Selling Footballs to the NFL

This week, I had a call from a former executive of one of my clients, a bright, young guy, who, at this point in his career, is still an operator, more of a manager than a senior executive. Resourceful. Determined. Good leadership attributes. Has a bright future.

He wanted to talk about sales, which I thought was kind of interesting, in part, because the consulting practice at SAI only deals indirectly with sales, but mostly because I did not think this guy could sell footballs to the NFL.

But, here is his story:

He left our client in late 2009, and took a position with a fund-backed real estate company that buys and builds out distressed residential communities. This company’s business model calls for standalone communities, essentially the management of single projects of finite duration. Early on, he personally managed sales in this community, with the help of two commissioned sales agents. They opened for sales in November. Initial sales were slightly below the budget of three sales per month, but quickly slowed.

By the end of May, the community only had nine sales; six sales behind budget, five months into the budget year. But – that understated the current situation. In the preceding three months (March, April, May), they had only sold five homes, four below budget. Traffic counts had improved, doubled, in fact, but the conversion rate (percent) had fallen from the 10% to 16% range to the 3% to 6% range.

In the next three months (June, July, August), they sold 16 homes, one above budget for the three month period. Compared with the previous three months, sales were up 150%, traffic was up 100%, and the conversion percentage rose from 4.7% to 7.7%, a 65% improvement.

And, he wanted to tell me why.

He talked with me about the rigorous problem-solving approach he had used to look at the symptoms of the problem and get to the root cause, an extension of the PDCA-Kaizen tools he had learned with our client. I listened to it. I listened to all of it. And, then I told him to go back and challenge these conclusions with a healthy dose of legitimate reservation. He came back with a couple of qualifiers, but essentially the same conclusion.

And, that conclusion will surprise many of you.

First, the qualifiers that were added. One, the increase in traffic coincided with the start of a new, heavier sales and marketing campaign that turned out to be effective. Two, at the beginning of June, he promoted one of his sales agents to sales manager, a move which seemed to better organize and solidify the sales team.

The important decision, however, was to take one specific element of a team-based performance compensation he had learned at our client, and apply it to his situation, to resolving the specific constraint that he faced, namely, insufficient sales. He and the new sales manager looked at the problem, argued about the differences in how they saw the situation, and debated different approaches. And – then – they made the following changes:

First – to give necessary attention to the increased traffic, which stemmed from the success of the marketing campaign, they hired two more sales agents, bringing the count to three. Not in the budget, but they did it anyway.

Second – they took the commission/draw arrangement for the three sales agents, and converted it to a base salary with a team-based commission arrangement, so that sales agents receive a $45,000 salary and share equally in a one-percent (1%) commission pool on all sales, versus the previous straight two-percent (2%) individual commission and $35,000 reimbursed draw (the sales manager has a slightly higher base salary and a slightly lower commission that is not part of the commission pool).

Third – they instituted a new flat monthly $1,000 cash bonus, for every sales agent, paid in any month where the team sold more than five homes (remember, the budget was three sales per month).

So far, so good. The results speak for themselves, but here is what this manager said:

“In addition to the results, the culture of the team has elevated to that of a pre-recession environment. The team is excited to come to work. They work together. Every day, they discuss where they are in relation to their targets and work together to constantly strategize how they are going to reach their goal as a team.

“I underestimated the impact this [compensation change] would have on the culture of the work environment.

“By the way – in case anyone says they cannot afford this – the overall three-year proforma reflected a two-percent (2%) sales commission paid to in-house sales agents. When you project that entire expense over the life of the project, and compare it to this fixed salary with just the one-percent (1%) pooled commission, we actually reduced the overall line item in the proforma by $179,000. We spent less. We paid out less. But, with the base salary – which relieved a lot of pressure in this difficult economic time – and with the new and improved team environment, we overwhelmingly changed the culture and made it a better place to work.”

My own observations: First – given the time periods when this occurred – it had nothing to do with the homebuyer tax credit. Second – this broke a lot of rules. Third – and foremost – this was a lesson about the effectiveness of changing a paradigm for how to compensate sales agents, and about using that change to break the external (market) constraint that limited the ability of this project to make money.

Okay, Fletch. It is just one project, and kind of a small one, at that.

But – in a larger, more important sense – is this not also a wakeup call? A call to rigorously challenge the status quo? A lesson to challenge the accepted way of doing everything? A warning not to settle for “industry best practices”? A call to not be afraid of being different, in the quest for being exceptional? An encouragement to resolve conflicts, challenge assumptions, break constraints, and solve problems, not compromise on the solution?

A call to stop settling for being average?

Does the world really need more average homebuilding companies?

I think not.