Customer Strategist Yucel Ersoz: Striking a Balance When Sizing Your Sales Force
The quintessential question of every organization's sales force strategy is deceptively simple: How many reps does the company need to hire? A sales force sizing strategy can help when determining the optimal sales capacity needed to properly service the marketplace.
Companies, however, are under increasing pressure to reduce the cost of sales, which leads to a tendency to undersize sales forces. Undersized sales forces may appear to deliver targeted profitability results in the short run, but in the long run they cause the company to forego shareholder value because potential growth in territories and client areas are overlooked and competition snatches it instead.
Sales force sizing, therefore, should strike a balance between immediate profitability and long-term growth.
Companies that risk taking a short-term view with sales force sizing efforts will feel the ramifications of focusing on maximizing profitability and sales per sales representative, rather than investing in high sales accounts and high growth potential areas.
In under-sizing the sales force, companies essentially leave money on the table. Even though companies that are sized with a short-term optimization in mind have on average 18 percent smaller sales forces than those sized for long-term optimization, the cost of having an under sized sales force is estimated to be roughly 4.5 percent of the company value chipped away.
To put this in perspective, imagine you are buying and selling shoes. If you employ only one salesperson covering Manhattan, your profitability will be high, but if the salesperson covers the entire U.S., your profit will be maximized. The trick is to enlarge the sales force so that the last salesperson who you add has a positive long-term value. That means the net present value of all his future revenues minus the net present value (NPV) of costs he will incur. The last salesperson may not be earning a profit, but if he grows his revenues much faster than his salary grows, his NPV will be positive.
This is an example of maximizing customer value, which requires an optimal sales force and a market-based approach. This method involves an understanding of customers' needs and expectations, an estimate of customers' growth potential, and a determination of which channels to leverage to reach customers, as well as deployment of the necessary resources. It also requires a tailored segment coverage strategy and an appropriately sized sales force to carry out the strategy.
Peppers & Rogers Group has devised a methodology for finding an optimal sales force size by directly linking sales team size to the value of the team. Every sales team has a net present value calculated by taking into consideration the value of net cash flows that the team creates, i.e. total sales less cost of goods sold less cost of operating the team. This methodology is forward looking: It considers not only the current profitability of a sales team, but also the growth potential of the team's revenues and prevents the company from leaving money on the table by under-investing in territories, segments, and clients with high-growth potential.
True, that it is hard to foresee the future, but it is better than under-investing. If the team does not deliver growth results expected when initial forecasts were made, it can always be undersized, but when competition has taken away market share in a high-growth region, it is usually too late to grow the sales team. All in all, the methodology aims to break the old wisdom that says "You earn more headcount when you sell more."
When your sales force sizing has been completed, a four-step reality check will ensure no material errors are made. Those steps are:
1. Perform a financial check to determine the expected profitability and financial ratios.
2. Compare key ratios with company expectations and industry norms.
3. Perform a competitive check of key accounts and territories, as well as coverage of product groups to make sure no strategic advantage is being lost to competition.
4. Review performance parameters and data to be recorded to ensure improved sizing calculations in the next review period.
We believe that this value-based approach serves companies not only in meeting short-term sales targets, but also long-term shareholder value creation targets. Many times short-term vision causes the latter to be swept under the rug, or at best, discussion around it is diluted by day-to-day worries. We feel it is time companies found a way not to do that.
About the author: Yücel Ersöz is a partner at Peppers & Rogers Group. Contact him at yucel.ersoz@1to1.com
Companies, however, are under increasing pressure to reduce the cost of sales, which leads to a tendency to undersize sales forces. Undersized sales forces may appear to deliver targeted profitability results in the short run, but in the long run they cause the company to forego shareholder value because potential growth in territories and client areas are overlooked and competition snatches it instead.
Sales force sizing, therefore, should strike a balance between immediate profitability and long-term growth.
Companies that risk taking a short-term view with sales force sizing efforts will feel the ramifications of focusing on maximizing profitability and sales per sales representative, rather than investing in high sales accounts and high growth potential areas.
In under-sizing the sales force, companies essentially leave money on the table. Even though companies that are sized with a short-term optimization in mind have on average 18 percent smaller sales forces than those sized for long-term optimization, the cost of having an under sized sales force is estimated to be roughly 4.5 percent of the company value chipped away.
To put this in perspective, imagine you are buying and selling shoes. If you employ only one salesperson covering Manhattan, your profitability will be high, but if the salesperson covers the entire U.S., your profit will be maximized. The trick is to enlarge the sales force so that the last salesperson who you add has a positive long-term value. That means the net present value of all his future revenues minus the net present value (NPV) of costs he will incur. The last salesperson may not be earning a profit, but if he grows his revenues much faster than his salary grows, his NPV will be positive.
This is an example of maximizing customer value, which requires an optimal sales force and a market-based approach. This method involves an understanding of customers' needs and expectations, an estimate of customers' growth potential, and a determination of which channels to leverage to reach customers, as well as deployment of the necessary resources. It also requires a tailored segment coverage strategy and an appropriately sized sales force to carry out the strategy.
Peppers & Rogers Group has devised a methodology for finding an optimal sales force size by directly linking sales team size to the value of the team. Every sales team has a net present value calculated by taking into consideration the value of net cash flows that the team creates, i.e. total sales less cost of goods sold less cost of operating the team. This methodology is forward looking: It considers not only the current profitability of a sales team, but also the growth potential of the team's revenues and prevents the company from leaving money on the table by under-investing in territories, segments, and clients with high-growth potential.
True, that it is hard to foresee the future, but it is better than under-investing. If the team does not deliver growth results expected when initial forecasts were made, it can always be undersized, but when competition has taken away market share in a high-growth region, it is usually too late to grow the sales team. All in all, the methodology aims to break the old wisdom that says "You earn more headcount when you sell more."
When your sales force sizing has been completed, a four-step reality check will ensure no material errors are made. Those steps are:
1. Perform a financial check to determine the expected profitability and financial ratios.
2. Compare key ratios with company expectations and industry norms.
3. Perform a competitive check of key accounts and territories, as well as coverage of product groups to make sure no strategic advantage is being lost to competition.
4. Review performance parameters and data to be recorded to ensure improved sizing calculations in the next review period.
We believe that this value-based approach serves companies not only in meeting short-term sales targets, but also long-term shareholder value creation targets. Many times short-term vision causes the latter to be swept under the rug, or at best, discussion around it is diluted by day-to-day worries. We feel it is time companies found a way not to do that.
About the author: Yücel Ersöz is a partner at Peppers & Rogers Group. Contact him at yucel.ersoz@1to1.com
No comments:
Post a Comment
Your Comments are INVALUABLE to Boost Our Business Oxygen