1. Revenues are often disconnected from profit and your firm’s cost of capital. Sales growth is good for firms that earn positive returns on invested capital, neutral for a firm with returns equal to its cost of capital, and bad for firms with returns below their cost of capital. After the financial crisis of 2008, CFOs increasingly know this and sales leaders should as well.
2. It’s important to distinguish between efficiency (doing things right) and effectiveness (doing the right things) in measuring sales. Depending on the strategy, some salesforces require efficiency (usually cost-efficiency) measures, while others require effectiveness metrics. Probably the most commonly used efficiency metric is the sales expense-to-revenue ratio. But cost effectiveness is a more complex relationship between selling costs, revenues, sales margins and customers acquired.
3. Performance metrics should change as the market or your strategy changes so that, in their reviews, sales managers are motivating the right things for today, not yesterday. In subscription-based businesses like software and many consumer web services, for example, key metrics early in the life cycle are about customer acquisition. But as the market matures, more relevant metrics are about account management, reducing churn, and up-selling or cross-selling additional services.
4. Knowing the difference between price and cost-to-serve. Profit is the difference between the price a customer pays the seller and the seller’s actual cost to serve that customer. That cost-to-serve can vary dramatically. Some of your customers require more sales calls than others; some buy in a few, big, production-efficient order quantities, while others may buy more in overall volume but with many just-in-time custom orders that affect setup time, delivery logistics, post-sale service, and other elements of cost-to-serve.
Many of your company’s capital costs are embedded in these cost-to-serve differences. If they are ignored in measuring sales effectiveness, the consequences for account management and competitive strategy are bad. If you can’t measure your cost-to-serve, your salespeople will be driven by competing price proposals. You can chase volume, but damage profits and your business model; you won’t allocate available sales resources optimally; and—perhaps most damaging—you are ultimately at the mercy of competitors who can measure their true costs and do these things more effectively.
Consider this example: for years, a mid-western, Fortune 500 manufacturing firm was a market leader selling a bundled solution of equipment, tools and consumables to manufacturers globally. Over time, customers unbundled the product-service package and the company lost share and profits. Meanwhile, the salesforce continued to be evaluated and compensated on sales volume.
The company conducted a study, charting the net price paid by each account (after discounts or price exceptions) vs. the cost to serve that account (including sales expense, and pre- and post-sale application and engineering costs attributed to that customer). The results were striking. They had customers in all possible combinations. Many high cost-to-serve customers were paying low prices, and vice versa. The former customers were destroying enterprise value even as they generated commissions for salespeople. And the latter group—low cost-to-serve customers paying higher prices—were profitable but vulnerable because they were in effect subsidizing other customers in the portfolio. Sooner or later, a competitor, a supply-chain consultant, or that customer’s smart finance people, will alert those buyers to the reality and cost-savings opportunity. It’s better to know this and make the required changes before you lose good customers.
Chart price paid and cost-to-serve by account in your company, and see what you find. You may like or loathe what you see there. But then consider the options, which range from changing pricing to reflect cost-to-serve, reducing or eliminating technical support, changing the type of support (e.g., online vs. in-person), different ordering and delivery terms, or perhaps using a channel that offloads parts of cost-to-serve to resellers whose economies of scope allow them to perform certain tasks more efficiently. Aligning strategy and sales also means sometimes “firing” customers that, despite all attempts, remain unprofitable accounts. But no salesforce, no matter how clever and hard-working, can generate sustained returns if it’s marching to the wrong metrics.