Understanding the real cost of sales.
Every CEO we work with is concerned about the cost of sales. They know how much they spend on their sales organization as a percentage of gross margin and total revenue. The most astute CEOs understand that traditional measures only tell part of the story. They know that their sales cost expense ratio may look great, but it does not measure the gross margin lost through weak sales performance. The cost of underperforming salespeople is astronomical.
Let’s look at an example of a 20-person sales team. Based on our analysis of over 2.2 million salespeople, you can expect to find 2 strong salespeople, 4 weak salespeople, and 14 are average. Your numbers may vary, but the distribution should be roughly the same. An example annual margin contribution of each group is in Table 1.
The bottom line is that average and weak sellers are costing you much more than you realize. We frequently find that strong performers contribute twice the margin per salesperson as the bottom performers and a third more than the average salesperson. We also know that stronger salespeople tend to sell at higher gross margins and the cost of serving their customers is lower.
Table 2 illustrates the enormous cost of mediocre salespeople.
- In our example, an average salesperson underperforms the strong by $125,000. With 14 average salespeople each short $125,000, the lost opportunity is $1,750,000 in margin. Most leaders focus all their energy on weak sellers. That is a mistake. The large group of average performers costs more than the weak performers.
- Every weak salesperson produces $250,000 less than their strong counterpart. Multiply the $250,000 shortfall by the 4 weak reps, and we’re talking $1M in lost margin.
- In this example, underperforming salespeople represent a $2,750,000 opportunity!
Why are CEOs wasting millions of dollars on underperforming sales teams? As long as the cost of sales is acceptable, they live with mediocre performance. As crazy as that is, most leaders have accepted the problem as “just the way it is.”
If you like to know how much your sales force is costing you, there is a free and easy-to-use tool at: https://knowledgeworx.com/knowledgebase/lost-margin-calculator
The cost of the sales is an important metric, but it only tells part of the story. Millions of dollars of opportunity are waiting to be captured through sales force transformation. Rethinking your sales structure and upskilling the average performers produces massive margin improvement. The opportunity is yours. Carpe Diem!
Jim Peduto is the Managing Partner and the co-founder of Knowledgeworx, LLC. Owners and CEOs rely on Jim’s strategic thinking and transformational growth expertise to transform their businesses.