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Is it Time to Concentrate on Sales Productivity?

Copyright MM, by Dave Kahle

Sales productivity may be a new concept for many distributor executives. "Sales" is easy to understand, and "productivity" is pretty clear, but when those two words are combined the combination becomes a bit vague.

What exactly is sales productivity, and why should you be concerned about it?

Let's think about productivity for a moment. We understand that the notion refers to the amount of labor it takes to accomplish some task or process. Take your warehouse, for example. It may take one hour of labor to pick, pack and ship a 50-item pick ticket. The ratio of one man-hour per 50 item pick ticket is a measurement of productivity. If your warehouse is going to get more productive, you must find some way to pick that 50-item order in less than an hour.

Your business may grow, and your warehouse may pick an ever-increasing number of orders. But, if your warehouse doesn't figure out a way to pick that order in less than one man-hour, you're just getting bigger, not better. The lack of improvement in productivity would be a cause for concern.

The same is true of sales. It may cost you $30.00 in sales costs to acquire $100.00 in gross profit (which, by the way, is a very real possibility). Over time, your sales person may acquire more and more orders and bring in an ever-growing quantity of gross profit dollars. But if he always costs you $30.00 for every $100.00 of gross margin, he's not becoming any more productive. You're getting bigger, but no better, at least in respect to your sales systems.

"OK", you're thinking to yourself. "Why should I care?"

If your market is growing rapidly, and if you're achieving a comfortable and stable average gross margin, and if you don't have pressures from any competitive sources, then, hey, don't worry. You can stop reading this article, and move on to perusing the other interesting stuff in this publication.

But, if your market is fairly flat, or if you're concerned about shrinking margins, or if you're looking over your shoulder at the competition, then "sales productivity" is a concept you need to bring into your business.

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In addition to fending off some of the more frightening threats to your prosperity, there are some real benefits to improving your sales productivity. Take profits for example.

Suppose your sales force currently costs you 25% of your gross profit dollars. And suppose that you could cut that by 1%, to 24%. What would happen to the money represented by that 1%? It could drop directly to the bottom line, which would not make you unhappy. But, you could use it in other ways. You could afford to take some strategically important business at lower margins, for example. Or, you could use it to fund some new technology improvements in other aspects of your business, or purchase a beginning inventory for some new product line. The opportunities are endless. The point is, improving sales productivity will free up cash that can be used in a number of critical places.

In an effort to respond to decreasing margins and competitive pressures, you've probably worked on some of the other aspects of your business. You may, for example, have invested significantly in computers. Most progressive distributors are on their second or third generation computer systems to help manage their internal functions.

Why did you buy those computers? Bottom line -- to become more productive. The competition would have put you out of business by now if you hadn't.

You may have streamlined your customer service function, tightened up your purchasing and inventory controls, even figured out how to turn your receivables more quickly. All in the cause of becoming more productive - of trying to stay profitable in the face of competitive pressures and shrinking margins.

But, if you're like most distributors, you haven't done much to improve your sales productivity. And this in spite of the fact that sales force costs are generally the single largest cost (after cost of goods sold) that your company has. Here's a simple test to ascertain whether that's the case in your business.

Ask your controller to revise your P & L statement - just this one time. Instead of lumping all your wages together, have him pull out your sales force wages, salary, commissions, bonuses, etc and state those separately. Then have him identify expenses you reimburse for the sales force, costs of car allowances, fringes such as 401K, health insurance for the sales force, etc. There are a number of other associated costs, but these should be enough to prove my point. Add up all those costs listed above, and compare it with every other item on your P&L statement. That single category, "sales force costs" is almost always far and away the largest single cost to your company.

You know that if you're going to survive in an era of shrinking margins, your business must become more productive. Having worked on improving productivity in other parts of your business, it's now time to look at that portion which holds the greatest potential for improvements, the largest single cost to our company, the sales force.

Still not convinced? Take the self-assessment included with this article to see if you should be focusing on sales productivity.

At about this time, a question should be bubbling up through your brain cells, just about to pop into consciousness. The question is, "OK, Kahle, so how do I improve the productivity of my sales force?"

The answer to that question is bigger than this article can handle. It encompasses a number of potential initiatives, including reengineering your sales system, fine-tuning your sales compensation plan, building in alternative methods of selling, training and equipping your sales force, recruiting more effective sales people, and instilling processes of continuous improvement. (Send for a free catalogue of tools and resources to help you get a handle on this. Call 800-331-1287; fax 616-451-9412, or email us).

Here's a good starting point, however. Begin by measuring your current sales productivity. Create a measurement that my clients affectionately call "Kahle's Kalculation." It will provide you a simple, easy, fair and accurate measurement of sales productivity that you can use over time to see if you're making progress. You can use it to measure the productivity of each individual sales person, each group or branch, and the entire company.

Here's how you do it.

    1. Pick a period of time. Let's start with last year.

    2. Working with each salesperson's numbers individually, calculate the total direct cost of that person for that period of time. In other words, add their total W-2 earnings, the cost of matching taxes, any expenses or car allowances, and the cost of fringes like 401-Ks, health insurance, etc. Add it up, and you'll have a number which accurately describes the cost of that person to the company for that period of time.

    3. Now, calculate the total gross profit dollars produced by that person for the same period of time. Compare that number to the costs, and you'll have a ratio; cost to contribution.

    4. Now, reduce that ratio to a percentage by dividing costs by gross margin, and you'll come to a percentage. That percentage is Kahle's Kalculation - a simple, fair, accurate measurement of the productivity of that sales person.
Because of the way we've formulated it, the lower the number, the more productive is the salesperson. So, if you have two sales territories producing about the same dollars of sales, if one salesperson has a Kahle's Kalculation number of 28%, and the other one has a number of 19%, the 19% salesperson is more productive, and therefore, more profitable to the company.

Now that you've calculated this number for every salesperson, combine all the salespeople's costs and compare that number to the sum of the gross profit produced by them, and you'll get a composite.

There are other levels and layers to be calculated, but this is a good start. If you'd like to really dig into this concept, call 1-800-331-1287, fax 616-451-9412, or Contact us electronically, and we'll send you, FREE, a six-page explanation of exactly how to measure sales productivity at every level of your organization. (Ask for "How to Kreate Kahle's Kalculation.")

Regardless, this simple first measurement will get you into the mindset of measuring sales productivity, and provide you a necessary first step to begin to make powerful and positive changes within your organization.

Dave Kahle has trained tens of thousands of B2B salespeople, sales managers and business owners to be more effective in the 21st Century economy. He's authored nine books, and presented in 47 states and seven countries. To access Dave's training, insights and tools online, visit The Sales Resource Center. Visit www.davekahle.com to check out a seminar near you.

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