Commercial Models, pt 1

In developing the FourThirds internal business plan, I’ve been thinking about how the commercial model will develop over time.

A company has essentially two commercial models it can adopt. There’s the sales-led model and then there’s the marketing-led model. In this post, I’m going to talk about the Sales-led model.

The Sales-led model dictates, quite simply, that the company sells to anyone willing to buy. Let’s suppose fictitious XYZ Ltd makes widgets for the auto-industry, but a smart engineer realises that with a small tweak here and there, the flagship widget could also be sold to the home heating industry. Fantastic news! A whole new marketplace to sell into. All of the product development costs have already been sunk so any money made is largely, less costs of sale, profit! Who wouldn’t do this? It’s free money!!

Of course, the euphoria soon wears off when XYZ Ltd realises that actually there are a lot of established players already in the market, and they don’t really understand what the market’s customers truly value. But they make a few sales and it’s a solid, if slightly slower than anticipated, start. So they keep going. Then the customers start asking for changes. “We really like the product, but do you think it could do this? And this? And if you could just tweak that. And we don’t want that bit. Oh and by the way – ABC Ltd are 10% cheaper”.

So they invest in new staff and marketing efforts. They make the changes and the customers are a bit happier. Now it’s a couple of years down the line and another bright spark at XYZ Ltd looks at the sales figures across all the product lines and an uncomfortable conclusion is drawn. Whilst they have been servicing the new market and their new customers with their tweaked widget, their core auto-indystry market has moved on. Competitors have innovated. Customer demands and industry drivers have changed. And all that time, XYZ Ltd has been in ‘maintenance mode’. The road to re-establish their previous market position now looks very steep. And costly.

With profits flat (or worse) in tenuous market position in both industries, XYZ Ltd is in trouble.

On the bright side, they have valuable IP in the widget. They have a reputation with some residual value and goodwill. They have good staff seeking to improve the company. But they are being sidelined in both industries.

What do you think they should do in this position?

Next post, I’ll talk about the Marketing-led model and what I think the best, albeit unlikely to be pain-free, solution is for XYZ Ltd.