Measuring profitability, Hollywood style
I recently read a Forbes online article (late 2014) that showcased the top 10 actors in Hollywood that produced the least ROI on their films. At the top of the list was Adam Sandler who returned $3.20 for every 1.00 paid. Adam was followed by Johnny Depp who was next in line at $4.10 returned for every $1.00 spent.
While these numbers won’t put an end to their careers, they certainly are revealing to the kind of initial return these actors could make for their future films. Their next films might be great productions told by Academy Award-winning directors, but for these actors with a recent portfolio of less desirable films, it may just be the kind of prediction producers would like to avoid, based on the reputation of their recent works.
A sucker for business intelligence, I thought about this analytics and wondered how many business owners and sales managers measure similar criteria with their own sales reps. Essentially, how well do you know your own sales? Whether you’re a veteran CRM user or a pro at Excel, sales analytics are instrumental in making the right decisions for your business and its ultimate success. But do you really know or routinely measure the cost of each sale or more specifically; each sales rep?
Incomplete data tells only half the story
Caution: CRMs can be deceptively optimistic in some cases because many of them only show you sales performance and neglect much of the relevant data that can tell you whether or not your rep is as successful as your dashboards charts and graphs make them out to be. Almost every CRM on the market focus on sales performance and don’t tell the other side of the story, which are the costs that coincide with sales. If your reps are diligently using their CRM then tracking their sales (revenue) is the obvious part. Your accounting software will fill in the blanks and tell you the rest of the story.
Here are some costs that you need to factor in that will help illustrate how successful your sales reps truly are.
Salary and Benefits
Seems like an obvious starting point, but what employees and sales managers often omit when injecting salary into the equation are hidden costs that the company incurs like payroll taxes and benefits, to name some. Be sure that you sum up the complete compensation package and not just the base. A few variables that may or may not apply are payroll taxes, 401(k) contribution, and insurances such as health, dental, vision, life, etc. Add all those up and you’ll quickly discover that benefits and taxes can easily add another $15,000 – $20,000 on top of a base salary. Rising healthcare costs are re-negotiated on an annual basis, so you should be sure to adjust these numbers each year before setting sales quotas.
Most sales reps earn commissions on each sale and usually subject to various types of sales activities, margins, products, seasons, etc. These should always be tracked separately because this number is generally different each month unless the rep consistently doesn’t sell a dime.
If you’re in outside sales, travel is part of the job. For some, travel may be local and simply mean driving from one side of the town to the other, visiting prospects, engaging in meetings and knocking on doors. Expenses may include mileage reimbursement or a car allowance, and even a few lunch meetings. These would be general expenses that influence the cost of your rep. For other’s, regional, national and even international selling requires one or more long-distance trips that include airfare and/or all the expenses that come with lodging. Meals and entertainment also play a factor. Always factor in your travel expenses and how many times you will be required to visit the customer at their location during and after the sale. Neglecting to consider this type of activity can wildly distort your rep’s profitability.
Meals and Entertainment
While this can coincide with Travel, it’s a category on its own, simply because you don’t have to travel to take a client to lunch or offer them tickets to a local baseball game. Lunch meetings can be deceptively inexpensive, but if your rep finds that’s the best way to do business it will add up quickly. Consider factoring this into your sales budget and letting your rep know what their monthly expenditure is. This is also is part of their overall cost.
Some lead services can be a great way to bypass prospecting and qualifying leads early in the sales cycle, allowing your sales reps to enter a maturing sales process, shortening the time to close. However, lead services cost money and are usually determined by the lead criteria. If your sales rep depends on this service, then this cost (at least the cost of the leads they’ve been assigned) is also a significant attribution to their overall expense.
Associations and Memberships
Sometimes you have to pay to play, even if it just means keeping up appearances. Joining an association may bring you closer to prospective clients and keep your company’s name top of industry mind, but not without cost, so you’d better be sure there is adequate ROI when paying your membership dues. Chamber memberships and networking organizations are the most common examples of organizations with annual or even monthly fees.