Spend sales dollars wisely – using key economic measurements to transform your sales system
By Dave Kahle
Over my career as a sales expert, I’ve personally and contractually worked with over 500 sales organiza-tions. I’ve learned some things. Here’s one: Very few chief sales officers have a good handle on the economics of the sales force. And very few entrepreneurs think about the economics of a sales system.
Almost everyone can tell you what the amounts of the various categories on a P&L statement indicate. So, sales salaries, expenses, advertising costs, etc. are readily at hand. However, very few decision makers dig deeper. And that means that significant information is never uncovered, and decisions are made on the basis of superficial, and often flawed, information.
Kahle’s Kalculation
Let’s begin with a measurement that only a handful of sales leaders understand: Sales Productivi-ty. One way to define productivity is to compare the cost of a unit of labor versus the output. It is an im-portant measurement for every other job title. For example, an order-entry clerk who inputs 100 lines an hour is more productive than one who inputs 80 lines, at least on the surface. If, however, clerk A (100 line) costs you $50 an hour, and clerk B costs you $25 an hour, the equation changes dramatically. Now, by driving down a bit deeper, we discover that clerk A costs you $.50 per line, while clerk B is more productive, costing you $.31 a line. So, in business, productivity is measured by the output per dollar of cost.
When we apply that to sales forces, it takes the form of something we call Kahle’s Kalculation of Sales Productivity. It’s a formula I created decades ago to measure sales productivity. (Click here to download a free copy of the E-book that explains it, complete with spread sheets and step-by-step direc-tions)
Basically, we compare all the direct costs of a salesperson (wages, fringes, expenses, etc.) to the gross profit produced by that person in that period of time. Having arrived at those two numbers, we then divide the total gross profit into the total costs. The result is a percentage. That percentage is a measurement of the productivity of a sale person. Here’s an example.
Salesperson Susan produced a total gross profit in her territory of $560,000 last year. She cost the company $102,000. Her productivity measurement is 18.2%.
Now that you have that measurement, you can use that information to inform your management decisions in a number of ways.
1. Compare the KK (Kahle’s Kalculation) number to a set of benchmarks we have created over the years. So, for a B2B salesperson, the acceptable KK range is under 20%. Specifically, 13%–19%. So, a salesperson who costs you 25%, for example, is probably not profitable. Regardless of how much gross profit he/she produces, the ratio of cost to gross profit just doesn’t allow enough to pay all the other costs of running the business and produce a profit.
This gives you a more accurate and specific measurement that will allow you to make informed decisions about individual salespeople, so that you can work with individual salespeople to improve their productivity.
2. Compare one sales team with another. You can modify the measurement a bit (see Kahle’s Kalculation for details) and create a measurement of the productivity of a sales team. And then compare one team with another to discover best practices and to make changes. This is particularly helpful to compare one branch to another, for example, or to more closely analyze a specialist sales team.
3. You can modify the number a bit and measure the productivity of the entire sales and mar-keting system for a company. Our benchmarks indicate that the acceptable range is 26%–34% for a company under around $20M in annual sales, and incrementally smaller as the size of the business increases. If your KK at the system level is 40%, for example, you are not as profitable as you could be because your sales system is inefficient. On the other end of the spectrum, if your KK at the corporate level is too low, say 18%, you are probably not growing as rapidly as you should because you are not investing adequately in the sales function.
Discrepancies at the corporate level are generally due to sales systems issues, rather than per-sonnel issues. Your compensation plan is flawed, or your system of account responsibilities is ineffective, or you are calling on the wrong markets, or using the wrong sales approach, etc.
Productivity of a sales call
Using Kahle’s Kalculation, we can determine the product ivy of a salesperson. With just a little thinking, we can ferret out some numbers that will tell us a great deal more about the situation by using them to discern the quality of a sales call.
Let’s think about the potential productivity of a sales call. It’s just a simple measurement of the total cost of the sales call compared to the total potential gross profit of that call.
To create the total cost of the sales call, take the salesperson’s direct cost and then divide that by the number of sales calls made by that person in that period of time. While this number varies greatly depending on the industry, the last numbers I have seen indicate that it is probably going to be some-where between $125 and $300 per call for a B2B sales call. Finding that number is often an eye-opener for sales leaders.
But, more important than the cost of the sales call is the potential productivity of that call. While potential is a slippery number to acquire, we can create some standards to help us make good de-cisions. For example, keep in mind (from earlier in this article) that a field salesperson should cost the company no more than 20 percent of the gross profit. So, the ratio of cost to profit is 1:5.
Now, if we impose that on a sales call, and we know that the call costs us $200, it then must produce gross profit of $1,000 (five times the cost) to make that call profitable.
At this point, the blood is draining from the faces of most sales leaders and salespeople reading this post. “OMG,” some of you are thinking, “we’re spending a lot of time on customers and calls that aren’t worth it.”
Yes, that’s right. One of the biggest flaws in the design of most sales forces is to allow the sales-people to waste time on accounts that will never be profitable. It is almost a universal malady.
You can use this set of economics to focus the investment of sales time on profitable accounts. For example, an account with $10,000 in potential gross profit may be only worth one or two field sales calls. While an account with $4M in potential gross profit could be seen every week.
While there are lots of potential responses to these numbers, it does bring us to one of the rules for 21st century sales system design: Match the sales system to the dynamics and potential of the ac-count.
For example, it may cost you $1,000 to have a salesperson call on a low volume account. How-ever, you can cut that investment dramatically by creating a sales system of 5 – 6 proactive outbound sales calls by an inside salesperson, coupled with a set of attractive product descriptions.
Your attention should not just be directed to the small end of the spectrum. On the other end of the spectrum, you are probably not investing sufficiently in the highest potential accounts. If the poten-tial is significant, then having just an outside salesperson call on them is insufficient. Remember the re-frain: Match the sales system to the dynamics and potential of the account. An account with huge po-tential ought to be invested in more heavily. Sales calls by executives, significant entertaining events, company visits, etc. should be a part of the process for high potential accounts.
QPC (Quantified Purchasing Capacity)
There are several more measurements we can talk about, but they are beyond the scope of this post. But here’s one more. QPC. QPC is the answer to this question: “If this account bought everything they could from me in the next 12 months, how much would that be?
Lots of people think in terms of an account’s potential, but often those ideas are vague and im-precise. “Oh yeah, it’s pretty big!” Because this measurement is based upon s a specific set of criteria, it provides a quantifiable measurement that can be used to compare one account with another, to deter-mine sales investment and to measure penetration of an account.
This is one of my pet peeves. When we think about collecting information about a potential customer, once we get beyond the demographics (name, address, type of business, etc.), what would be the next most important piece of information we should collect about every prospect and every customer? Would it not be ‘how much they can buy?” In other words, QPC?
And yet, in over 500 sales organizations that I have worked with, only one had an understanding of QPC, a requirement that salespeople collect it, and a field on the CRM customer master screen to in-put it. One in 500.
This measurement is so incredibly powerful that it can touch multiple sales issues. For example, just collecting the number and attaching it to an account can be powerful all by itself, even if you never do anything with it. When the average salesperson sees a verifiable measurement of an account’s potential, that number is almost always larger than the salesperson had anticipated. The actual potential in a customer can motivate a salesperson, all by itself.
In addition, you can use that number to determine one half of our rule: Match the sales system to the dynamics and potential of the account. QPC goes a long way to determining the ‘potential of the account.” You can’t precisely create and match a sales approach unless you know the QPC.
It also takes the measurement of ‘penetration’ into the 21st century. Now, it is no longer a matter of, “I think we’re getting X percentage of the business.” It is an objective measurement. If the ac-count had $1M of potential purchases, and you are getting $50,000 your penetration is pretty low.
One more thing: This post presents some of the basic sales system measurements. While most sales lead-ers don’t dive this deeply into the economics of the sales force and the sales system, these few simple measurements can be used to transform a sales system and provide a figurative shot of adrenalin to a sales force. Think of it as “Economics of a sales system – 101.”
Dave Kahle is one of the world's leading sales authorities. He's the author of 13 books, including 11 Secrets of Time Management for Salespeople, and How to Sell Anything to Anyone Anytime. He writes a weekly Ezine for salespeople; and has presented in 47 states and eleven countries. As a salesperson, he was the number one salesperson in the country for two different companies in two totally distinct industries.
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