The Sales Manager's Guide To Controlling Cost of Sales
Every Sales Manager is responsible for cost of sales, which includes two considerations. The first is to bring in as much revenue as possible through their sales team, and the second is to bring in the revenue with the least possible cost outlay.
Even though the sales team brings in most of a company's revenue, most finance people look at sales as an expense. They look at the sales, general expenses, and administrative costs (SGA) line items. To maximize the profitability of sales efforts, the Sales Manager's job is to reduce or maintain general sales expenses while driving maximum revenue. There are some areas where it makes sense to reduce sales expenses, and other areas where reducing expenses can be counterproductive.
Below are some ideas to consider for cutting the costs of sales. These ideas may or may not be right in the situation because for every action there is a reaction. There are few places where this is truer than with sales personnel.
The first items most companies address to control cost of sales are the variable expenses associated with sales. This includes travel, lodging, entertainment, meals and outside expenditures. These are cut back, at least short term, until sales increase or return to normal levels. However, there is a reaction to cutting those expenses. Cutting out all non-billable expenses might reduce sales success and put sales into downward spiral. Consider the consequences of cuts before making them.
Review The Commission Plan
Every sales rep quickly figures how to maximize the commission plan to their benefit. The key to an effective commission plan is one that motivates behaviors that profitably sell the products and services into the marketplace. And it makes them happy to be doing it.
Companies often justify increasing commission rates and lowering base salary to make it possible for some reps to bring in more money by making more sales. Some companies even go to straight 100% commission plans, but this can invite the sales reps to look for other employment opportunities. That can lead to another large round of hiring and training expenses.
When reviewing the commission plan, make small steps in the mix between salary and commission. Monitor the change in sales and associated sales support expenses as result of the changes. Modify the plan based on the results. Remember, variations in the pay scheme affect top performers differently than bottom performers. Engage the sales team to help brainstorm commission plan changes. Always pay special attention to retaining the top performers.
Address Individual Performance
Generally the biggest cost item on any Sales Manager's budget is the fully loaded cost of a salesperson. The goal is to have the proper number of sales people all producing at top levels. This is the ideal situation to manage cost of sales. Evaluate the historical performance of each member of the team. It is better to cut a person loose rather than to prolong the agony when an individual has not produced in an acceptable time. Removing headcount from the team saves expenditures and expenses.
However, there are costs associated with terminating a member of the sales team. There are the costs of interviewing, hiring, on-boarding, training, lost revenue, and customer dissatisfaction in an open territory. These costs add up quickly. Have a plan together and move rapidly to deal with the risks and consequences when swapping out a sales rep.
Losing a top performing salesperson has a greater impact on the cost of sales. Sales Managers focus the majority of their time and effort on the poor performers, at the expense of their top performers. There is a greater return when a top performer increases the percentage of their sales. Leveraging the top sales producers is a good way to reduce the cost of sales. Losing a top performer can be very painful for the business.
Review territory coverage to see if there is a way for fewer people to cover more territory. Is technology and communications being used as well as possible? This can help reduce head count and cost of sales. Make certain that changes in territory coverage does not impact or dilute the sales to the point that customer coverage is lost.
If you use sales partners or independent reps, review their performance and coverage as well. It is better to keep the top-producing partners and expand their impact than it is to hang on to non-producing partners and hope that they will eventually get better.
Economies of Sales Calls
Sales calls are very expensive but face-to-face time with the customers and prospects is valuable. It is important to strike a balance. Review the number of calls that are logged each week. Compare that number to the weekly sales to calculate the cost of sales per call. Calculating the average revenue produced per sales call and the average cost of each sales call is an excellent metric to have on a sales manager's dashboard.
Do the best to enhance the number and effectiveness of sales calls that the team makes. Focus the team's efforts on the most profitable prospects and redirect efforts towards accounts or geographies where the cost of sales is lower. Aim for those situations where the opportunity for repeat business is higher.
Cost of sales is impacted positively when you can get more revenue per sales call.
Sales Contests and Promotions
It is possible to increase short-term revenue with sales contests. These should be designed to motivate salespeople to meet specific objectives. Often times a one or two month sales contest can yield better results with less additional costs then an increased bonus or commission plan. Designing a fair sales contest is sometimes difficult. Take the time to design a contest that incentivizes the behavior you want to achieve. It's difficult to change the annual sales compensation plan, but it's much easier to run a short-term sales contest at little additional cost.
It is much more expensive to obtain new customers, then to generate additional revenue from existing customers. The costs of marketing, prospecting, relationship building, and setting up business engagements with new accounts all take time, resources, and money. By growing existing accounts, sales teams can focus on customers who already have a relationship with the company, and who have processes already in place for transacting business. This helps reduce the cost of sales.
Resources are expensive. Getting the maximum utilization from them is important to managing the cost of sales. Review the cost and usage of the most critical resources. Those resources can include:
Qualify the investment of any resources before you engaging them. Consider the targets, the objectives, the available time, and the other opportunity costs of using the resources. Ask if the planned level of resource usage makes sense compared to other alternatives. Sometimes the plan needs to be adjusted for more realistic targets. See if resource requirements can be reduced, without impacting total sales. See if resources can be shared by combining usage with other team members.
With today's technology, it's possible to use webinars and videoconferencing to cut down on expensive face-to-face time. Sometimes increasing resources a small amount might advance the sales plan even more rapidly than the cost of the additional resources. Employing either of these strategies helps reduce the cost of sales.
The other side of cost reduction is to increase revenues per sales rep. This means the Sales Manager needs to manage and execute the role effectively. There are several key areas to consider when managing the team's business for maximum revenue. They fall into three categories. They are the business aspects of the job, leadership and readiness and helping with strategic engagements. Here are things to consider in each area:
Leadership and Readiness Aspects
Helping With Strategic Engagements
Keeping the cost of sales in line with revenues is a necessary part of any sales Manager's job. Be aware of the costs of sales in all aspects of the business. Impact the costs in a positive way by increasing revenue while keeping costs steady, declining, or growing at a rate which is lower than sales are increasing and you will consistently lower the cost of sales.
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