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Hytek Controls, A Case Study
The following case is a perfect example of the problems facing small industrial manufacturers, and how marketing intelligence can be gathered and used to guide a successful sales effort. Out of respect for my client’s confidentiality, their name has been changed. All
other data and information is accurate.
The Company and the Situation
Hytek Controls is a 36 year old, privately held firm that designs and manufacturers a full line of speed controls for all types of industrial motors. Hytek sells through distributors and direct sales representatives throughout the United States, as well as Canada and Mexico. The United States is Hytek’s primary focus, accounting for approximately 95% of all sales, and equaling approximately $7,000,000 annually. An example of a typical Hytek customer might be an O.E.M. (original equipment manufacturer) that needs a control unit to control the speed of the conveyor, a pump, or other device. This might be a custom, one-time application that requires a single control unit or it might be a production line that will require several thousand control units over the course of a year.
The range of applications for Hytek’s line of control units is very broad, ranging from submersible pumps to pizza ovens. Profit margins and contribution margins are similar for all of their products and in all the industries they serve, so the company’s general philosophy on sales is to sell any product they have to whoever wants it. This “shotgun” sales approach has resulted in sales to more than 750 O.E.M.’s in the past 18 months, with about 10% of these customers providing 90% of the total sales.
The company’s sales effort is typical of most small industrial manufacturers, and consists of a small team of direct sales reps calling on distributors and past customers. A few cold calls are also made to try to locate new business, and trade shows and a small advertising budget also bring in some new leads that need to be followed up on. Sales had been rather flat until the last couple years when they started to increase slightly.
The company has been undergoing a change in leadership over the past few years, with the original owners retiring to a seat on the board instead of active management. The new management is not content with the small sales gains being achieved and is looking for a way to boost sales significantly. They know they make a very high quality, competitive product and they have an excellent reputation in the industry. The new V.P. of Sales and Marketing believes that the company is not reaching the right audience, but he is having a difficult time trying to identify what the right audience is, as well as how to reach them if he knew.
Identifying the Target Market / Audience Profiling
Identifying Hytek Controls’ target market required some primary and secondary market research tasks, that began with “Data Mining” their own databases and information. Hytek’s marketing database was in better shape than most of my clients, since they had made a focused effort to get it cleaned up over the past few months. I had them filter out all of the customers that were not
O.E.M’s (they also sell individual units for replacement and inventory stocking to end users), and I had them compile the accounting information for the total dollar amount of purchases for each O.E.M for the past 18 months.
At this point Hytek supplied me with 755 O.E.M. records, and I was able to export this data into a powerful marketing intelligence software program that my business is licensed to use. This program provides continually updated Dun and Bradstreet information on more than 11 million business and organizations in the U.S. By working with Hytek’s data, I was able to match 529 records (70.1%
match), giving me a good statistical sample of Hytek’s past O.E.M. customers. Hytek’s records were appended to add critical information about these companies, including their annual sales, number of employees, SIC codes, corporate structure, age, location, etc.
Analyzing this data (see Exhibit 1 for an example of the analysis output) revealed the following:
a) The shotgun sales approach was creating a lack of dominance in any SIC code categories or in any specific locations (evaluating by either states or metropolitan areas). However, some SIC codes were high enough to be considered promising, including some industries (like printing trades machinery) that had
never even been mentioned in the pre-analysis meetings as an area of focus.
b) The size of Hytek’s customers, based on annual sales and number of employees, was much smaller than everyone anticipated. This indicated that Hytek was either not attracting or not aggressively pursuing the larger companies where volumes and overall sales could be higher.
c) Over 80% of the companies analyzed were privately held firms.
d) The biggest surprise was in the area of company age. The majority of Hytek’s customers were companies older than 11 years and a very high percentage were actually over 21 years old. This suggested that Hytek was either not attracting or not aggressively pursuing younger companies that are looking for long-term suppliers to fuel their rapid growth curves.
This information allowed me to compile a good profile of Hytek’s overall O.E.M. customer, but my next step was to compare this general population profile to their “Best Customer” profile. I determined their best customer simply on a dollar amount of sales basis. Every customer that had purchased more than $10,000 worth of Hytek’s products in the past 18 months was filtered out of the general population list, and a separate analysis was performed on them.
This best customer list consisted of only 68 companies and represented only 9% of the entire O.E.M. customer list. The analysis on this list revealed the following:
a) The SIC codes and locations were still quite scattered, but there were many similarities to the overall list. A few new / different SIC codes appeared in this analysis that looked very promising, including several codes that had more than 3 companies each. The
following is a brief summary of some of these codes, with a comparison of how the same code ranked in the general analysis.
Summary
7.4% = #3589, Service industry machinery (was 2.8% in general analysis)
5.9% = #3523, Farm machinery and equip (was 2.5% in general analysis)
5.9% = #3535, Conveyors and conveying equip. (was 2.3% in gen. analysis)
5.9% = #3821, Laboratory apparatus and furn. (was 1.5% in gen. analysis)
4.4% = #5084, Industrial machinery and equip. (was 5.7% in gen. analysis)
b) Annual sales and the number of employees highlighted the fact that the companies on this best customer list were considerably larger. For instance, the $24.9 to $249.9 million category increased from 6.7% to 19.2% of the list.
c) A similar percentage of companies were privately held, but several of the highest revenue generating companies on the list were public.
d) Again, the big surprise was in the area of company age, but this time the surprise went the other direction. The number of companies on the best customer list that were 5 years old or less increased from 14.2% to 26.5%. In addition, this analysis should that
the average purchase of companies in the 5 years old or less category was $58,495, compared to only $31,472 for companies older than 5 years. It became very clear that these younger companies had a better chance of producing higher sales volumes.
The Ideal Customer Profile
By comparing the best customer analysis and the general population analysis, and considering the problems and opportunities identified in these analyses, I was able to develop an “Ideal Customer” profile. Hytek’s ideal target customer looks like the following:
1) 10 years old or less
2) 5 to 499 employees at the individual plant
3) $2.5 to 99.9 million in annual sales
4) Located in the top 13 dominant states (IN, MI, CA, NJ, PA, OH, NY, KS, IL, FL,TX, MN, and WI)
The object here is to create customer clusters that can be more efficiently serviced by the sales staff. If many customers are located in the same area, then a salesperson can make several visits in a shorter period of time. After these states are sufficiently covered, then the marketing effort could strategically move into other states.
5) SIC codes based on the top SIC codes identified in the best customer analysis that
The strategy here is to focus on proven areas of expertise, before expending resources to learn and develop products for new industries.
6) Private or public companies
Market Potential and Market Penetration
Based on the ideal customer profile developed, the market potential and market penetration was determined for the entire market (also see Exhibit 2) as well as some specific, dominant SIC code markets. This report is summarized as follows:
Note: For this analysis, potential is evaluated by the number of potential customers or companies, rather than the sales potential. Sales potential may be a phase two project to complete the report that was developed. To determine a sales potential, other factors would need to be considered, including the motivating “drivers” for each particular industry, as well as the macroeconomic / competitive situation, etc.
Entire Market (All recent customers SIC codes, 8-digit):
Potential = 6594 Companies
Penetration = 1.03% (= 68 / 6594)
SIC #3589, Service Industry Machinery (8-digit codes):
Potential = 89 Companies
Penetration = 5.62% (= 5 / 89)
SIC #3523, Farm Machinery and Equipment (8-digit codes):
Potential = 17 Companies
Penetration = 23.53% (= 4 / 17)
SIC #3535, Conveyors and Conveying Equipment (8-digit codes):
Potential = 246 Companies
Penetration = 1.63% (= 4 / 246)
SIC #3821, Laboratory Apparatus and Furniture (8-digit codes):
Potential = 64 Companies
Penetration = 6.25% (= 4 / 64)
SIC #5084, Industrial Machinery and Equipment (8-digit codes):
Potential = 348 Companies
Penetration = .86% (= 3 / 348)
Top 5 SIC Codes (above), 3589, 3523, 3535, 3821, 5084 (8-digit codes):
Potential = 764 Companies
Penetration = 2.62% (= 20 / 764)
Recommendations
The information compiled and analyzed for this report allows Hytek Controls to understand exactly who their ideal market is, and where problems exist in their current sales and marketing effort. Although the work done so far is extremely valuable and has provided Hytek some insight that they have never had before, it is only the beginning of the work that needs to be done. Now that they
have the information, they need to use it to their advantage.
It is clear from this analysis, that Hytek Controls has barely begun to penetrate the potential markets that exist for its products, so a strategy must be developed to target and attract these new companies. The key to this strategy is a very focused mailing and telemarketing campaign to reach these new potential customers. I proposed a step-by-step approach for Hytek to follow, and these
recommendations are listed below.
1) Verify the marketing message, corporate image, and company capabilities.
It is not enough to simply target the proper ideal customers. If the right message, image and capabilities are not in place, the effort is a waste of time and money.
a) Evaluate all of the company’s marketing materials, including the website, sales literature, advertising, directory listings, etc. to make sure that the right message is being conveyed to attract larger and younger companies than
what Hytek has attracted in the past.
b) Analyze the recent public companies that have purchased Hytek’s products and consider what their special needs or concerns were. Then address these issues in all future marketing materials and make sure the sales staff and distributors are educated on this matter. This could be done by conducting
interviews with the sales, production and accounting personnel that interacted with these customers.
c) Conduct additional market research through the use of surveys / questionnaires to some past customers and ideal prospects to determine what their needs and concerns are. Then address these issues in all future marketing materials and make sure the sales staff and distributors are educated on this matter. This would be done best by an outside entity where confidentiality can be promised to those people taking part in the survey if they
so choose. More accurate and honest feedback can be gained with this approach.
d) Conduct some competitive market research to determine the strengths and weaknesses of the competitors and their products. Many factors should be judged in this analysis, including price / feature comparisons, service and support, website content and functionality, who shows up on internet searches,
financial strength, etc.
2) Develop a targeted marketing strategy and process.
a) Determine how many leads can be handled in a given period of time and what the sales goals are for this program / the company. Factors that must be considered include the actual mailing processing, follow-up phone calls, meetings and follow-ups with interested leads, etc.
Phone calls need to be done about a week after a mailing, data needs to be entered in the database for each call, many times information will need to be resent, and subsequent mailings (approx. 2) need to be done about every 2 to 3 weeks. If a large amount of leads are desired in a short period of time, then a telemarketing firm should definitely be used, but if a small, steady flow of leads is desired, then it can probably be handled in-house (or with minimal assistance from an outside firm).
b) Determine the strategy for which potential markets should be targeted first and how broad to go with the list. Additional research may need to be conducted to determine which of the dominant industries shows the highest probability of growth or a continued need for Hytek’s products.
c) Develop the targeted marketing mailer packages, by gaining a thorough understanding of that market’s needs and drivers. A powerful letter and call script need to be developed, and a business reply card should accompany this letter and sales literature.
3) Evaluate and implement a reinforcing advertising and PR plan.
a) This effort may include on-line branding, trade publication articles, quarterly newsletters, advertising, etc. The goal here is to reach the same audience being targeted in the mail and telemarketing campaign, through other sources. This branding effort will reinforce the message that the company is trying to convey.
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the process click here.