Guest post contributed by Kevin Purcell
As a sales leader, how do you define and measure sales productivity?
Before you can measure sales productivity, you should have a good working definition of the term. We understand that productivity refers to the amount of labor it takes to accomplish some task or process. For example, it may take one hour of labor to build a widget. The ratio of one man-hour per widget is a measurement of productivity. If your warehouse is going to get more productive, you must find some way to build that widget in less than an hour.
If your warehouse doesn’t figure out a way to build that widget in less than one man-hour, you’re just getting bigger – not better. Even if your business grows, and even if your warehouse picks up an ever-increasing number of orders of widgets, the lack of improvement in productivity would be a cause for concern.
When we talk about productivity as it relates to sales, the same principles apply. It may require $40 in sales costs to acquire $100 in gross profit, but, over time, your salesperson may acquire more and more orders and bring in an ever-growing quantity of gross-profit dollars. But if he or she always costs you $40 for every $100 of gross margin, he or she is not becoming any more productive. You’re getting bigger, but not better.
What’s the ROI on improving sales productivity? Simply put, improving sales productivity will free up cash that you can use in a number of critical places.
For example, suppose your sales force currently costs you 25% of your gross profit dollars. And suppose that you could cut that by 1% to 24%. What would happen to the money represented by that 1%? It could drop directly to the bottom line, which would not make you unhappy. But you could also use it in other ways. You could afford to take some strategically important business at lower margins. Or you could use it to fund some new technology improvements in other aspects of your business, or purchase a beginning inventory for some new product line. The opportunities are endless.
If the following are true for your business, sales productivity probably doesn’t have to be a primary focus:
- your market is growing rapidly,
- you’re achieving a comfortable and healthy average gross margin, and
- you don’t have pressures from any competitive sources.
If any of the below are true, however, you definitely need to focus on sales productivity:
- your market is fairly flat,
- you’re concerned about shrinking margins, or
- you’re in a very competitive market.
If your company is facing decreasing margins and competitive pressures, you could take action in a variety of areas. For example, you may choose to improve your customer-service function, tighten up your purchasing and inventory controls, figure out how to turn your receivables around more quickly, or create a mobile sales force.
The reason you would undertake any of these initiatives would simply be to improve sales productivity. If you didn’t take these steps, the competition would put you out of business.
Because payroll is generally the single largest cost (after cost of goods sold), job cutbacks can help you survive in an era of shrinking margins. But the sales force is a special investment; sales is the only area of any business where employees have the potential to increase revenue exponentially.
In fact, when I think of sales productivity, I think of one basic metric: revenue per sales professional. There’s a cost (or investment) for every sales professional you hire, so you expect those sales professionals to sell at some level above their cost to the organization.
To get the highest ROI from your sales force, you have to lead and manage your team in the right way. At the Boston Sales 2.0 Conference on July 23, I’ll be sharing a framework to establish healthy and long-term sales productivity, including strategies to help you:
- Get the most from new hires in their initial three months on the job.
- Hire the sales reps most likely to succeed in your selling environment.
- Use pipeline metrics to improve forecast accuracy.
Check out the clip below of my presentation from last year’s Sales 2.0 Conference in Boston. This event is a great investment for any sales leader looking for ideas and solutions to help grow and evolve a winning sales organization.
Kevin Purcell is Sales Director at Hewlett-Packard and leads the HP sales- force transformation across the Enterprise Servers, Storage, and Networking organization for the Americas. He has more than 25 years of sales leadership experience at companies including Sybase, Bearing Point, and Oracle Corporation. He will speak on July 23, 2012 at the Boston Sales 2.0 Conference.