The leadership of a wholesale distribution company primarily focuses on improving bottom-line profits. Given this goal, a common question posed to sales executives is, “What is the right performance measure for managers and sales reps to achieve bottom-line growth?” Experience has shown that the answer to this question evolves over time and as the company cycles through various business growth phases. Each growth phase requires different performance measures for the sales team.
Phase 1. Companies are new to the market and attempting to quickly grow and acquire new customers. The sales team is measured based on total sales revenue. As the business continues to grow and increase in size and scale, the sales performance measure shifts from a single undifferentiated focus on total sales to specific revenue goals for different segments of the business, such as one goal for service revenue and a second goal for product revenue.
Phase 2. The business grows to a point where it has achieved the size and scale to become profitable; the performance measures shift from revenue to gross margin. Typically, the reason for this change is that the sales representatives need to shift their focus from simply growing top-line revenue to one that takes in account pricing and profitability. For gross margin to be an effective performance measure, sales representatives should have the ability to influence the sale price. In this growth phase, it is not uncommon for companies to place a “load” or additional cost to the true cost basis of the product; thereby, negatively impacting the gross margin dollars with which a sales representative is credited.
Phase 3. The business enters a period with compressed margins and there is increased focus on business profitability. During this phase, companies tend to add one or two additional performance measures such as combining order size and gross margin %. The result of these plans is generally a commission matrix. For example, an order that is $2,000 GM and 22% GM would pay a higher commission rate than that of an order worth $2,000 GM and 12% GM. In this example, the dual motivations for the rep would be increasing or maintaining order size while simultaneously increasing pricing. The degree to which one or the other is emphasized can be controlled by the commission rates in the commission matrix.
Phase 4. There is a shift to focus on more precise measures. Typically, the companies shift the focus to a metric-like contribution margin, or cost to serve the customer. In addition to account for the cost of goods, companies also try to reflect the cost of warehousing and delivery of the product, the actual total sales expense and other variable costs such as the cost of inside sales and order desk support. This transition requires a strong management process, which measures and tracks all relevant costs rather than just COGS and freight. It might include manufacturers’ rebates, special handling charges, etc.
Phase 5. As the business matures into this phase, the role of the sales force continues to evolve, providing more marketing and sales execution support and less individually driven sales activities. As this occurs, customers shift their focus away from their assigned sales rep and take a broader view of what value the company can provide. This phase places less focus on the sales compensation programs. Compensation levels are reduced and more emphasis is placed on other marketing and customer support programs. Typically, there is a comprehensive change in the performance metrics during this phase to include overall territory volume performance, new account sales and customer satisfaction.
As companies progress along their growth continuum, it is important to ensure that the management practices, programs and performance metrics correctly align.
Robert Conti is the President of SalesApex. He can be reached at firstname.lastname@example.org.
Categories: Sales Effectiveness