Of all the metrics in the sales and marketing world (and there are a lot of them) probably the most misunderstood is cost-of-sales. Many sales managers view cost-of-sales as a labor cost; pay smaller commissions and your cost-of-sales goes down.
That’s naive, though, because sales costs are only meaningful insofar as they affect profitability. Cutting costs in a way that cuts into revenue (a more common situation than you’d think) is stupid. Your goal is to make sales costs more efficient, not just smaller.
More important, much of a company’s sales costs are hidden inside the budgets of other groups: specifically marketing, R&D and IT. Because of this, creating the most efficient cost-of-sales requires a broad approach. Here are some suggestions:
1. Compensate on profit rather than on revenue
Many companies still use gross revenue to measure sales performance. Focusing solely on revenue, however, can easily put a company in a position where you’re losing money on each sale and trying to make up the difference by selling in volume.
In the past it was impossible to compensate on profit because most company’s back-office systems weren’t capable of reporting the profitability of each sale. Today, however, most companies have a fairly good idea of their cost-of-goods, which makes it possible to provide salespeople with solid estimates of how much profit their sales are generating.
Since profit, not revenue, is the point of selling in the first place, it only makes sense to measure sales accordingly. A big advantage of this approach is that it reduces the temptation to discount (a hidden cost-of-sale) in order to close a deal.
2. Create a Strategic Account program
Sometimes winning and servicing a particular customer is more important than the profit generated by that customer.
For example, a small software firm might have GM as a clients – and tout that relationship in its marketing materials to create credibility. In this case, it may be more important long-term to keep GM happy than to worry about the profit margin.
Similarly, it might make sense for a services firm to lose money at the beginning of a relationship (as in a pilot project) in the hopes of winning a larger deal to provide services to an entire corporation.
The problem with the “strategic accounts” is that if you have too many of them, you start losing money.
Therefore, while you should normally compensate salespeople on profit (see #1 above), you also need a formal process to create an exception where the salesperson gets compensated on some other metric, like customer satisfaction.
Why a formal process rather than an informal one? If it’s informal, your salespeople will be tempted to categorize too many customers as “strategic” simply so they can use discounts to close deals.
3. Measure marketing on conversion rate
Some companies treat marketing as a strategic activity rather than a tactical one. This plays havoc with your cost-of-sale because it encourages marketing to measure itself based upon activities rather than sales results.
The solution is to measure and compensate marketing not on how many brochures they print or focus groups they run but on the quality of leads they generate, with quality being measured by how easily those leads convert into customers.
This is not to say that every marketing activity should be individually measured based on conversion rates. An ad, for instance, may have a cumulative rather than immediate effect.
However, the effectiveness of the marketing effort and marketing group as a whole should be based upon lead quality. This reduces cost-of-sale because easily-converted leads take less time to close.
It also reduces cost-of-sale because it eliminates time and energy-consuming arguments between sales and marketing over what constitutes a good lead. If the sales team as it exists today can convert the lead quickly, it’s a good lead. Case closed.
4. Create a formal procedure for R&D requests
There’s nothing wrong with getting R&D folk involved in a sales opportunity; indeed, some complex products require it. However, using R&D to help close business can vastly increase cost-of-sales.
Consider: every day that an engineer spends helping on a sales engagement ensures that the engineer in question’s current project will be a day late. It is not unusual, especially in small firms, to find an entire R&D group mired in special requests from sales, indefinitely delaying the next version of the product.
Using R&D resources in sales situations also encourages salespeople to sell products or product features that don’t yet exist, effectively committing R&D to do work that’s of use only to that individual customer.
A formal process that allows sales management and engineering management to decide collaboratively what deserves the attention of the R&D team prevents such abuses and ensures that R&D costs applied to sales are applied wisely.
5. Reduce your sales-related IT expense
Your CRM system can be a huge sales expense. This is obviously true if a CRM implementation fails, which still happens about 50% of the time. However, even if the implementation is successful, it can be a money drainer.
The worst offenders in this area are the old ERP-based, in-house SFA systems. Even if you arm-twist your salespeople into use these clunkers, they not only cost big bucks in license fees but can actually prevent sales by forcing sales activities into out-of-date sales processes.
Client-server implementations can be just as bad. The culprit here, though, isn’t obsolescence so much as the feature-creep that’s endemic to PC-based software. Salespeople want to sell; they don’t want to futz with complicated screens.
What’s worse, if you add a bunch of applications to a client-server CRM system, it not only adds to the complexity but also creates the huge risk that your customizations won’t work on successive versions of the basic platform.
In other words, the Keep It Simple Stupid (KISS) rule very much applies to CRM. The simpler the application, the easier it is to learn, the less it will cost to train, support and maintain.