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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.
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 profitablein 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.
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?"
Here's a good starting point. Begin by measuring your current sales productivity. 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.
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 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.
Dave Kahle ( www.davekahle.com ) is a consultant and trainer who helps his clients increase their sales and improve their sales productivity. He speaks from real world experience, having been the number one salesperson in the country for two companies in two distinct industries. Dave has trained thousands of salespeople to be more successful in the Information Age economy. He's the author of over 500 articles, a weekly ezine, and five books. His latest is 10 Secrets of Time Management for Salespeople.
He has a gift for creating powerful training events that get audiences thinking differently about sales. Dave Kahle's "Thinking About Sales" Ezine features content-filled motivating articles, practical tips for immediate improvements, and helpful tips to help increase sales. Join on-line at www.davekahle.com/mailinglist.html
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