By: Filemón. V
Published: October, 2013
It has been my experience that when you ask members of the different operating departments in a company what their basic purpose or their reason for being, you normally get answers related to their basic functions. The Sales department will frequently respond that their reason for being is to reach sales and volume objectives, obtain the highest possible distribution and exhibition levels and to maintain a healthy accounts receivable position.
The responses related to the area’s basic function are more recurrent as you progress down in each department’s structure. Rarely does it permeate throughout operational areas that their reason for being is to make money or to make the highest possible profit and return on investment. Successful companies have managed to convey that every individual in the organization can contribute to the company’s products’ positioning and to the profit which ensures the firm’s long term viability.
The Sales Organization
Given the impact that the sales organization has on overall company results, any effort to focus the group on making money will have a significant repercussion on the company’s profit picture.
Particularly in consumer product markets, the Trade is becoming highly concentrated and more operationally sophisticated. New Point of Purchase disciplines have emerged to improve turnover and profit per square meter. Trade Marketing, Category Management, Shopper Marketing have changed salesperson profiles over time.
Aside from the traditional traits: assertiveness, empathy, ability to communicate, discipline, need to excel, confidence, etc., salespeople have new demands. Among these are strategic thinking, in-depth knowledge of their company and its products, understanding of their client’s needs and strategies. Available to them is now the ability to turn concepts into specific actions and obtaining the optimum benefits from the Point of Purchase tools.
These demands require a higher educational level and hence raise the bar for activities which provide job satisfaction.
A system to measure Sales’ effectiveness based on Profit per Client will not only improve the company’s profit picture but will also provide a scheme whereby the salespersons can act as businesspeople and be measured accordingly. In order to implement the process, the salesperson´s compensation structure must be modified.
Profit per Client is a result of a Cost-to-Serve process
“Cost-to-Serve (CTS) is an approach that helps companies recognize that bottom-line profitability, not sales volume or gross margin, is the true measure of success. It incorporates a broad view of costs, so you can track, measure, and model every element of the equation to help improve profits. It gives companies the information necessary for them to focus the right level of resources on the right customers and segments” Frank Burkitt, Principal, Deloitte Consulting LLP
If your company is already into the Cost-to-Serve process, you are more than ready to implement a salespersons compensation structure based on Profit per Client. If you have not instituted this discipline in your organization you can use the sales data available in the commercial area to build a model which will serve as a platform for successful future CTS implementation.
Basic steps to implement a profit oriented sales organization
The Profit per Client Information
The Profit per Client analysis must include the following for each client and SKU in the product line:
- Gross Sales minus Discounts and Allowances yield the Net Sales figure for every SKU.
- Product Costs. Use the average product unless a specific cost can be assigned to an identifiable client (special formulation, packaging, etc.)
- Net Sales minus total identifiable product cost will provide the Gross Margin. The sum of all SKU margins will provide the product line Gross Margin per Client.
- All identifiable Point of Purchase activities which can be assigned to a specific client (Promotion costs, Shopper Marketing activities, Special exhibition material, etc.)
- Total distribution cost (Freight, special handling and storage, additional to normal inventory demands)
- Financial cost of average monthly accounts receivable.
The final result is a Profit per Client figure
Sales’ top management must be thoroughly briefed on the Profit per Client structure. Since this is highly sensitive information a decision has to be made as to how far down the Sales Force structure will the detailed information be provided. The objective is to safeguard vital data and at the same time, give each tier in the Sales organization the adequate information to develop their sales strategy.
The compensation structure should reflect the impact that the different levels of the sales organization have on the final profit per client figure. The total compensation must be divided; a proportion based on Profit per Client and a portion based on traditional sales objectives (Sales, volume, distribution, accounts receivable, etc.) The higher up in the sales organization the higher the portion based on profits.
The Sales Organization has to be trained in this new discipline. With the Trade becoming ever more sophisticated and operationally complex, a basic objective of the Profit per Client strategy is to turn every member of the sales force into sales executives, not mere order takers. Every element in the Profit per Client structure has a positive or negative impact on the final profit picture.
- Unit Net Sales can be reduced or increased by the level of discounts and allowances which the salesperson negotiates.
- Product Line profitability is increased or reduced according to a sales mix skewed toward the higher or lower margin SKU’s.
- The Point of Purchase activities will impact profitability depending on their ability to generate additional volume at a reasonable cost.
- Clients who have lower days outstanding and who require lower inventories will generate a higher profit due to lower working capital costs, etc.
The salesmen’s focus on client profits has to be reconciled with other activities which are similarly focused on profitability (Trade Marketing, Internal or Trade Category Management, Shopper Marketing). One way to accomplish this is by modifying their compensation structure so that it mirrors the Sales Area’s compensation structure
Changing the sales organization to a focus based on making money, has important benefits in addition to improving the profit picture
In order to set quantifiable objectives for the sales organization, the company will have to invest considerable time and effort in developing a Profit per Client figure that is timely and reliable.
- The information has to be developed for all SKU’s and the total product lines which the sales organization handles.
- Every element that has an impact on the Profit per Client number has to be analyzed and quantified.
- The Profit per Client information has to be maintained and updated.
This information is a formidable tool to develop and implement product, marketing and sales strategies. It provides a unique instrument to rapidly and effectively measure a strategy’s success or failure
Sales, Marketing and Account Receivables areas will be constantly reminded of the profit objectives. Sales will become more critical of plans and materials they receive from sales support areas as they impact on their take home pay. The system promotes constant evaluation of all sales/marketing activities to correct deficiencies and to repeat successful efforts.
The system fosters creativity and initiative among the sales organization; the idea is to promote an entrepreneurial spirit.
A compensation system based on Profit per Client is a self liquidating effort. Properly designed, the additional profit generated, will more than compensate the increased take home pay. The more money the salesperson makes the more successful the program.
The system connects very easily with the Trade’s objectives since they pursue the same profit goals through increased volume, rapid turnover and effective Point of Purchase support.
Implementation of this scheme will lead to increased sales force morale and job satisfaction due to a higher take home pay and a direct relation between personal efforts and measurable results.
If your organization eventually moves toward the implementation of a full Cost-to-Serve process you will have taken a head start in one of the areas that has a very close link to the financial success of the company, the Sales Organization.
All opinions expressed are those of the author. Strategy Business Group Blog is an independent and neutral platform dedicated to generating debate around the key topics that shape global, regional and industry agendas.