Imagine asking someone out on a date by saying:

I hereby request your attendance at a film or other comparable activity in a public social setting as arranged by mutual agreement. Should the request be granted, I will accept financial liability for the evening’s activities to the amount of a reasonable sum that would normally be incurred during such activities. The purpose of the proposed social activity is to ascertain mutual compatibility for further social interactions and possible sexual activity, as mutually agreed upon by both parties. If the request is granted, neither party is under any obligation to engage in further social interactions, nor to engage in sexual activity at the conclusion of the proposed social activity.

What are the odds of someone accepting this proposal? Very low I suggest.

Byrnes shows you don’t need to engage in costly activity-based costing to discover the roots of most losses. Most of the unprofitable and marginal business can be turned around using a few selective techniques.

We agree we have embraced Byrnes thinking and developed a 7-step process which we call The Customer Pyramid Forensic Analysis Process. Here is an overview.

The Customer Pyramid Forensic Analysis Process:

Step 1: Construct a profitability database using representative sets of transactions.

Step 2: Project the impact of changing your account and product/service mix.

Step 3: Develop a profitability profile for representative groups of customers.

Step 4: Identify the key profit levers that will make the business profitable.

Step 5: Project your findings onto the whole of the business.

Step 6: Create an action plan.

Step 7: Refine the sales strategy and offer that you take goes to the market.

However, our research suggests the Pareto mindset is getting in the way of sound business judgement. Even worse, it results in businesses tolerating what should be intolerable levels of unprofitably in their customer base.

Let me explain, when you segment a customer base by fees the Pareto principle invariably holds true 20% of the customers generate 80% of the fees.

Yet, when you analyse profits, Pareto no longer applies.

As Kaplan and Anderson showed in their insightful 2007 book, Time Based Activity Costing.

• The most profitable 20% of customers generate 150-300% of total profits.

• The middle 70% of customers are breakeven

• The least profitable 10% can lose 50-200% of total profits.

In short, business tolerate high levels of unprofitability.

In his book Islands of Profits in a Sea of Red Ink, MIT lecturer Jonathan Byrnes explains why companies tolerate sucj high levels of what he calls “embedded unprofitability.”

Byrnes claims:

• The 20% to 30% of the business that is  superprofitable masks the problem.

• Finance and management control information is not structured to surface the problem or opportunity areas.

• Even if all departments make budget, a company can still be 30-40% unprofitable.

In his new book, Flash Foresight: How to see the invisible and do the impossible, he shows readers how to understand and take advantage of the accelerating pace of technological transformation.

Burrus reminds us technological change has been driven and accelerated by what he calls the Three Digital Accelerators.

Digital Accelerator 1: Processing Power

Way back in 1965, Gordon Moore observed that the number of transistors on an integrated circuit seems to be doubling about every twenty-four months. His, then tiny, company was called Intel and his observation came to be known as Moore’s Law.

Moore’s Law says computer processing power doubles every eighteen months.

Digital Accelerator 2: Bandwidth

The second digital accelerator is the growth of bandwidth - that is the amount of information that can travel over a given bandwidth.

Burrus tells us, “Digital bandwidth increases at an even faster rate than the accelerated growth of digital processing power.”

Today, bandwidth is superfast - and it is continuing to accelerate.

Digital Accelerator 3: Storage

Yet, as processing power and bandwidth climb at ever increasing rates, it’s the increase in our tools capacity to store all the information from that increasing processing and bandwidth is going through an even steeper, more dramatically escalating curve.

Today data storage is virtually unlimited - and so cheap it’s virtually free.

How will these three digital accelerators impact on your business? Will they make your current business model obsolete?

If you want to make sense of how technology is transforming the business world, read Daniel Burrus’Flash Foresight: How to see the invisible and do the impossible (Harper Collins, 2011).

To understand what we need to do next in sales and marketing, we need to appreaciate where we have come from.

The huge change affecting markets and marketers came in the 1970’s when product-driven selling and marketing began to give way to customer-driven selling and marketing. The cause: A global over supply of product, virtually every category, shifted the balance of power in marketing from producers to customers.

Here is a quick history of the major changes:

Sales 1.0 Customer-Centric Selling

In the 1980’s, product-focused marketing gave way to customer-centric marketing. Relationship Marketing, Solution Selling and Customer for Life became the new mantras.

Sales 2.0 Customer Relationship Management (CRM)
Techonology first began to transform sales with the arrival of contact management packages like ACT. Today, web-based CRM makes it possible for sales teams to manage, forecast and report on all phases of the sales cycle. But while CRM has delivered increases in efficiencies and sales force productivity, it has rarely enhanced the customer experience or deliver a sustainable source of competitive advantage.

Sales 3.0 Customer Experience Management (CEM)

Currently, the best performing sales organizations are shifting their orgranizational mind set from CRM to Customer Experience Management (CEM). Their goal: “Right Touch/Right Customer/First Time/Everytime”. CEM increases customer engagement, shorten sales cycles and increases closure rates. The result is a high velocity sales organisation.

Lots of sales and proposal teams, especially those in professional service firms are weak at identifying quantitative economic benefits.

Sales people need to consider five key, quantifiable bottom line drivers:

1. Cost reduction.

2. Margin improvement (this comes from the customer improving his/her price and/or product mix.

3. Cash-flow improvement.

4. Revenue improvement.

5. Return on investment to the customer.

Of course, you should also never neglect the qualitative benefits such as improving customer retention and better quality.

If you are looking for a more detailed guideline in this area, Ram Charan’s book Profitable Growth (2004) contains a brilliant one page template that outlines how to build a Value Proposition Account Plan.

CNN named Richard D’Aveni as one of the top management thinkers of the world. His book Hypercompetition (1994) introduced market analysis and mapping tools that have been adopted by a number of leading consultants firms including McKinsey.

D’Eveni’s latest book, Beating the Commodity Trap: How to Maximise Your Competitive Position and Increase Your Pricing Power (2010) reveals the three most common commodity traps companies face:

1. The deterioration trap. A number of industries suffer from the emergence of a dominant low-end competitor such as Zara which caused the “Zarafication” of the European fashion market.

In the deterioration trap, prices go down and benefits go down too.

2. The proliferation trap. Many industries suffer from product proliferation. In the motorcycle market, for example, Japanese motorcycle making and American niche rivals such as Big Dog and Victory have surrounded Harley’s position.

In the proliferation trap, prices go up or down, while benefits go up and down in all directions, around local firms products.

3. Escalation. Industries such as consumer electronics are experiencing price decline while benefits are increasing. In other words, the market witnesses and escalation in the ratio of benefits offered by the product to prices charged. This is what Apple did in iPods, reducing prices while improving functionality, in the process outthinking an entire raft of digital competitors.

In the escalation trap, prices go down and the benefits go up.

D’Aveni argues differentiation is not enough to beat the commodity trap. Specific strategies are required to:

1. Escape the commodity trap

2. Destroy the commodity trap

3. Turn the commodity trap to your advantage

D’Aveni’s practical strategies are based on research into thirty diverse industries - from restaurants, to retailing, to automobiles. Beating the commodity trap is a must read. Extinction is the price of fading to the commoditization war.

Talented business development professionals are always in scarce supply.

In The Differentiated Workforce: Transforming Talent Into Strategic Impact (2010) authors Brian Becker, Mark Huselid and Richard Beatty urge companies to manage their strategic talent like a share portfolio.

So, which business development positions are strategic?

Here are some key questions to remember when assessing whether a business development position is strategic.

1. Strategic business development staff are those who significantly enhance the probability of achieving your business strategy.
2. Strategic positions have major revenue enhancing or cost reducing impact on the firm.
3. Strategic positions have a strategic impact on the firm’s customers.
4. Poor performance is immediately detected.
5. The selection of a wrong person is extremely costly.

Virtually all senior business development professionals I meet, who hold positions in their firm’s senior hierarchy believe they are ‘strategic’. But that is not the case.

As a first step, you need to identify your strategic capabilities.

1. Identify and review your capability criteria
2. List possible strategic capabilities
3. Assess each for present wealth creation impact
4. Determine the most important three to five business development strategic capabilities for your business.

The Differentiated Workforce will end up, well thumbed, on most HR professional’s book shelves. The smartest Business Development Leaders I work with have already read it.

I can’t think of any company better than Harrah’s Entertainment – the Casino Operator – at using customer analytics to segment their customer base. Harrah’s analytics allows it to estimate the potential life time of millions of individual customers.

• Diamond customers have a prospective lifetime value of $100,000.
• Platinum customers have a prospective lifetime value of $20,000.
• Gold customers have a prospective lifetime value of $2,000.

Recently, Harrah’s added a new category Seven Star. Seven Star customers are reward members with a yearly value of $50,000 or more.

Seven Star and Diamond customers have lifetime values of at least fifty times those of Gold customers.

James L. Heskett, W. Earl Sasser and Joe Wheeler in The Ownership Quotient report that Seven Star and Diamond customers made 20 percent more recommendations to friend to visit Harrah’s properties that Gold customers the previous year Further, their recommendations to friends recruited customers that were 73 percent greater than those recommended by Gold customers.

The Ownership Quotient is a remarkable book which shows you how to put the Service Profit Chain to work for competitive advantage.

Answer these questions, yes or no:

1. Are you an above average driver?
2. Do you have an above average ability to judge humour?
3. Does your professional judgement place you in the top half of your organisation?

If you are like most people, you will have answered yes to all three questions. Social psychologists call this the illusion of superiority, which suggests people have an unrealistically positive view of themselves. Remarkably, research shows the least capable people have the largest gaps between what they can do and what they actually achieve. In other words, the least competent are often the most confident.

The illusion of superiority is often combined with two other illusions: The illusion of optimism and the illusion of control.

The illusion of optimism makes people see their future as brighter than others.

The illusion of control makes people behave as if events are subject to their control.

These three illusions are probably driving CEO’s to continue to fuel multi-trillion dollar global mergers and acquisitions where most deals destroy rather than create value for the acquiring company.

To gain insight into how we consistently make bad decisions you should read Michael J Mauboussin’s latest book Think Twice (2010).

Mauboussin is Chief Investment Strategist at Legg Mason Capital management and adjunct professor of finance at Columbia Business School. He is also the author of the brilliant and acclaimed book More Than You Know.