How to Plan for Sales Slumps
Aargh! The sales didn't meet forecast. Now what? Will this trend continue? Or is it just a temporary blip? Discovering the cause of any drop in sales is key to developing strategies for coping with the situation, particularly for small businesses. Read on to learn how to plan for sales slumps by determining the underlying causes.
Some products and services have a seasonality aspect to them that will naturally create sales peaks and valleys throughout the year. While the lows can be very low (maybe even zero) at times, the peaks make up for it. Examples of businesses that can experience this type of sales cycles include: swimming pools, Halloween costumes, HVAC services, travel and construction.
Even though business owners and sales managers are aware of the cycle, it can be very unsettling since overhead expenses keep accruing regardless of sales. The good news is that if peaks and valleys are relatively predictable, sales forecasting is a whole lot easier.
- Know the Peaks and Valleys. Though this may be difficult for brand new businesses, those that have some sales track record should have a better idea of which months are peaks and which are valleys. Knowing when these might occur can help in planning promotions, staff and facility requirements.
- Set Aside Reserve Funding for Downtime. Refer to the company's monthly profit and loss statements to determine overhead expenses throughout the year. Plan to place in a reserve savings account an amount equal to or greater than annual total overhead. This helps eliminate stress and can prevent the need to access emergency loans to cover such items as payroll. Even if it's just the small business owner that gets paid as would be the case in many micro businesses, a reserve can keep the business going without dipping into personal funding.
- Offer Preseason, Post Season and Off Season Sales Promotions. Preseason promotions can help get anticipated peak periods off to a great start. Post season deals can squeeze some last revenues from the market before heading into a slump. Off season deals can help fill in the slump periods though they are unlikely to buoy sales to peak levels.
- Offer In Season Promotions with Caution. There is no reason to offer promotions and discounts while demand is high. However, some businesses do so to push the sales peak even higher. In season deals should be kept to a minimum.
- Use Downtime to Retool. Every business, no matter how efficient and effective, needs downtime to recover. This is especially the case in peak-and-valley businesses which can stress out staff, systems and facilities during peak periods. Plan productive activities for downtime such as facility improvement, sales and staff training, software and website updates and other improvement projects.
Long Sales Cycles
Similar to seasonality, sales cycles can also cause sales slumps. This is particularly the case in large, commercial B2B (business to business) businesses and complex sales such as industrial equipment, transportation and long-term consulting projects. Some deals could take years to close if the dollar value is extremely high. Examples: jet airliners, commercial real estate, government projects and custom software design.
Since the volume of orders may be small while the dollar values are high, forecasting is usually based on contracts that are existing in-house or tentative. Historical sales levels, along with published industry indicators and reports (such as the Dodge Reports for the construction industry) can be used to estimate additional sales.
- Understand the Sales Cycle. Monitoring how long it takes from initial inquiry to actual closed business is an important metric for forecasting slow or long sales cycles.
- Set Aside Reserves for Longer Periods. Unlike annual seasonal sales slumps, these sales could take years to close. So reserves to cover overhead expenses for multiple years needs to be set aside to avoid the need for debt to keep the business alive. How many years will depend on the specific sales cycle.
- Develop a Lower Cost or Alternate Offering. To fill in gaps between large projects, some businesses offer second tier or alternate product and service lines. These can be stripped down versions of primary products whose sales could generate larger sales inquiries in the future. Or these could capitalize on company strengths which could migrate well into other offerings. Example: communications systems that can handle security surveillance. With this strategy, carefully evaluate whether the cost to develop an alternate product line will produce enough return and avoid cannibalizing the main line that causes a "robbing Peter to Pay Paul" scenario.
Obsolescence and Technology Trends
A company can manufacture the finest desktop PC computer in the world. But with technology marching to an ever more mobile device beat, the desktop computing market is in decline. This is an example of technological obsolescence which will, inevitably, cause a sales slump. The technological marketplace is littered with stories of failed companies who pursued building a better mousetrap (Wikipedia) in favor of innovating.
Usually companies with "cash cow" products (those with high market share, but low future growth) can easily be lulled into thinking the market will remain that way for years. Unfortunately, as technology developments come along faster and faster, it is unwise to not be looking to what's next.
- Identify When an Offering will Become a Cash Cow and Seek Greener Pastures. Monitoring sales figures over a long period of time will usually show a sales increase as a product gains popularity, stagnation and then decline. Using graphs to track sales over extended periods of time can help easily identify when a profitable product may be heading into decline. Innovation must become a top priority even when sales are at their peak for a profitable product.
- Dump the Duds. Discounts and promotions on aging product lines can help forestall the inevitable sales slump. Be aware, though, that it is easy to mistake these promotional sales as a sign of renewed interest.
Changes in Customer Attitudes and Preferences
Changes in customer attitudes and preferences can torpedo a company's sales quickly. Examples would include environmental and product safety issues that sway customers to purchase alternatives or eliminate the purchase altogether. Example: Plastic baby and water bottles that contained BPA were left on store shelves when news broke about BPA dangers.
- Subscribe to Relevant Blogs and News Sources for the Industry. These publications, whether in print or online, can be valuable in identifying threats to sales on the horizon. Be prepared to push other product lines or pursue new ones.
- Watch Consumer Trends. For general consumer trends, subscribe to trend watching sources such as TrendHunter.com and trendwatching.com.
Regardless of how well a business is run or marketed, a poor economy can cause slumps that can close the doors in a hurry. The Great Recession late in the first decade of the new millennium made this a reality that many businesses now need to face.
- Monitor Economic Trends. What is ironic is that in the early years of an economic downturn, some businesses will still be doing very well, maybe even excellently. This can trick business owners and sales managers into thinking that economic changes will not affect them.
- Prepare for an Extended Slump. As with seasonal or sales cycle slumps, setting aside funds to keep a business going during a downturn should be done as soon as possible. This will help ensure survival.
- Limit Promotions. Also ironically, promotions to help boost sales during recessions and other economic downturns can actually have a negative rebound. Cash strapped customers now become used to receiving a much lower price and/or perks, making raising prices later very difficult.
- Hold the Line on Profit Margins. The knee jerk reaction to economic troubles is often to lower prices. Like unwarranted promotions, price reductions can eat into a company's profit margin to the point of being unsustainable.
As Kenneth Gronbach notes in The Age Curve, the 11 percent drop in population with Generation X had a devastating effect on the economy. Many businesses in every segment, especially real estate, did not acknowledge this shift and kept planning (hoping?) for sales from the massive Baby Boomer population. Result? Recession.
- Watch Population Trends. Monitor census data for shifts in the general population makeup and regional trends.
- Prepare to Divest or Invest in Response. Certainly adjust sales forecasts in response to changing demographics. But carefully evaluate the long term effect of the shift on sales. If the market is shrinking, and will continue to do so, changing or eliminating company's offerings that are no longer viable may be the best answer. If the shift is deemed temporary and the market will rebound, or the market is anticipated to grow, then investing in preparation would be appropriate.
Sales Personnel and Service Changes
Changes in systems, facilities, procedures and personnel can cause sales slumps, particularly while changes are being made and new personnel are getting acclimated to their new jobs. This is especially the case when new salespeople come on board. They need to get to know the market and the market needs to get to know them before any significant sales volumes are realized.
- Have a Sales Training and Mentoring Program in Place at All Times. Some salespeople change jobs quickly to take advantage of greater compensation packages either at other employers or with the same employer. This can leave gaps in sales territory coverage which can be devastating. So having a solid sales training and mentoring program in place can help provide a line of succession should an inevitable opening occur.
- Have Realistic Expectations for New Sales Personnel. Being the "new guy" is tough! Not only do new personnel have to learn a new job, they need to learn a new culture and market, too. This will certainly have an impact on their performance. Setting achievable goals for the first year can help get launch a satisfying and successful start for all.
- Alert Customers of Changes in Personnel, Procedures and Places. Put new sales or service people serving customers who have high expectations can be frustrating for both parties. Same for changes in how and where things are done. Posting "Please Be Patient With Us While We're Improving Our Service to You" type notices in service areas or on websites can help diffuse some of the frustration for everyone and keep sales from walking out the door.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
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© 2013 Heidi Thorne