How to Reduce Your Cost of Sales
Why would you bite the hand that feeds you? That's a standard argument against training a cost-cutting eye on your company's sales department. After all, it's the sales team that brings in most of a company's revenue and secures the necessary cash flow to keep you in business. So why take anything away from these important players? When business is sluggish, however, that has a way of changing managers' thinking. If you find you must reduce your sales expenses, you should know that some trims are acceptable, even smart. Other methods of cutting your cost of sales are don't-go-there, last-of-the-last-resorts.
Keep in mind that if you burn the salesperson, you might burn the customer relationship, cautions Michael Ahearne, a professor of marketing at the University of Houstin. He cites 2007 data gathered by researchers at the University of Washington, which found that customers do remain loyal to a sales rep.
With that said, here's a list of tips for cutting your cost of sales, ranked from bad to better to best.
Switch to a 100 percent commission plan. This is a Hail Mary play, and possibly the worst sales-compensation sin you can commit. Companies justify this money-saving move by jacking up commission rates, making it possible for persistent reps to rake in more money in the end. But even with generous "kickers," most salespeople will find it hard to get by on commissions alone. "To go from salary plus commission to straight commission, you're asking salespeople to leave," says David Hoffmeister, professor and executive-in-residence at DePaul University Center for Sales Leadership in Chicago. It's worth adding that all-variable pay will hit bottom performers the hardest in terms of pay, even as your top sellers head for the exits.
Dig Deeper: Setting Commissions
Make across-the-board salary cuts. This manuever can seem democratic but could be catastrophic. "The thinking is, I'd rather keep everyone and ask everyone to share the burden," says Ahearne of the University of Houston. "But it's better to lose the people not producing for you. Don't punish everyone across the board. Keep the pay up for top performers and turn the dogs loose."
This rule is particularly relevant in industries where salespeople have plenty of opportunities to job hop. DePaul studies show that as of 2008, sales turnover hovered around 22 percent, up from 18 percent in 2004, and 56 percent leave voluntarily. So do the math: The cost savings from reducing salaries is likely to be less than the cost of hiring replacements. Hoffmeister has found that the cost of recruiting a salesperson was, on average, $27,000 (whether respondents used third-party recruiters or simply handled recruiting in-house.) "Too many companies don't know what the cost of hire is, and that's a bad sign," says Hoffmeister. He adds that training expenses and lost profit from an open sales territory can bring the total cost of sales turnover per rep to $70,000 or more. Thus, an across-the-board cut that sends one key salesperson packing can in fact have terrible consequences.
Share some of the downside. There are times when it's necessary to ask salespeople to share a little more of the risk. You can increase the variable side of the comp equation – by say another 10 to 20 percent – and decrease fixed costs without too much push back. But it's all in the way you broach the topic. The key is to get input and buy-in from your top reps. "You have to be open with salespeople so they understand the financial situation so there can be some kind of ownership of the solution during downturns and they don't feel manipulated," says Ahearne. There's a catch to this strategy, though. "You can ask salespeople to share the downside," he says, "but don't limit the upside when the economy improves." That means no cap on commissions. Establishing a cap only serves to kill the dream.
Expand sales territories. You may decide to layoff one rep out of, say, 10, and ask the other 9 to cover his or her territory. This step is generally received more warmly (by the survivors at least) than changing or reducing everyone's pay. Not everyone will relish the increased workload, of course, "but they should be able to make more money," says Hoffmeister.
Take a fresh look at independent reps. An independent rep won't pay you much attention unless your product is one of his or her top 3 revenue producers. And you need to carefully consider whether an independent rep is a good fit for the types of accounts you call on. That said, independent reps are often a great choice if you are introducing a new product and can't yet fund a sales force. Some companies find it effective to use a combination of staff salespeople and independent reps. You may also consider creating a hybrid sales track that allows independents to work their way up to salaried staff.
Dig Deeper: Managing Part-Time and Independent Sales Reps
Pay attention to sales call economics. You can reduce your sales costs by reducing the average cost of a sales call. Don't know what that is? It's not rocket science if every salesperson logs their calls each week. By calculating the cost of a sales call among different product lines or customer segments, you can pursue the most profitable prospects. A good way to tighten your belt is to redirect your sales force to the accounts where the cost of a sales call is lower and the potential for repeat sales is higher. Is a prospect worth, say, a $350 sales call?
Besides great analysis of sales leads, you can also use technology to make sales calls less expensive or more efficient. Webinars, webcasts, and conference calls have certainly brought down the average cost of a sales call.
Just be careful of taking disciplined sales call economics a step too far: When a face-to-face meeting is needed to clinch the deal, it doesn't pay to be cheap. Five-star salespeople are used to staying in 5-star hotels and it's unwise to deny them that little pleasure. "Not all salespeople love to travel, but when they do travel, they don't want a daily allowance. They want a nice hotel," notes Hoffmeister.
Bring on the sales contests. Sales contests are short-term incentives used by managers to motivate salespeople to meet sales targets. A 60-day sales contest can sometimes yield better results, without significant additional costs, than a 6-month bonus plan. Recent studies on sales contests done at the Sales Excellence Institute have found that it's not the size of the prize that matters as much as other factors, such as structuring the competition to reward multiple winners. "You put a chunk of money into the pot and you guarantee the top 25 percent salespeople will win something because they're competing against each other, not the economy," says Ahearne.
Meanwhile, a bonus plan spanning six months is hard to predict and budget for. "You could have no winners or a ton of money to pay out," says Ahearne. "We've found shorter contests are generally more effective and financially less risky." Contests are particularly better than bonus plans when motivating salespeople to sell multiple product lines, he asserts. You can't change the sales comp plan every time the stock market moves, but you can do a sales contest any time.
Cutting Sales Costs: Additional Resources
"Customer Loyalty to Whom? Managing the Benefits and Risks of Salesperson-Owned Loyalty," Journal of Marketing Research, Vol. 44, No. 2, May 2007, pp. 185-199. [Summarized in Marketing News, May 1, 2007, 30; Lead article in AMA Marketing Thought Leaders Newsletter, June 2007, Vol. 4, No. 6.]
The Center for Sales Leadership at DePaul University www.salesleadershipcenter.com
The Sales Excellence Institute at the University of Houston www.salesexcellenceinstitute.org
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