Part I

THE BIG PICTURE

Management Resource: Sales Force Investment and Budgeting

You are probably undersized if:

Key customers wonder where your representative is. Current customers are considering switching suppliers. New customer development is down. Your salespeople feel overworked, but costs seem under

control. Your salespeople do not have enough time to determine

how customer needs might be changing or providing solutions to those needs.

You are probably too large if: Your favorite customers are asking, “Didn’t I just see you?” Overall, your customers seem to be getting plenty of attention. Your salespeople seem to have considerable free time. Your salespeople don’t seem to be sufficiently stimulated. Finance has noticed that your cost of sales is out of line with

industry norms.

Figure SMR2-5

Is Your Sales Force Sized Correctly?

Sales Due to 2004 Effort

Pre-2004 Carryover

Sales

2004 2004 SalesSales2004 2004 SalesSales

2005 2005 SalesSales2005 2005 SalesSales

Sales Due to 2005 Effort

Sales Due to 2004 Effort

Pre-2004 Carryover

Sales

$80 $80 MillionMillion$80 $80

MillionMillion

Figure SMR2-6

An Illustration of Carryover

$95 $95 MillionMillion$95 $95

MillionMillion

Figure SMR2-6

Conditions That Affect Carryover

Low CarryoverLow Carryover High CarryoverHigh Carryover Low switching costs High switching costs

High levels of new incremental business

Low levels of new incremental business

small purchase volumes Many new customers Short selling cycles

Few new customers Large purchase volumes Long selling cycles

No maintenance or service activity

High levels of maintenance or service activity

New products Mature products

High levels of competitive noise Low levels of competitive noise

Growing market Flat or declining market

Products similar or nearly identical to competitors’ products

Highly differentiated products

Weak brand and/or company loyalty or new brand and/or company

Strong brand and/or company loyalty

Sales force is the only promotion vehicle

Many promotion vehicles in addition to the sales force

Gradual Downsizing Case:

Metropolitan Area

1

Gradual Downsizing Case:

Original Territories

6

54

3

2

Gradual Downsizing Case:

Closed Territory 2

6

54

3

1

Gradual Downsizing Case:

Rebalancing

6

54

3

1

Gradual Downsizing Case:

Territory 6 Closed

3

54

1

Gradual Downsizing Case:

Rebalancing

3

541

Gradual Downsizing Case:

Three Different Salespeople

3

541

Number of Frequency of Length of Number of salespeople = Accounts X Sales Calls X a Sales Call Selling time available for one salesperson

THE WORKLOAD FORMULA

Moderate CallFrequency

Sales

Low CallFrequency

High CallFrequency

TextileSegment

CarpetSegment

Figure SMR2-7

Sales Response Relationship

COMPANY SIZE INDUSTRYUnder $5 Million (MM) 14.7% Business services 1.7$5-$25 MM 10.5 Chemicals 2.9$25-$100 MM 7.9 Communications 9.8$100-$250 MM 3.5 Educational services 47.9Over $250 MM 6.8 Electronics 4.2

Fabricated metals 10.8PRODUCT OR Health services 19.9SERVICE Hotels & other lodgings 21.4Industrial products 4.1 Instruments 2.3Industrial services 6.4 Machinery 10.1Office products 9.4 Manufacturing 13.6Office services 8.1 Office equipment 9.0Consumer products 5.4 Paper and allied products 6.8Consumer services 7.9 Printing and publishing 12.0

Retail 6.1Trucking and warehousing 12.2Wholesale (consumer goods) 3.7Wholesale (industrial goods) 9.5

Average 6.9%

Sales Force TotalCost as a Percentage of Sales

Sales Force TotalCost as a Percentage of Sales

Table SMR2-6

Sales Force Selling Expenses as a Percentage of Sales

$10,000,000 Expected Sales x .136 Field sales expense ratio (wages, commissions & travel)$ 1,360,000 Sales budget x .85 Percent of budget for sales force $ 1,156,000 Budget available for salespeople

Dollars available = $1,156,000 = 20 (number that Wages and expenses per person can be hired)

PERCENT OF SALES APPROACH:A PAPER COMPANY EXAMPLE

Suppose: A division has 80 salespeople Sales for next year are forecasted to be $128 million Each salesperson is expected to generate $1.6 million

in sales Each salesperson costs $225,000

Then: Sales force costs would equal 14% of forecasted sales ($225,000 x 80 = $18 million / $128 million)

Suppose: A division has 80 salespeople Sales for next year are forecasted to be $128 million Each salesperson is expected to generate $1.6 million

in sales Each salesperson costs $225,000

Then: Sales force costs would equal 14% of forecasted sales ($225,000 x 80 = $18 million / $128 million)

Suppose another 10 salespeople are added to the sales force.

Suppose the new salespeople are expected to sell $500,000 each.

Assuming the same cost per salesperson for the new people, what will be the new sales force cost ratio as a percent of sales?

Suppose another 10 salespeople are added to the sales force.

Suppose the new salespeople are expected to sell $500,000 each.

Assuming the same cost per salesperson for the new people, what will be the new sales force cost ratio as a percent of sales?

THE PROFIT IMPACT OF SALES FORCE SIZE: AN ILLUSTRATION

Suppose our division has a 60% contribution margin.

What will be our division’s contribution dollar projection for the original 80 salespeople?

Suppose our division has a 60% contribution margin.

What will be our division’s contribution dollar projection for the original 80 salespeople?

If we hire the 10 new salespeople and they generate $500,000 each, while costing us $225,000 each:

What happens to contribution dollars?

If we hire the 10 new salespeople and they generate $500,000 each, while costing us $225,000 each:

What happens to contribution dollars?

So your sales force cost ratio has increased from 14.1% to 15.2%, but your contribution dollars also increased from $58.8 million to $59.55 million.

So your sales force cost ratio has increased from 14.1% to 15.2%, but your contribution dollars also increased from $58.8 million to $59.55 million.

PROFIT ILLUSTRATION (continued)

Compare actual expenditures with plansCompare actual expenditures with plansCompare actual expenditures with plansCompare actual expenditures with plans

Revise expenditure Revise expenditure categoriescategories

Request additional Request additional funds as neededfunds as needed

Revise expenditure Revise expenditure categoriescategories

Request additional Request additional funds as neededfunds as needed

Figure SMR2-8

The Sales Budgeting Process

Estimate personal selling costs Estimate personal selling costs needed to reach sales goalsneeded to reach sales goals

Estimate personal selling costs Estimate personal selling costs needed to reach sales goalsneeded to reach sales goals

Forecast salesForecast salesForecast salesForecast sales

Design marketing programDesign marketing programSet advertising and promotion Set advertising and promotion

expenditure levelsexpenditure levels

Design marketing programDesign marketing programSet advertising and promotion Set advertising and promotion

expenditure levelsexpenditure levels

Figure SMR2-9

The Customer-Product Matrix

ConvergenceConvergence

SellingSelling

$__________$__________

New New Business Business DevelopmenDevelopmentt

$__________$__________

Account Account ManagementManagement

$__________$__________

LeverageLeverage

SellingSelling

$__________$__________

CUSTOMERSCUSTOMERS

PRODUCTSPRODUCTS

New

Current

NewCurrent

SALES FORCE EXPENSE CLASSIFICATIONS

Sales force salaries, commissions, and Sales force salaries, commissions, and bonusesbonuses

Social SecuritySocial Security

Retirement plansRetirement plans

Hospitalization and life insuranceHospitalization and life insurance

AutomobileAutomobile

Travel, meals, lodging, and Travel, meals, lodging, and entertainmententertainment

Sales manager salaries, commissions, Sales manager salaries, commissions, and bonusesand bonuses

Office supplies and postageOffice supplies and postage Office rent and utilitiesOffice rent and utilities Clerical and secretarial servicesClerical and secretarial services Recruiting and trainingRecruiting and training Samples and other sales aidsSamples and other sales aids

SALES FORCE EXPENSE CLASSIFICATIONS