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The value of improving commercial capabilities

COVID-19: The value of commercial capabilities

Even in normal times, most companies are constantly looking at ways to improve their commercial capabilities. Success in doing so can lead them to up to a 5% EBITDA improvement under normal circumstances. In the abnormal times in which we now find ourselves, however, the value at risk is likely to be significantly higher.

The predominant financial levers needed to achieve this level of benefit are illustrated here:
 

Typical commercial value tree
value-tree-image-graph

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Just as the commercial capabilities are integrated, these levers are also interdependent — not mutually exclusive. Taking action to optimise the salesforce effectiveness or even pricing strategy will therefore affect multiple levers simultaneously.

Clearly the levers that should be pulled will depend on the level of recovery in any given market or segment, however, it is also often a question of optimising trade-offs at the customer level. In other words, if you have a customer who is proving unprofitable, you might need to alter pricing, commercial terms or product mix to achieve your desired level of profitability – although a reduction in service or a shift to a lower cost channel could have the same result, with less risk of losing the customer. In the same way, for a profitable customer or one promising high growth potential, you may find that additional costs incurred in an improved sales/service experience are key to reducing churn while improving volumes and mix.

The way that individual commercial levers can be applied also varies by industry. In consumer goods, the focus might be on the optimisation of trade terms or commercial terms. In a manufacturing environment, by contrast, businesses might view asset utilisation as the predominant lever, due to the large capital cost of the asset.

Once again, however, the maximum benefits come when all levers are optimised together. It is common for one organisational silo to undermine the financial performance of another in situations where the commercial operating model does not span the silos as it should.

Context is therefore an overriding principle in developing an effective commercial operating model for any business. This must include aspects of:

  • Industry specific context and practices, as well as cross-industry leading practice.
  • Business and sales channel model (B2B vs B2B2C vs B2C).
  • Company size and complexity, including revenues, numbers of products and customers etc.
  • Company structure, including elements such as vertical integration.
  • Product/service commoditisation vs specialisation and value-in-use.
  • Market share and the balance of supply and demand.

Read the next section: COVID-19: What will make your efforts to improve commercial resilience successful?

Read the previous section : COVID-19: Improving commercial resilience for future business performance