In this four part series, we are blogging about the 4 areas where your business may be leaking profit. In this post, we focus on how your sales department may be leaking profit.
In our last post, we talked about COGS or Costs of Goods Sold and highlighted a few important ways in which to avoid profit leaks:
#1: Know your targeted COGS and related Gross Margin for each product you sell
#2: Know your targeted labor utilization when your people’s time is what you are selling (i.e. marketing companies, legal, etc)
#3: Monitor #1 and #2 on a monthly basis and make adjustments, if necessary. You can use a platform like Envisionable to set goals and track these KPIs.
Feel free to go back and read that blog for clarification.
Now Onto Part II – Sales
How can you be leaking profit out of the “sales” bucket?
There are a few ways:
#1: Failing to structure the salesperson’s comp correctly.
#2: Not setting clear goals or holding the salesperson accountable.
#2 A. Giving the salesperson too much responsibility.
#3: Failing to understand the CAC.
Let’s go through each of these in turn.
Failing To Structure The Salesperson’s Comp Correctly
Structuring a salesperson’s compensation is a tricky thing. On one hand, you don’t want to pay the salesperson too much or set their expectations for compensation incorrectly. On the other hand, you want to keep a good salesperson and make sure they are properly motivated to sell. It should be a win-win proposition. There is not one size fits all approach. It may take a few iterations to get things right. It is critical that the salesperson feels you have their best interests at heart AND that the salesperson has bought into your vision and core values.
If done incorrectly, the salesperson’s compensation could eat into the company’s profits. It will become almost impossible to pull back the salesperson’s comp and they will feel that they are being taken advantage of. They may even seize up and stop selling.
So how should you approach this problem? You should have a financial model which shows how a salesperson’s compensation affects the overall profitability of the company. Does the compensation package scale correctly? Does the salesperson know what their OTE (on target earnings) will be? Is the salesperson 100% clear about HOW their compensation is calculated?
Not Setting Clear Goals Or Holding The Salesperson Accountable
This point SHOULD be settled if you’ve structured the salesperson’s comp correctly, since the compensation package should have clear goals, targets or quotas embedded within the package. In other words, what are you expecting the salesperson to deliver for the compensation that you are offering?
I’ve seen businesses (and run businesses) where a salesperson is just not delivering yet, the business continues to pay them. Each paycheck is lost profits for the business. I also understand that salespeople can go through dry spells. I am not talking about that. I am talking about a failure to achieve the goals that were agreed upon by both the salesperson and the owner of the company.
How do you fix this problem? Set clear targets or quotas for each salesperson. Let each salesperson know in advance what will happen if they do not meet their quotas. Offer coaching or sales training to under-performing salespeople. Use a tool like Envisionable to set goals and monitor those goals on a weekly or monthly basis. In fact, we have one customer who has a daily goal for their salespeople and they are required to enter their daily results! Guess what happened to the results?
Giving The Salesperson Too Much Responsibility
I called this point “#2 A” because it’s really a sub-point of my last point, but I wanted to call it out because I see this problem often.
In an effort to save money small business owners often put too much responsibility on their salespeople by asking them to prospect, sell, account manage and sometime deliver the products and services.
I get that as a small business owner, you are looking for people to just get it done and wear too many hats.
Unfortunately, you may be preventing the individual to be successful in any one area.
Prospecting is much different from selling or closing. Closing is much different that managing accounts. Managing accounts is much different that delivering a service. Not to mention the fact that very few people have the ability (I would suggest no one has the ability) to operate successfully across all those functions.
In order to justify a compensation package, small business owners put additional responsibilities on salespeople, which has the absolute opposite effect that they intend.
Again, be very clear about the expectations and don’t give a salesperson more than one to two things to focus on.
Failing To Understand The CAC (Cost To Acquire A Customer)
What is CAC (cost to acquire a customer)?
In his blog, David Skok does an incredible job at detailing what this means, so I won’t go into detail here. He even provides a few calculators that you can use.
The main point I want to make here is that you need to know how much it costs you to get your next customer and how much you will actually make off of that customer (called the LTV or life time value).
If you don’t understand these numbers, and if they are out of balance (see the picture below), you most certainly will be leaking profits.
** Photo Credit – http://www.forentrepreneurs.com/startup-killer/**
If you’ve set up your accounting correctly, you should be able to calculate your CAC and compare it to your LTV.
If you find your business model is out of whack, you have a couple choices, charge more for your product and services or dig deep into your sales and marketing costs to determine ways to be more efficient.
Need help assessing these profit leaks, setting goals or tracking KPIs?
We can help. Contact us for a free 15 minute consultation or a DEMO of the Envisionable platform – it only takes about an hour and you’ll learn a few things you can apply to your business immediately which will save you time and money.