Sales Expense: The Overlooked Metric29 Jul, 2014 By: Tom Callinan, Strategy Development
The industry model is frequently quoted, a topic of discussion at industry events and even a training program offered by an industry association. Having spent eight years at the company that first developed the model, I am intimately familiar with every metric of revenue mix, gross profit margin, contribution, expenses, operating income and productivity. As I work with dealers across the country it is clear to me that they have strong knowledge of the target metrics in equipment gross profit, service contribution, and general and administrative expenses.
Most dealers have aggressively worked to improve their service contribution. It is well known and accepted that 52% service contribution is a level that can and should be achieved. These dealers have no hesitance in putting processes in place that support that goal, including specific metrics on call length and part’s authorization at the technician level. Yet these same dealers frequently accept sales expense in the 32% - 39% range against a benchmark of 25%. When we work with these dealers to address their sales expense issues they do not exhibit the same open-mindedness they have with service.
Sales expense has three components: Sales professional expense at 14%, manager at 5% and “other” at 6%, but the primary focus should be on the ultimate total sales expense of 25% of equipment revenue. Keep in perspective that this 25% expense is based on 36% equipment GP, so effectively you are spending about 70% of every dollar of equipment GP. If GP varies from 36% the flow through should be 25% of the delta. In other words, if GP is 38% then sales expense should be 25.5% (25% + (38% - 36%)*25%).
If you have a small sales team and you need to pay the manager 8% of equipment revenue in order to achieve industry sales manager pay then you should not need to spend 6% on “other” since you will require less support given the low span of control of you manager; he can do more administrative work than the manager who manages eight sales professionals writing $4 million a year. This is one example of focusing on the 25% versus each of the three sub-categories.
What drives high sales expense? Two major culprits are low span of control with managers and low sales professional productivity. If your managers average a span of control below five sales professional you probably have high sales manager expense relative to the benchmark. Furthermore, if your sales professional productivity is below $500 thousand per year your sales expense is probably higher than 14%. Frequently, I see companies with both low span of control and low productivity. That is an instant sales expense killer.
Although sales professional compensation could be an issue, it is usually due to the fact that the sales professionals have productivity below $500 thousand, sometimes as low as $300 thousand, or even less, so the sales professional’s base salary is close to if not above 14%, driving overall sales professional expense toward the 20% range. If sales professional expense is at 20% and manager expense at 8% you are 3 points above benchmark before you add in “other sales expense,” which will certainly drive your sales expense north of 30%.
How do you fix your sales expense issues? That will take some analysis of the facts to determine the specific issues but it will certainly require an open mind to the fact that you should be achieving benchmark sales productivity with a sound management span of control.
Tom Callinan is the founding principal of Strategy Development, a management consulting firm for the technology and outsourcing space specializing in sales effectiveness, advanced sales training, operational improvement and performance improvement strategies. Callinan was an executive with IKON Office Solutions (acquired by Ricoh in 2008), most recently vice president and general manager of IKON’s largest business unit with revenue of $1.4 billion. Prior to IKON, Callinan was the founder and CEO of Copifax, Inc, a copier dealership that was recognized with numerous awards and acquired by IKON in 1997. Callinan graduated with honors from The Wharton School, University of Pennsylvania. At firstname.lastname@example.org or 610.527.3317 or visit www.strategydevelopment.com