observation made by CSO Insights in their SPO Report 2008 about the mediocre forecast accuracy is a flagrant proof of this behavior. According to this report, even around 21% of deals forecast(!), so well down in the pipe, end up with no customer decision. I believe this percentage has not varied much over the time CSO Insights are doing their yearly survey. Until now, I had the opinion that keeping unrealistic opportunities in the pipeline and even putting them into forecast was related to the fact that salespeople are generally of an optimistic nature.

In Dan Ariely's book “Predictably Irrational” (yes thats where I got the idea for the title of this post), I have found insight in basic human behavior (the way we are wired) that might help salespeople and sales managers to fight the urge of keeping unrealistic opportunities in their pipelines. If you agree that keeping doors open is a valid metaphor for wanting to keep as many opportunities as possible in the funnel, you might be interested in the chapter in “Predictably Irrational” entitled:

Keeping Doors Open

Therein, Ariely describes a series of experiments done with MIT students with the help of a simple computer game. The students were shown three differently colored doors on a computer screen. They could enter any door with a mouse click. After having entered the virtual room they then could accumulate earnings as each subsequent click staying in the room added a small sum of money to their earnings. The total amount of accumulated earnings was visible real time. Though, not all rooms offered the same potential of earnings, thus inviting students trying to increase earnings by looking behind different doors. In the first set up of the game , the only limitation was the amount of clicks available. Clicks had to be used wisely as each time a room was switched, the necessary click for the change would not give additional earnings. Only with subsequent clicks applied in the newly (re)entered room, additional money could be earned. Students, earning the highest amount of money from the experiment, sampled all three rooms and then, based on the knowledge from sampling, spent most clicks in the room showing the largest potential for winning.

Where is the relevance for salespeople?

Take the three doors as three opportunities and the limited number of clicks as the one limit you always have, your time. The experiment actually confirms selling best practice; to qualify and then to focus on the opportunity with the highest potential. The set up is though not sufficiently reflecting the harsh reality of selling. Not attending a door for a while, did not have any penalty for the students. That is like acting in a market with no competition. So the second set up added a threat for a door to close permanently if it was not addressed after a certain amount of clicks (time). This set up comes closer to the real sales environment considering competition. There the threat of a door permanently closing is equivalent to he concern, that unattended opportunities might be won by the competition.

Modified behavior when there is a threat for permanent loss of an opportunity

Students faced with the additional constraint of having a door permanently closed on them, started racing frantically between the doors so none would permanently close. They left their previously rational behavior of sampling and then staying in the room they had found offering the highest profit potential. Students working in the set up of this additional constraint in average earned about 15% less money than those in the initial set up. Even when students were told in advance which door hat the highest earnings potential they did not change their behavior of racing around. Apparently our brains are wired in a way that the fear of permanent loss is so strong that we keep reacting to it even if we rationally know that it hampers our ability to maximize financial returns

Do we therefore have to accept cluttered pipelines?

No. Look at star sales people. They are known as ruthless qualifiers, meaning that they work with fewer opportunities in the funnel and still make more money than the average performers. My recommendation for salespeople is that overcoming the fear of permanent loss is a prerequisite for being able to to become a star performer.

As a manager, you might get inspired by the story of Xiang Yut, the Chinese commander fighting against the Qin dynasty in 210 BC. After having crossed the Yangtze river, he had the ships burned that carried the troops over; thus cutting of the escape route. He also violated an other golden rule of military commanders, keeping the morale of the troops by feeding them well. He instead had the cooking pots destroyed. Having done this, Xiang was not exactly popular with his troops as they had no other choice but fighting their way to victory if they did not want to perish. However the measures proved to be effective for the outcome of the war. Yut's troops won 9 consecutive battles thereby destroying the main troops of the Qin dynasty.

You might not want to be so radical. Instead of just commanding your salespeople to take the clutter out of their pipelines, you might want to coach them and sort out the opportunities with them. Be prepared that this might already be enough to make you momentarily not too popular, For being able to command or coach your people on this, you have to be brave and overcome not only your fear of maybe being momentarily less popular but also your own fear of permanent loss. Overcoming these fears will give you and your people the focus needed to increase your chances for winning.

Enforcing the adoption of sales methodologies can help you with this task. From studies, we know that increased win rates is the primary benefit sales managers who have managed getting good adoption of sales methodologies can report

You now should have a better chance to get adoption, because you know that overcoming the fear of permanent loss is a strong barrier to rational behavior. Overcoming this fear yourself and helping your people do the same will help you to obtain better results.

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