Two Investments
If your product, service or business is new, you’ll need to invest in building the system first. Then, once the system is in place, you’ll need to invest regularly in empowering and enhancing that system.
A New System
So, how much should you invest in creating a system? Here’s a rough rule of thumb – whatever you spent in time and money to get the product or service ready to market, you’ll need to invest an equal amount in time and money to put the system in place to sell that product or service.
Note that this applies to a new market. That was the case for my potential client. If they had created a product that could have been sold through their existing system – the same architects and the same reps that sold their legacy products -- then the investment would not need to be so large.
And that unveils a fundamental sales system principle: It is always easier and less expensive to sell something new through your existing system than it is to create a new system.
When I use the term ‘system’ I am referring to all the processes, tools, and people who combine to bring the product or service to the market. In the case of the new sign board product, the system would have been comprised of:
* a list of all suspects (building managers) and their contact details
* a way of contacting them – in this case, it could have been any or some combination of
* email
* snail mail
* telephone call
* independent reps.
Regardless, the emails would have to be written, the snail mail letters composed and printed, the product brochures created and printed, the pricing offers refined, the telephone scripts created and refined, and the phone sales people hired, trained, and managed.
In the case of independent reps, the rep groups would have to have been identified, the rep program put together, the rep support team identified, hired and trained, each rep groups contacted and pitched, and the monitoring system put in place.
* a way of monitoring the relationships and the sales activity – a CRM system acquired, customized, populated and everyone trained in it is use.
* a way of moving the first-time buyer to the point where they purchased repetitively. That means a method devised to identify the potential for future purchases in each customer.
* a set of measurements in place to monitor on a monthly basis to assure that system was working, and to identify places in the system that needed refinement and upgrading.
What I’ve described above is the skeleton of the sales system necessary to give the product a fighting chance at success. As you can see, the creation of the system to sell the new product to a new market can require, in time and money, an investment equal to the investment in time and money to create the product itself.
Ongoing Maintenance
Once your system is in place, you now move from the design to the management and refinement of that system. It is one thing to create a job description, for example, for an inside sales person, set up the hiring profile, create the compensation plan, build the training regime, design the management structure, and hire your first inside sales person. All these tasks fall into the initial development phase.
Now, however, you must pay that person each month, develop him/her, monitor and manage them, and provide them with the tools necessary to be successful at the job. So, there are ongoing monthly costs of maintaining and refining your system.
Identify the costs
In order to gain an accurate measurement of your ongoing investment, you must first determine which costs are part of your sales & marketing system. My general rule is to include anything which is directly related to acquiring and nurturing customers. So, typically, your system would include:
* the total costs (W-2, matching taxes, fringe benefits) of every sales person.
* the total costs of the people who supervise them.
* the total costs of any sales and marketing executives.
* the total costs of the mediums those folks use to contact prospects and customers
* for inside sales people, that would include the cost of the phone, computers, internet service, etc.
* for outside sales people, that would include car allowances, expense reimbursements, costs for cell phone, tables, or laptops.
* the total costs for any marketing collateral – website design and maintenance, emailing software and services, hard copy brochures sell sheets.
* the total costs for any advertising and marketing efforts. In addition to traditional and electronic advertising, this includes things like annual trade fairs, shows and exhibits, marketing sundries (pens, caps, etc. that you might give away)
* any sales or customer-related software, and its upgrade and maintenance.
The specifics will vary by company, of course, but this gives you an idea of what should be included.
Do the Math
Now that you have the costs fully identified, you need to create a report that sums them up and offers you a monthly cost of your sales and marketing system.
Once you have the absolute dollar costs, compare that to the absolute total dollars of gross margin produced by the company for the same period of time. So, at this point, you’ll have two numbers: Absolute dollars of costs, and absolute dollars of gross margin.
Now, express your costs as a percentage of gross margin by dividing the larger number (gross margin) into the smaller cost number. You’ll produce a percentage. That percentage is a powerful measurement of the effectiveness of your sales and marketing system.
Here’s an example. Your total sales and marketing system costs are $115,000 this month. Total gross margin is $400,000. Divide the $400,000 into the $115,000 and the result is 28.75%. We call this process “Kahle’s Kalculation of Sales Productivity.”
(If you’d like a free description of Kahle’s Kalculation, including a line-by-line explanation, click here.)
You can use this number to compare one month to the next and chart trends in the effectiveness of your sales system. It is most helpful in determining the impact of various new elements to the system. For example, if you hire a new sales person for a new territory, the impact will be reflected in an increase in the percentage.
What should the number be?
One question almost everyone asks at this point, is this: “What should that number be?”
My answer: In a business with annual sales of +/- $20 Million, the sweet spot is a range from 26 to 34 percent.
~ In a business with annual sales of +/- $20 Million, the sweet spot is a range from 26 to 34 percent. ~
If your business is smaller than that, your percentage can trend upward a bit. If your business is larger than that, your KK number should trend downwards. That single number can shine a light on the impact and effectiveness of your sales system.
For example, if your number is higher than that, you are probably investing very heavily in the future growth of your business (maybe you just opened a new sales branch, for example), or your system is not very efficient. You have a significant amount of under-performance aspects to your system. It is very difficult, for example, to be profitable at 40% or more.
If your number is too low, that indicates that you are probably not growing at the rate that you could or should be, because you are not investing appropriately in the growth of your business. It could also be that you are a very mature company in a mature market where there is little or no growth expected, and you are taking profits out of the business via a reduced investment in
sales.
Summary
One of the most common reasons companies don’t reach their potential is a lack of understanding of their sales systems and a lack of appropriately investment in the sales function of a business. Hopefully, these concepts and tools will provide you a leg up in the battle to build your business.
