Sales Management Sem - III

N L Dalmia Institute of Management Studies & Research

Prepared by: Dipesh Maitra.2009-10

Sales Management• Evolution of Sales Management. Before the industrial revolution, which began

about 1760 AD in England, Small-scale manufacturers had a commanding influence on the economy. Manufacturing received most of the attention, because that was the major problem. Selling goods to nearby customers was done without any problem. After the industrial revolution in UK & the American revolution in the USA, large scale manufacturing organizations started dominating the economy. Separate functional departments were established, which included manufacturing, finance & sales. Due to manufacture of large quantities of goods, selling to nearby markets was not adequate & there was a need to expand the market. This was possible with the involvement of wholesalers & retailers, selling the companies goods to consumers who were located far away from the manufacturing unit.

• In the meantime, marketing activities like advertising, sales promotion, shipping or dispatching & so on became not only important, but also complex. It, therefore, became necessary to split the marketing function into sales function & other support functions like advertising, sales promotion, marketing research, & marketing logistics or physical distribution..

• It is important to understand that the sales department continues to occupy an important position even today, because it is the income or revenue producing function & no other function in the organization brings in income or money.

• What is sales Management? It has been defined in many ways. One of the most acceptable definitions, from the American Marketing Association is as follows: “ Sales management means the planning, direction, & control of personal selling, including recruiting, selecting, equipping, assigning, routing, supervising, paying & motivating as these tasks apply to the personal sales force”.

• However, the definition of AMA made Sales Management nearly same as “the management of sales force” This meaning of sales management is not in line with the broader responsibilities of modern sales managers.

The Selling Process• There are eight steps to the sales process. These steps are: 1. Prospecting, 2. Pre-

Approach, 3. Approach, 4. Needs Identification, 5. Presentation, 6. Handling Objections, 7. Closing the sale, 8. Implementation / Follow-Up. These steps will occur sequentially , one after the other. In other situations , however, sales people might find that the steps occur in a different order, they repeat , or they are skipped.

• Prospecting. It involves identifying potential customers for a particular product or service. A prospect is a MAD buyer, someone with the Money to spend, the Authority to buy what you are selling, & the Desire to buy it. The process of finding prospects involves several steps. The first step is to identify a lead, or someone who appears to have the characteristics of a prospect. That is the person appears to have a need (desire), money & authority. The sales person must still qualify the lead – determine that the person has the money, authority, & desire to purchase, which happens later.

• Pre-Approach. During the pre-approach stage, the sales person tries to learn everything about the account. Perhaps using contact management software, the account’s history with the firm can be explored & the sales person can tell what the customer needs. Or, using the internet, the sales person can examine the account’s financial strength, future strategies, & the like. The sales person may also try to find out what can be learned about the industry in which the account operates.

• Because the pre-approach stage can take a significant amount of time, in the prospecting stage a sales person might do little if any pre-approach planning. That’s because the needed information is held by the buyer (versus say date base). Later in the process, pre-approach planning becomes more necessary to ensure that progress is made toward an eventual sale. Note that a well prepared salesperson is more likely to be trusted. Preparation signals that the sales person is knowledgeable, competent, & cares about the customer. .

The Selling Process• Approach. The approach step can be difficult because at this stage the sales person

must ask the buyer to commit to a meeting without really knowing what customer needs or wants. To obtain this commitment , the salesperson must make an opening statement that gets the buyer’s attention. A good opening statement causes the buyer to focus on the salesperson, dropping all other activities or thoughts. For example, a salesperson might say something like, ‘Hi my name is Vijay from NLD, & our firm is helping companies increase sales by upwards of 20%. May I have a few minutes to explore whether NLD could do that for you?’ This statement is a good one because the seller is focusing on the potential of increasing sales. Alternatively, if the seller had said, Hi, my name is Vijay, & I’d like to sell you CRM software, the focus is entirely on the seller’s goal. The statement is not likely to get the salesperson anywhere.

• How does the approach differ when the salesperson & buyer are meeting for the 3rd or 4th time? A good opening statement is still needed. In other words, you will need a good reason, or opening statement to get a time commitment from your customer.

• Needs Identification. The next step is the needs identification step, the step in which the salesperson confirms that the prospect has money, authority & desire to purchase. The needs-identification step is comprised of 3 important elements. The first element is the use of ‘SPIN’, New Base or some other questioning technique in order to figure out the customer’s needs.

• The second element is the identification of the decision process elements facing the customer (authority to purchase). The third is gaining pre-commitment. A pre-commitment is an agreement that all the customer’s needs have been identified, a budget has been worked out, & the decision process is known. In other words, the pre-commitment sets the rules for the sale & confirm that the buyer is MAD. In many instances, the buyer already understands what is needed, or the needs are so similar across customers that the salesperson can simply focus on the presentation..

The Selling Process• (contd). Qualifying buyers for Mad is important. Failing to do so can have many

negative consequences. The most obvious consequence is that the salesperson wastes time with someone who might like the product but isn’t allowed to make that decision.

• Presentation. During the presentation, the sales person describes the product & how it meets the buyer’s needs. Now the salesperson is playing by the rules: presenting on how those needs can be met & providing the right information to the right people so a decision can be made. A sophisticated product such as a Cessna Citation executive jet has many features – so many, in fact, a salesperson could put the buyer to sleep explaining everything the plane does. Thus, during the presentation, the seller focuses on only those features the buyer needs.

• One approach to presentations is to string together a series of FEBA’s, or statements of Feature, Evidence, Benefit,, & Agreement. Using this approach, the salesperson begins with a characteristic of the product or feature. For example, a pharmaceutical salesperson might say something like,” Placron reduces cholestrol to safe levels.”. Then evidence is provided. “ As you can see in this clinical study , the reduction has been well under 200 in about 85% of all patients who do not respond to competitive drugs.” Note that the evidence is written or visual. Whenever possible, the salesperson should offer tangible evidence that is credible. (A clinical study is usually completed by an objective third party & is published in a journal. It is, thus, both credible & tangible). The salesperson then ties that feature back to the need mentioned by the customer; in this case, “ so as you noted, you would have fewer patients with difficulty lowering their cholestrol.” Describing how a feature satisfies a need is a benefit. Finally, the salesperson asks the customer if the product meets the need, gaining agreement. “Is this type of Cholestrol reducing program you are looking for.?” One advantage of the FEBA approach is that the potential buyer participates in the process; the presentation is just not one-sided. This reduces the likelihood of customer’s raising objections,

The Selling Process• Handling Objections. Objections are reasons a buyer offers to not buy your

product. They can occur anytime during the sales call, not necessarily during or immediately after the presentation. For example, a salesperson might hear an objection as soon as introductions are made: “You are with what company? Oh, you guys are terrible – I hate your products!”

• Most objections, though, come near the end of the sales call. Even with good needs-identification & strong FEBA statements, customers sometimes realize they left out a need earlier, they conclude that the product won’t meet their needs, they misunderstand something the seller says, or they simply do not want to buy the product at present time. No matter the reason behind the objection, the salesperson should probe to determine what lies at the root of the concern & then seek to resolve it. In some instances, the concern is legitimate; only when the product’s other benefits outweigh the concern should the buyer go ahead & make the purchase.

• Closing the sale. A salesperson asks the buyer for the sale during the close, but that’s not the only time the salesperson asks for commitment. When a sales person asks for an appointment, permission to make a presentation, or some other commitment, the request is a form of closing ..

• Closing the sale should be natural part of the selling process & no surprise to the buyer. At this point, the buyer has already said several times that the features of the product meet the stated needs, a budget has already been discussed, & an implementation schedule for the product’s delivery has been developed. When the seller asks for the order, the asking should be a logical conclusion of the selling / buying process.

• In addition to asking for the order, though, a good close accomplishes several other objectives. The decision should be reinforced by the seller & the implementation schedule confirmed for the product’s delivery. In this way the buyer leaves the meeting feeling secure in his decisions & aware of what will happen next.

The Selling Process• (contd) If the salesperson reaches the close of the sales call but is turned

down, a ‘thank you’ is still appropriate. Most experienced salespeople are disappointed with a rejection, but they have learned not to take it personally. It is important to treat the buyer with respect & lay down the groundwork for future sales.

• Implementation / Follow up. Following the close & assuming a sale has been made, the customer has to accept the delivery of the product. The salesperson’s job may then be to ensure that the customer has a good experience with the product. The responsibility might include training the buyer on how the product works, how to obtain service, & any policies or procedures of which the buyer should be aware.

• Follow up does not stop with the initial training, however, a regular training program for all those who are involved is to be established. Regular follow up by a salesperson can set him apart from competitors who would sell but the forget customers. He can institute a practice of not only meeting his old customers, but also look after their needs, service or billing problems if any & overall if everything was running smoothly. As word of such kind of service spread, the salesperson will find it easier to sell to new clients too.

Sales Responsibilities• The primary responsibility of a sales person is to increase sales. For order getters this

will involve identification of customers, presentation, demonstration, demonstration, handling objections & closing the sale. In order to generate sales . 6 enabling functions should be carried out.

• Prospecting. It is searching for & calling upon potential customers. Most sales people rely on established customers rather than actively seeking new business. They working their comfort zone calling upon old contacts rather than searching out & selling to new customers. A company should insist that a certain percentage of the revenues should come from new customers. The incentive plan can be structured in a way that it becomes more lucrative to acquire new customers. But there is need for balance. When there is excessive emphasis on acquiring new customers, the current customers’ running requirements may be ignored leaving them dissatisfied. Prospects can be identified from several sources.

• (A) Existing customers. Satisfied customers should be asked if they know of any one who may be interested in the products being sold. Sales people should also ask if the customer’s name can be used as an example of a satisfied customer. Sales people can offer some incentives to customers for providing names of prospective customers. But the best chance of obtaining such a list from customers is when they are satisfied with the services & behavior of the salesperson.

• (B) Trade Directories. These provide means of prospecting. These directories give names, addresses, telephone numbers, size of firms & products they make. But a sales person cannot rely on this source exclusively. The data may be too large & unqualified & the salesperson will have to make a lot of cold calls & visits.

• (C) Enquiries. Enquiries from prospective customers can be stimulated by advertising, direct mail or exhibitions. Such enquiries should be dealt with promptly & checked to establish their seriousness & worth. This process of checking leads to establish their potential is called qualifying.

Sales Responsibilities• (D) The Press. Advertisement of prospective customer may reveal their expansion plans that may

suggest potential business for the company. Articles in scientific, professional & business publications may reveal new products being developed by companies that may require the salesperson’s company products

• (E) Cold canvassing. This involves calling on prospects who may or may not need the product. Cold canvassing may become frustrating at times but a salesperson must always remember that most cold calls always provide some information about the prospective customers which will be helpful in tracking them for future business. But it is important that a salesperson maintains a record of the interaction he had with the customer, no matter how uninterested the customer sounded at the time of the interaction. When such records are revisited by the salesperson at frequent intervals he may find that some customers had given him hints about when they would need the salesperson’s product & other indications which may be acted upon now.

• (F) Maintaining customer records & information feedback. Customer record keeping is an important activity for salespeople who focus on getting repeat orders from their customers. For industrial salespeople information should be available on decision making limit i.e. who are the important people to see, when they have been seen, & what are their choice criteria. Salespeople should be encouraged to maintain data of finer nuances of their customer requirements & behavior. These records become very valuable when key contact employee of a major customer leaves the company. These records will help the company in reconstructing its relationship with the customer.

• Sales people should be encouraged to send customer & market information to the head office. Test marketing activity by competitors, news of imminent product launches by competitors, rumors of policy changes of & industrial customers & competitors, feedback on own & competitor product performance, performance on delivery & after sales service may be useful to management & should be provided to them.

Sales Responsibilities• (G) Providing Service. Sales people meet many customers & they become familiar

with solutions to common problems. They have a good idea of the equipments, processes, & materials that other companies may be using successfully. Salespeople can help their clients by suggesting these equipments, processes, & materials to them.

• Sales ream should understand that the customer may be using an equipment, but he is not an expert in the technology of the equipment. So when an customer has a problem with the equipment he will expect the sales team to help solve the problem. Sales teams should always welcome a call for help from a customer as the team gets another opportunity to demonstrate its usefulness to the customer & cement its relationship with him.

• (H) Handling complaints. Dissatisfied customers tell 6 other people on an average about their cause of complaint. Dealing with complaint quickly & efficiently is a key aspect of selling. The ability of a sales team to emphasize with customers & react sympathetically creates goodwill. When the sales team promptly solves customer problems, the complainants will now spread the news of how they have been treated. More important than finding a solution to the customer problem, which is obviously important, is to reduce the anxiety of the customers, which in most cases can be done by reaching the customer site as soon as possible.

• (I) Tour Management. Journey routing may be delegated to sales people. Many sales people believe that the most efficient routing plan involves driving out to the farthest customer & zig zagging back to home base. By adopting a round trip approach usually results in lower kilometers traveled. But adopting a round trip approach usually results in lower miles traveled. But efficiency alone should not rule the journey routing. If an important customer has some urgent requirement, a salesperson should make adjustments to reach him even if the distance traveled increases.

Sales Responsibilities• (contd). Call frequency is also be delegated to sales people. It is sensible to grade

customers according to their potential of contributing to the revenues of the organization. Sales people may overcall on established, friendly customers even though they do not have much growth potential. Customer with greater potential to buy the company’s products should be visited more frequently.

• Relationship Management. Many selling situations are not one-off, situation free encounters, but long term in nature. This is particularly true in organizational markets, where the two parties work together to create, develop & maintain a network within which both parties do business. The management of relationships with key customers is a major responsibility of the salesperson. Although the number of sales people is falling, the number of key account managers is growing, which is testimony to the importance that companies are attaching to managing relationships with their important clients.

• Buyers are also reducing the number of suppliers that they are buying from. In fact, most companies are keen to source one component from only one supplier & most companies are willing to source more than one component from the same supplier. They have more stake in each other’s business. Buyers & suppliers are doing more for each other than merely buying & selling products. Suppliers are aiding their buyers in designing components & are taking overall responsibility for the components they are supplying. Buyer are helping their suppliers to improve their processes & cost structures.

• The objective of relationship management is to build goodwill that is reciprocated by placing orders. This can be achieved by providing exceptional customer service through:

• Technical support:. The suppliers should help the buyer in installation, commissioning, & maintenance of equipments they sell.

Sales Responsibilities• (contd) Expertise: The supplier & buyer have expertise in different

technologies & they should be able to use their technologies for mutual benefits.

• Resource support: The buyer & seller should put their resources at each other’s disposal. The idea is that the buyer & seller should understand their mutual dependence & realize that they have to collaborate to becomes competitive unit.

• Improving service levels: Since suppliers are supplying sub-assemblies instead of components, customers require greater services from their suppliers. Suppliers have to upgrade their level of services to be able to be add value to the operations of the customer.

• Lowering Perceived Risk. Suppliers have to assume some of the risk of the buyer. He may provide guarantee of performance & an opportunity to return the equipment if the customer does not find it suitable.

• Sales people should develop trust through high frequency of contact, ensuring that promises are kept, & reacting quickly & effectively to problems.

Tasks Performed by Sales Management

• Determining & achieving the firm’s Personal selling objectives -> Formulating Sales Policies -> Structuring the Sales Force -> Deciding the Size of the Sales Force -> Designing Sales Territories -> Developing Sales Forecast & Sales Budgets -> Fixing Sales Quotas / Targets for Individual Sales Territories / Salesman -> Creating the Sales Force (a) Selection (b) Recruitment (c) Induction/Orientation -> Managing the Sales Force -> (a) Compensation (b) Motivation (c) Morale building (d) Sales coaching/supervision (e) Evaluation/appraisal (f) Training & development. -> Managing the marketing Channels -> Ensuring growth & developing New Accounts -> Sales Communication & Reporting -> Sales Coordination & Sales Control (including sales expense control) -> Building the Sales Organization -> Assisting Marketing Management in Aspects Like Product Mix, Pricing, Distribution, Advertisement & Sales Promotion -> Creating & Maintaining the Right Image for the Company & its Products in the Market.

• Areas Where Personal Selling Objectives Have to Be Set. (a) Sales volume & sales growth .(b) Share of each product in the total volume. (c) Market Share (d) Profits (e) Selling expenses (f) Key accounts (g) New accounts. (h) Addition of new dealers & expansion of channel (e) Proportion of cash & credit sales (f) Collection of sales proceeds / amounts due (g) Pre sales & after sales service. (h) Training of dealers (& customers in some cases). (i) Assistance in sales promotional measures (j) Supplying market intelligence.

• Where Sales Policies have to be Set. (A) Product. Product line rationalization & improvement. 1. Whether some the existing products are to be dropped. 2. What models, types, sizes, colors, & packing are to be sold. 3. How service is to be provided. 4. What kind of product guarantees are to be given.

Tasks Performed by Sales Management

• (B) Distribution. 1. Channel design & channel types to be used. 2. Channel remuneration, motivation & training. 3. Channel-principal relations 3. Channel costs.

• (C) Pricing. 1. Whether prices should match or be above or below competition. 2. Pricing to be followed for each class of customer. 3. Discounts & Rebates 4. Terms of delivery & terms of payment.

• TASKS PERFORMED BY SALES MANAGEMENT.• Sales management performs a number of strategic tasks as well as a number of

administrative & operational tasks. Deciding the selling strategy, fixing the selling style of the sales force, interface with advertising, & guiding the selling strategy of marketing channels, are examples of strategic tasks. Administrative & operational tasks include sales force recruitment, territory design, target setting, sales force motivation, salesperson’s performance evaluation & routine follow ups with the channels.

• Determining Personal Selling Objectives. The first task in sales management is to precisely determine the role of personal selling in the marketing mix of the firm & set the personal selling objectives. It sets the goals for the sales team & leads the team to achieve the set goals.

• Areas where personal selling objectives have to be set. Personal selling objectives may vary from firm to firm & would depend on the corporate * marketing objectives of the firm, the strategy adopted by it, the type of products marketed, the nature of the target market, the types of channel chosen, the resources available, & competitors’ practices. For example, the personal objectives will vary depending on whether the firm’s emphasis is on sales in the short run, or sustained sales over the long term, whether it is on immediate profits or on building enduring customer satisfaction.

Sales Operations Planning• The planning in the sales operations is always done jointly by the sales managers &

the channel members. Some of the points in the operations planning exercise are highlighted.

• 1. List of markets to be covered & the schedule – the company would like it to be represented in full strength in all potential markets & outlets. 2. Market share objectives to be achieved & how- built into the secondary sales targets agreed with the channel partners. 3. Tracking competition in order to always do better than them. 4. Designing coverage beat plans / call plans using a milk run concept – how many outlets to be covered in a day, frequency of calls on an outlet & when a call is to be made. The milk run concept makes sure that there is no crisscrossing in the coverage – the calls are made in a sequence. 5. Ensuring highest call productivity – every call has to be made to give results. 6. Market working methods & tools – whether to cover the markets with ready stocks or book orders & deliver stocks later, how to run the call, how much credit to extend & to whom. 7. Sales promotion efforts – could include the power of the sales call or the consumer & trade promotions occasionally run by the company. 8. New product-pack launches – each such event has important milestones in volume sales, placement of the products & merchandising to be achieved. These are agreed with the channel partners & then it is their responsibility to achieve the same. 9. Shelf space maximization & merchandising – most relevant to consumer products. The intention is to occupy the best shelves fully, giving little chances for competition to be present. This also means utilization of costly point-of-purchase (POP) materials effectively in the market place. The shelf space to be achieved in each outlet should at least be in proportion to the market share enjoyed by the company in the particular market. 10. Reports & records – include those required by the company & those required by the company & those required for statutory purposes (government rules). All reports & records have to be timely & accurate.

Forecasting• Basic terms used in forecasting. Before we discuss approaches & methods of

forecasting, it is necessary to define & understand some of the basic terms used in forecasting sales or demand. These terms are closely related, used loosely & therefore, cause misunderstanding among academicians & managers.

• Market Potential. It is the best possible (or maximum) estimated sales of a given product or service for the entire industry in a given market for a specific period of time. For example, the market potential for personal computers (PC’s) in India for the year 2005-06 is estimated to be 4 million numbers. Market potential is also called as industry sales forecast. The following 4 parts must be included for a complete definition of market potential as well as sales potential & sales forecast.

• 1. Item marketed, such as a product, or service. 2. Sales estimated in units or value (Rupees). 3. Description of the market by a geographical area, or type of customer, or both. 4. A specific time period, such as a particular year.

• Market Forecast. It is the expected industry sales of a given product or service at one specific level of industry marketing expenditure, in a given market, for a specific period of time. Market forecast is also called as market size. For instance, market size of talcum powder in the organized sector in India, for the calendar year 2004, was Rs 700 crore (Rs 7000 million).

• Sales Potential (or company sales potential). It is the best possible or maximum estimated sales of a given product or service, for a company in a given geographic area for a specific period of time. Sales potential is also defined as the maximum share (or percentage) of market potential that is expected to be achieved by a company. For instance, sales potential of ICICI – Prudential is expected to be close to 5% of the gross premium collection of Life Insurance industry in India in coming years.

Forecasting• Sales Forecasting (or company sales forecast). It is the estimated company sales

of a given product or service, under a proposed marketing plan, in a given market, for a specific period of time. There is a relationship between the company’s sales forecast & proposed marketing expenditure or marketing plan. A company may make a sales forecast for an entire product line (like detergent from Hindustan lever or a product item such as wheel brand.

• Sales potential & sales forecast are usually not the same. Sales potential is what a company would achieve under ideal conditions. Typically, the sales forecast is less than the sales potential, for different reasons, such as limited production facilities, & inadequate financial resources.

• Sales Budget. It is the estimate of expected sales volume in units or revenues from the company’s products & services & the selling expenses. Sales budgets are generally set slightly lower than the sales forecast, in order to avoid excessive risk. Sales budget is used for making purchasing, production, manpower & cash flow decisions. The sales budget goes into complete details of expected sales of each product item.

• Sales Quota. It is a sales goal or a performance goal set for a marketing unit for a specific period of time. The marketing unit may be a salesperson, a branch, a region, a dealer, a region, a dealer, or a distributor. A company management set sales quotas on the basis of the company sales forecast.

• Forecasting approaches. Two basic approaches are there for forecasting. 1. Top-down or break-down approach 2. Bottom – up or build up approach.

• Top-down / Break – down approach. In this approach, typically the company sales forecast is developed at the business unit (or SBU) level, by using suitable forecasting methods. The head of sales / marketing then breaks down the company sales forecast into region, district, territory, salesperson, & individual customer sales quotas.

Forecasting• (contd) STEP 1. Forecast Relevant External Environmental Factors Over Specified

Time Period -> STEP 2. Forecast Industry Sales or Market Potential for Relevant Industry Over Specified Time Period. -> STEP 3. Company Sales Potential = Industry Sales Forecast (step 2) x Company’s share of Total Industry Sales in Percentage. STEP 4. Company Sales Forecast of the Product / Service Under Study. STEP 5. Sales / Marketing Manager’s Forecasts for Region’s, Branches, Territories, & Customers.

• The key steps are step 2 & 3. In step 2, some of the methods used for forecasting industry sales or market potential are (a) Delphi method, & (b) Regression analysis.

• In step 3 for estimating the company’s share of the total industry sales, a number of factors must be considered, including the company’s current market share, target customers & their perceptions about the company’s performance on key factors like quality, service, & price in comparison with major competitors, & the company’s relationship with major customers.

• With respect to step 4, the company’s sales forecast is usually lower than the company sales potential due to insufficient funds, increase in competition, or shortage of raw material.

• The last step of breaking down the company sales forecast to different regions & territories is done based on market potential of different geographical areas. For this, , two major methods are available. (a) market build-up method., primarily used by business marketers, & (b) multiple – factor index method, mainly used by consumer marketers.

• Market build-up method. The first step in this method, is to identify existing

Forecasting• (contd) & potential business buyers in the geographical territory. The second step

is to find out their potential purchases of the product under study. The final step is to add up the business potential of all the buying firms to obtain a fairly accurate estimate of market potential for the product or service for a specific geographic territory.

• Multiple- Factor Index Method. For the consumer marketing company, the estimation of the market potential for a geographical area is done not by identifying individuals & households, because they are very large in numbers.

• This method first identifies the factors that influence the sales of a product or service. Generally, there are more than one sales factors, such as population & income that influence sales. These factors are given certain weights, corresponding to the degree of sales opportunity.

• Let us take an example of a company, manufacturing & marketing detergents all over India. The company wants to find out the market potential of detergents in all cities, including Bangalore. The major factors that influence sales of detergents are population, personal income & retail sales, which are given weights of 0.4, 0.3, & 0.3 respectively. Suppose, Bangalore has 0.7 percent of India’s population, 1 percent of India’s disposable personal income, & 0.9 percent of India’s retail sales. The multi factor buying index for Bangalore would be : 0.4 (0.7) + 0.3 (1) + 0.3 (0.9) = 0.85. Based on the Indian detergent industry forecast of Rs 55000 million for the year 2005-06, the market potential for detergents in Bangalore would be: 0.85 percent of Rs 55000 million, i.e. equal to Rs 467 million for the year 2005-06.

Forecasting• Bottom-up / Build-up approach. This approach starts with the company’s area or

branch managers asking its salespersons to estimate or forecast the sales in their respective territories.

• STEP 1. Salesperson’s Sales Forecast of Individual Customers. - > STEP 2. Combined into Area/Branch Sales Forecasts. - > STEP 3. Combined into Regional / Zonal Sales Forecasts - > STEP 4. Combined into Company Sales Forecast.

• Salespersons are given guidance by their respective area / branch sales managers on how to get information from the existing & potential customers on the estimated purchases of the company’s products services for the specified future time period. Each area or branch manager then adds the sales forecasts received from the salespersons, modifies the same where ever needed, & sends the combined sales forecast figure for each product in units & value to his superior, that is, regional or zonal sales manager. Each regional / zonal manager adds the sales forecast received from the area or branch managers, modifies the same, if needed, & sends the regional sales forecast to the sales / marketing head . The head of sales/marketing repeats the process & presents his proposal to the CEO for discussion, modifies & approval of the company’s sales forecast.

• Some companies use both top-down & bottom up approaches, in order to increases their confidence in the sales forecast. However, comparison of the two approaches indicate that top-down approach needs less time & cost, as it uses data on forecast from secondary sources like planning commission report on market forecasts, & indicators by Centre for Industrial & Economic Research, New Delhi. Bottom-up approach is very accurate for short term forecast (up to one year), as it is based on primary data collection, which means more cost & time. Firms may develop sales forecast internally or buy forecast from outside sources such as market research companies.

Forecasting• (contd) Sales Forecasting Methods. These methods or techniques can be classified

as (a) Qualitative methods & (b) Quantitative methods.• Qualitative methods. (a) Executive Opinion, (b) Delphi Method (c) Sales force

Composite, (d) Survey of buyers’ intentions (e) Test Marketing.• Quantitative methods. (a) Moving averages (b) Exponential smoothing (c)

Decomposition (d) Naïve / ratio method (e) Regression analysis (f) Econometric analysis.

• Executive Opinion method. This is the oldest, simplest, & the most widely used method. A study of 150 companies found that 86% used executive opinion method to forecast sales. The method includes getting the views of top executives of the company regarding future sales. The sales forecasts are made either by taking the average of all the executive’ individual opinion or through discussions among the executives. Some executives’ opinion may be supported by the use of forecasting methods, & other executives may form their opinion based on experience, judgment, & intuition.

• The advantages of this method are: (a) forecasting can be done quickly & easily, (b) less expensive than other methods, & (c) very popular, particularly among small & medium-sized companies. However, there are some disadvantages: (a) unscientific (b) subjective & (c) difficult to break down the forecast into sub units (like regions, branches) of the organization.

• Delphi Method. This method is similar to the executive opinion method, & was developed by Rand Corp. during the late 1940’s. The difference is that the members of the expert panel do not meet or discuss in a committee. The procedure includes selection of panel of experts from & outside the organization. A coordinator asks each expert separately to make a forecast on some matter. Each member of the expert panel submits in writing his forecast anonymously. The coordinator summarizes these forecasts into a report that is sent to each panel member. The

Forecasting• (contd) experts are then asked to make another prediction separately on the same

matter, with the knowledge of the forecasts of the other experts on the panel. This process is repeated until the panel of experts arrive at some consensus. The basic belief in this method is that experts, without any pressure or influence will develop a more accurate prediction of the future.

• The advantages of this method are: (i) Objective forecast that is accurate, (ii) Useful for technology, new product, & industry sales forecast, & (iii) both long & short term forecasting possible. However, the disadvantages are: (i) difficulty in getting panel of experts, (b) longer time to getting consensus, & (c) break-down of forecast into products or territories is not possible.

• Sales force composite method. This method involves sales people to estimate their future sales. It is an example of bottom-up approach& is also called a “grass roots” approach. Each sales person estimates in his / her territory how much quantity or value existing & potential customers will buy of each of the company’s products and / or services. This method is often used by industrial or business marketing companies. Sales representatives make the sales estimate in consultation with customers & sales supervisors, and / or based on their experience & intuition. The company sales forecast is made up (composite) of all the salespersons’ sales forecast.

• The advantage of this method are: (i) forecasting is done by sales people who are closest to the market & have better insight into sales trends than any other group in the company, (ii) detailed sales estimate broken down by customer, product, sales representative & territory are possible, & (iii) high reliability of sales forecast.

• The disadvantages include: (i) sales forecast are often pessimistic or optimistic, as sales people are not trained in forecasting, (ii) if sales forecast are used to set sales quotas, which are linked to incentive schemes, salespeople may deliberately underestimate the demand, & (iii) many salespersons are not interested in sales forecasting, & prefer to spend time in the field meeting customers.

Forecasting• (contd) Survey of buyers’ intentions method. This method is sometimes called as

market research or market survey. It includes asking existing & potential customers about their likely purchases of the company’s product & service for the forecast period. For instance, the question like the following is asked: Do you intend to buy a refrigerator within the next six months?

• (a) Not at all – 0.0. (b) Slight Possibility- 0.20 (c) Fair possibility- 0.40 (d) Good possibility 0.6 (e) High possibility 0.8 (f) Certain buying 1.0

• The above is called a purchase probability scale. The customers are also asked other questions, such as product features, price & service, which are all a part of the questionnaire. The information collected from buyers help the company to make effective decisions not only in sales & marketing areas, but also in production, research & development.

• Several research organizations conduct periodic surveys of consumer buying intentions. They combine various bits of information into a consumer confidence measure. One such survey is done every quarterly since December 2002 in India by Economic Times , which measures the consumer optimism through consumer confidence index.

• The advantages of this method are: (i) useful in forecasting sales for industrial products, consumer durables, & new products. (ii) it also gives consumers’ reasons for buying or not buying; (iii) relatively inexpensive & fast, when only few customers are involved ( for example business buyers’ survey). The disadvantages are: (a) sometimes buyers are unwilling to reveal their plans, (b) buyers are sometimes over optimistic, & (c) expensive & time consuming in consumer non durable markets Where consumers are very large in number.

• Test marketing method. This method is useful for forecasting sales for a new product, which has no historical or previous sales figures

Forecasting• (contd) It can also be used for estimating sales for an established product in a new

territory. Major methods used for consumer-product market testing include: (i) full blown test markets: (ii) controlled test marketing, & (3) simulated test marketing.

• FULL BLOWN TEST MARKETS. It consists of the company choosing a few (two to six) representative cities, in which full promotion campaign is introduced, similar to what would be done in national marketing. The duration of the test market varies from a few months to one year, depending on the repurchase period of the new product. Buyer surveys are carried out to get information about consumer attitude, usage & satisfaction towards the new product. If the test markets show high trial & repurchase rates, the product should be launched nationally; if they show a high trial rate& a high repurchase rate, the product is acceptable, but more consumers should try it; if both trial & repurchase rates are low, the new product should be left permanently.

• CONTROLLED TEST MARKETING. The company with the new products hires a research firm & gets a panel of stores at specific geographic locations. The research firm delivers the new product to the panel of stores, arranges promotions at the stores, & measure the sales of the new product. The research firm also interviews sample consumers to get their perceptions on the new product. Both full blown test market & controlled test marketing expose the new product to the competitors.

• SIMULATED TEST MARKETING. . In this method, about 30-40 consumers or shoppers are selected, based on their brand familiarity & preferences in a particular product category, such as baby care & soft drink products. These shoppers are shown commercial or print advertisements of well known products & also the new product, without any specific mention. These consumers are given a small amount of money & asked to buy any items in a store. The researcher of the company notes how many consumers buy the new product & competing products. These consumers are interviewed to find reasons for buying or not buying, & later after usage of the new product, satisfaction levels & repurchase intentions. This method gives accurate results. The new product is not exposed to the competitors. .

Forecasting• (contd) For industrial product market testing, the methods used are Alpha Testing

(testing within the company), & Beta Testing (testing with outside customers) for high cost & new technology products & services. For example, Infosys sent its banking software product, Finnacle, to the experts for a thorough check-up to see if it’s fit for the multi-billion dollar US market. The supplier of the new product / service will ask the customers about their purchase intentions & other information after Beta testing. Another method used for introducing a new industrial product is participating in the industry trade-shows.

• The main advantages of this method are: (a) its usefulness for forecasting the sales of new or modified products, & (b) in deciding whether a company should go ahead for a national launch of a new product, without spending a huge amount. The disadvantages are: (a) for some of the methods like full blown test market & controlled test marketing, where there are possibilities of the information on the new product going to competitors, there are chances of spoilage of the test marketing, & (b) if repurchase period is long, particularly for consumer durables, it is difficult for the company to wait to measure test results. In such cases, the company decides to introduce a new product in a small geographical area & subsequently “roll on” to other areas, in a planned manner.

• MOVING AVERAGE METHOD. This is relatively simple method that develops a company forecast by calculating the average company sales for previous years.

• Sales forecast for next year = Actual sales for the past 3 or six years / Number of years (3 or 6 years).

• When a forecast is developed for the next period, the sales in the oldest period is dropped from the average & is replaced by sales in the newest period, hence the name “moving averages”. If a company operates in a stable environment, a short 2 or 3 year average may be most useful. However, if a firm is in an industry with cyclic variations, the moving average should use data equal to the length of a cycle or a longer averaging period.

Forecasting• (contd) The advantages of this method are: (a) A relatively simple method, (b) easy

to calculate & (c) widely used for short-term & medium-term sales forecasts. The disadvantages are: (a) unable to predict a downturn or upturn in the market, (b) cannot predict long-term sales forecast accurately, & (c) historical data is needed.

• EXPONENTIAL SMOOTHENING CURVE. This method is closely related to the moving averages method for sales forecasting. By using the exponential smoothing equation, the forecaster can allow sales in certain periods to influence the sales forecast more than sales in other periods. The equation of exponential smoothing method is as follows:

• Sales forecast for next year = (L) (actual sales this year) + (1-L) (this year’s sales forecast), where (L) is a smoothing constant, or probability weighing factor.

• The forecaster decides the value of the smoothing constant based on (a) review of sales data, (b) knowledge & observation about the conditions in the forecasted period & conditions in previous period, & (c) intuition. For instance, a smoothing constant (l) with a high value of (0.7) or (0.8) allows most recent periods of actual sales to influence sales forecast more than sales in earlier periods, where as a smoothing constant with a low value of (0.2) or (0.3) allows earlier period of actual sales to influence forecasted sales more tan sales in recent periods. The smoothening constant (L) can range from something greater than zero to something less than 1.

• The advantages of this method are (a) Simple to operate, (b) forecaster’s knowledge or intuition can be used in forecasting, (c) useful method when sales data have a trend or a seasonal pattern, (d) immediate response to a upturn or downturn in sales, & (e) used by many firms. The disadvantages are: (a) smoothing constant is somewhat arbitrary, & (b) long-term & new product forecasting are not possible.

Forecasting• (contd) DECOMPOSITION METHOD. In this method the company’s

previous periods’ sales data is broken down ( or decomposed) into 4 major components, such as trend, cycle, seasonal, & erratic events. These components are then recombined to produce the sales forecast. For example, a growth of 3% in sales due to the development in technology, capital formation & population (trend component). Increased terrorist activities are expected to reduce sales by 5% (erratic events component). The sales in the 3rd quarter of the year are expected to go up by 15% due to festive season, as compared to other 3 quarters (seasonal component). The forecaster would combine the different components in order to forecast sales. We notice that trend, cyclic & erratic events are included in the calculation of annual sales forecast. However, the seasonal component is used for forecasting sales for less than a year, like quarterly or monthly sales forecast. The major advantage of this method is that it is conceptually sound method. However, the disadvantage of this method are: (a) difficult & complex statistical methods are needed to break down sales data into various components, & (b) historical data is needed.

• NAÏVE/RATIO METHOD: Naïve or ratio method is a time series method of forecasting, which is based on the assumption that what happened in the immediate past will continue to happen in the immediate future. The simple formula used is as follows:

• Sales forecast for next year = Actual Sales of this year x Actual sales of this year / Actual sales of last year.

Forecasting• (contd) The advantages of the methods are: (a) simple to calculate, (b) requires less

data, & (c) accuracy is good for short term forecast. However, the method also has certain disadvantages such as: (a) it cannot be used for forecasting sales for long term periods & new products, & (b) accuracy of sales forecast would be less, if past sales fluctuate considerably.

• REGRESSION ANALYSIS. This is a statistical forecasting method that is used to predict sales, called as dependent variable ‘Y’. The company then identifies causal (cause & effect) relationship between the company sales & the independent variables or factors, which influence the sales. If there is only one independent variable (x), say promotional expenditure, it is plotted on a graph of paired data of past sales & promotional expenditure. This is called linear or simple regression, with only one independent variable, & different pattern of relationships.

• In practice, the company sales are influenced by several independent variables, such as price, promotional expenditure & population. To forecast the effect of several independent variables on the company sales, the method used is called Multiple Regression Analysis

• ECONOMETRIC ANALYSIS. In this method, many regression equations are built to forecast industry sales, general economic conditions, or future events. The procedure followed is as follows.

• To find out which factors or variables influence sales & the relationship between sales & these factors as well as the interrelationships between the factors, develop a number of regression equation representing these relationships. A forecast is prepared by solving these equations on a computer. The major advantage of this method is that accurate forecast of economic conditions & industry sales are possible. The disadvantage is that a large volume of data is required representing the various factors.

Sales Quotas• After finalizing the sales forecast & the sales budget, the next logical step for a

company is to set up the sales goals or sales quotas, for marketing (or sales) units, such as regions sales territories, salespersons, distributors, & dealers.

• What are Sales Quotas? Sales quotas are sales goals (or quantitative objectives) set by a company for its marketing units for a certain period of time. A marketing unit includes a region, a territory, a branch, a salesperson, a distributor, or a dealer. Sales quotas (also called quotas) can be set on sales volume (Rupees sales, & unit volume), expense, profit margin, activity, customer satisfaction, & combination. Annual sales quotas for each marketing unit are broken down to quarterly & monthly quotas.

• Sales quotas are developed from the annual marketing plan of the company. After preparing the sales forecast, the company decides its sales budget, which includes the company’s sales volume & selling expenses. The company sales budget is then broken down to sales quotas for regions & sales territories. Each territory manager divides the territory’s quota among the sales persons, distributors, & dealers, who are attached to the territory. How the territory manager or the sales manager sets the sales quotas for the marketing units reporting to them will be discussed subsequently.

• Objectives of Quotas. Importance or objectives of sales quotas include (a) making available performance standards. (b) controlling performance (c) motivating people , & (d) identifying strengths & weaknesses.

• Making available performance standards. A sales quota makes available to the sales manager a tool to measure the performance of the salesperson. A quota also provides a goal or a target to the salesperson. Hence, a quota is a performance standard, against which the actual performance is compared to understand whether the salesperson is performing well or not. . .

Sales Budgets• Sales Budgets. What is a sales budget? A sales budget consists of estimates of

expected volume of sales & selling expenses. The sales volume part of the sales budget is based on the sales forecast . Sales budgets are generally set slightly lower than the sales forecast to avoid excessive risk.

• The sales volume budget, which is derived from the sales forecast, is broken down into (a) product-wise quantities, the average selling price per unit , & sales revenue, (b) territory-wise quantities to be sold & sales revenue, & (c) customer-wise & salesperson-wise sales volume quota during yearly, quarterly, & monthly budget period. In other words, the sales budget includes a detailed estimate of sales revenue as well as selling expenditure.

• The selling expenditure budget consists of the selling-expense budget & the sales department administrative budget.

• The selling expense budget includes expenditures for personal selling activities, such as the salaries, commissions (or incentives) & other expenses for the salespeople. Any plans for increase in numbers of salespeople must also be included in this budget.

• The administrative budget of the sales department should include the salaries of territory sales managers, sales supervisors, their secretaries & office staff. The budget should also include operating expenses like rent, power, supplies, office equipment, & general overhead.

• Thus the sales manager is responsible for preparing 3 detailed budgets. (1) the sales volume budget, (2) the selling expense budget, & (3) the administrative budget of the sales department.

• Purpose of the sales budget. The sales budget is the key factor for the successful performance of the sales department. There are many purposes or reasons of the sales budget, including planning, coordination, & control.

Sales Budgets• Planning. The budgeting process in a company consists of profit planning based on

expected sales, minus the cost of achieving the sales. From the total budget of the organization, the marketing & sales budgets or plans are developed. The sales budget or plan includes sales goals, sales strategy & action plan, & the costs of executing the strategy & the action plan. The company level sales plan is then broken down to detailed sales goals (or quotas) by products by products, territories, customers, & salespersons. Sales quotas include sales volumes, selling expenses, & key activities or tasks to be performed by salespersons. Although the typical budget period is one year, the sales budgets & quotas are prepared on quarterly & monthly basis.

• Co-ordination. At the corporate level, the budget process is used for coordinating the activities of various functional areas. For example, the sales budget is finalized in a coordination meeting involving the functional heads like production, finance, marketing & human resource. During the operation of the budget, the production planning is done in consultation & coordination with Sales & Marketing functions. Within the marketing function, there is a need to coordinate the efforts & expenses of sales department with other support functions like advertising, sales promotion, customer service, & marketing research. It is only through the coordinated efforts of all the functional areas the sales budget can be achieved.

• Control. Any budget, or goal, becomes a tool for evaluation of performance. In fact, the sales budget stated in terms of sales volume& selling expenses, becomes a standard of performance , against which the actual performance is measured. Once the yearly sales budget at the company & marketing units (like territory, salesperson) levels are finalized & broken down to quarterly & monthly goals, the same is measured against the actual performance. If the actual performance of a salesperson or a branch manager is found to be favorable during a quarterly budget review meeting, he/she is appreciated & suitably rewarded.

Sales Budgets• (contd) However, if the performance is unfavorable with respect to budgeted sales

volume or selling expenses, the reasons are identified and corrective actions are initiated so that in the next quarterly review, improvement in the performance takes place. This process is called control, which is possible due to establishment of sales budget.

• Methods used for deciding sales budget. Sales managers are required to decide expenditure levels for each item of selling expenses. The methods used for allocating money to each category or item of selling expenses are (a) percentage of sales (b) executive judgment & (c) Objective & task.

• Percentage of sales method. Sales & marketing managers use this method by multiplying the sales volume budget by various percentages of each category of expenses. For example, the sales manager may decide travel expenses for salespeople to 0.3% of the budgeted sales revenue, advertising expenses to be 1% & sales promotion to be 0.8% of the budgeted sales volume. The sales manager may decide these percentages based on the past experiences or on the basis of marketing & sales plans. These percentages are used during the monthly & quarterly evaluation of performance on sales volume & selling expenses for each sales territory & sales person.

• Executive Judgment Method. Here the sales manager uses his judgment to decide the budgeted selling expenses for each category. The judgment may be based on marketing & sales plans, as well as, sensible opinions of senior executives.

• Objective & Task Method. The first step is to look at the sales volume & objective to be achieved during the budget period of say one year. Then based on the sales & marketing strategies, the tasks or actions are decided that are required to be carried out in order to achieve the earlier stated objective. The 3rd state is to estimate the costs of carrying out the tasks. The costs are then added up to find out whether the profit objective can be achieved .

Sales Budgets• (contd) Objective & Task Method. Review of sales revenue, cost, & profit figures

continues until their managers are satisfied with the sales & profit objectives, the tasks, & the budgeted cost / expenditure of various items of selling expenses.

• Sales Budget Process Most organizations have certain process or procedure for the preparation of the sales budget. Many companies have developed certain formats, worksheets, guidelines, & time table for the preparation of the annual sales budgets. The steps generally followed in the sales budget process are as follows:

• (1). Review Situation. The sales manager should review the past performance, current & future (budget period) marketing environment. The review of the past budget performance can help the sales manager to understand the deviations of actual performance against the budget & the items or elements where the company showed favorable or unfavorable variances. Similarly, a review of current & future factors of marketing environment such as customers, competitors, economy, technology, government policies or regulations would help the sales manager & the marketing manager to understand the changes taking place in the external environment. These review meetings of Sales & Marketing key executives would help evolve guidelines & assumptions to be made for the budget period by all the field sales managers. If possible, the field sales managers & sales supervisors should also be involved in understanding the market situation. Ideally this activity should start about 4-6 months prior to the commencement of the new accounting year.

• (2) Communication: The head of the sales function should communicate in writing to all the field sales managers (such as area, branch, district, & regional managers) about the budget preparation, including the formats, guidelines, assumptions, & timetable. Each first-line sales manager estimates the sales volume in units & value for each product & service to be sold, along with estimated selling expenses (consisting of salaries, commission, & sales force expenses like travel, lodging, food, & entertainment to customers), & administrative budget, ( which includes salaries of

Sales Budgets• (contd) (Communication) of sales managers, supervisors, office staff; operating

expenses like rent, supplies, power, office equipment, & general overhead)• (3) Subordinate Budgets. The first-line sales managers prepare the sales

budgets for their respective sales territories & submit the same to the immediate reporting managers (like regional or divisional managers), who add & modify (if necessary) the sales budgets received from the first-line managers. The Regional / Divisional Sales managers submits their sales budgets to the national sales manager, who prepares the company’s proposed sales budget by combining the budgets received from regional or divisional managers.

• (4) Approval of the Sales Budget. In consultation with the marketing head, the national sales manager prepares 2 or 3 alternative proposals of the sales budget, & makes a presentation to the top management of the company. After a detailed discussion on the alternative proposals, the sales budget finally gets approved.

• (5) Other Departments. The final sales budget is given to other departments like production, finance, materials & human resource to prepare their budgets. The approved sales budget is also broken down into each sales territory, as well as into quarterly & monthly periods. Only the sales budget has revenue & expenditure budgets, whereas all the other departments in the company have expenditure budgets. Accounts / Finance department prepare cash budget & profit budget, based on the sales revenue information given by the sales department, & the expenditure budgets given by all the departments or functions.

Sales Quotas• (contd) For example, a branch manager of a consumer durable marketing company

sets sales quotas for his salespersons in terms of sales volume & selling expenses per annum. The yearly quota is further broken down to quarterly & monthly quotas for each salesperson. The branch manager uses these quotas as performance standards for each salesperson, & measures the actual performance to compare with the quotas on monthly & quarterly basis.

• Controlling Performance: By setting quotas for salespersons activities, sales volume, & selling expenses, the sales manager is controlling the performance of sales people. For instance, when a quota of 8 calls per day on retailers or 5 calls per day on business customers is set, they salespeople know that they have to make those many number of calls. The sales manager is indirectly monitoring or controlling the activities of salespeople by setting quotas. Similarly, to check wasteful expenditure on customer entertainment, lodging & meals, expense quota are set as a percentage of sales.

• If the actual performance of the salesperson is favorable in comparison to the quota, the sales manager should appreciate & reward the salesperson suitably. However, if the salespersons performance is unfavorable, consistently over a period of time, the sales manager should find out the reasons for poor performance, by talking to the salesperson & the customers, & reviewing the sales reports of the salesperson. Only after understanding the reasons or causes of poor performance, corrective actions, such as training in deficient areas, counseling or reviewing marketing strategies can be taken up by the sales manager. This is how the sales manager controls the performance of the salespeople.

• Motivating people. Most salespeople are motivated by money. Sales force compensation is often tied to the extent or degree of achievement of sales quotas. The financial compensation includes salaries, commissions and/or bonuses (also called as incentives).

Sales Quotas• The incentives, in most companies, are linked to the quotas. If sales people believe

that the quotas are achievable, they will put extra efforts to achieve the quotas & earn the rewards of incentive payments or recognition. Motivation of the salespeople is linked to the setting of quotas. Sales managers should not set quotas that are too high & non-attainable. At the same time, they should not set easily attainable quotas. In both these situations , motivation of salespeople declines.

• Sales contests are the additional motivating factors for special selling efforts of sales force. The performance during the period of the sales contest is linked to quotas set for individual salespersons. Typically, special quotas are set for sales contests in order to create enthusiasm among salespeople, resulting in superior performance. The incentives or rewards of achieving special quotas during sales contests are also attractive, in terms of winning trips abroad – Australia, Singapore, Malaysia, Thailand, & Sri Lanka.

• Identifying strengths & weakness. When actual sales performance is compared with respective quotas of different territories & salespersons, the sales manager can identify successful & unsuccessful performers. Further, analysis of causes of poor performance may reveal that the training program needs improvement, better product quality required to meet customer needs, & positioning strategy needs to be reviewed. This analysis helps identify weakness as well as strengths of the company in comparison to its competitors. Sales people are closest to the customers & customer’s perceptions are important to know the company’s strengths & weaknesses. Sales managers should, therefore, review the actual performance of salespeople with their quotas on regular basis.

• Types of quotas. Companies set many types of quotas. The most common types of quotas are (a) Sales volume, (b) financial, (c) activity, (d) combination.:

Sales Quotas• (contd) Sales volume quotas.. Most companies have sales volume quotas for

individual salespersons, distributors, retailers, geographical areas, or products, for a specific period of time. For effective control, it is proper to set sales volume quotas for the smallest marketing unit. For instance, instead of setting quotas for regions (such as north, east, west & south), it is better to set quotas for branches or districts within a region. Similar approach is used for setting sales volumes quotas for products for specific time periods. For example, the management can achieve better direction & control by setting quotas for individual product items & brands, instead of setting it for entire product lines. Similarly, annual sales volume quotas are broken down to quarterly & monthly quotas. Generally companies establish sales quotas for all those items for which they make a sales budget. Companies set sales volume quotas on Rupees sales volume, unit sales volume, & or point sales volume.

• Rupee sales Volume. When salespeople are required to sell many products, it is easier to manage if quotas are set in Rupees. For instance, in Crompton greaves when the organization structure was changed from product divisions to customer segment orientation, the salesperson handling industrial customers were required to sell all the 31 products of the company & their sales target or quotas were expressed in Rupees million per year, which were further broken down to quarterly & monthly quotas. Another reason for using Rupees sales volume quotas is that it allows an analysis of selling expenses to sales, expressed in percentage or ratio.

• Unit sales volume. Companies set sales volume quotas in units (numbers, tons, & liters) of products in 3 situations. One situation is when salespeople are selling a few products. For instance, a company which markets precision steel tubes to business customers, has set sales quotas to branch managers & sales persons in Rupees as well as in metric tonnes (MTs). The second situation is when prices of the product fluctuate rapidly, resulting in sales people achieving the Rupee sales quotas easily due to increase in prices.

Sales Quotas• (contd) Unit sales volume. The third situation is when the price of each product or

service is very high & it is easy to understand unit sales quotas. For instance a company manufacturing power transformers, sets sales volume quotas in numbers for its regions & sales engineers, because the average price of each power transformer is Rs. 20 million.

• Point Sales Volume. Some companies use sales volume quotas, conveyed in ‘points’. It is used in a situation when the company wants to improve its profitability, by asking salespeople to sell more those products that relatively contribute more to the profits. For instance, a company had two products, product A’s contribution to profit was two times that of product B. In order to improve the profitability, the company set sales volume quota in points, by assigning two points for each MT sales of product A, & one point for each MT sales of product B. Salespeople could achieve their sales quotas in points easily by selling product A more than product B. This also helped the company to achieve the profitability goal.

• Financial Quotas. These are the goals set to control gross margin or net profit, & expenses for various marketing or sales units, such as sales territories (branches, regions), salespeople, & products.

• Gross margin or net-profit quotas. Gross margin quota is decided by subtracting ‘cost of goods sold’ from sales volume. Cost of goods sold is equivalent to cost of manufacturing the product. The problem of gross margin quota is that sales managers & sales persons have no control on the cost of manufacturing & hence, they are not responsible for gross margins. Some companies, therefore, decide net profit quotas by subtracting cost of goods sold & salespeople’s direct selling expenses from sales volume. Direct selling expenses of salespeople include their salaries as well as traveling, lodging, boarding, & customer entertainment expenses. The problem of net profit quotas is that some sales person may reduce necessary expenses like traveling, which may have a negative effect on sales.

Sales Quotas• (contd) Gross margin quotas Companies use net profit quotas to convey to field

sales manager & salespeople that profits are more important tan sales volume & that they should focus on profitable sales.

• Expense quotas. Companies are trying to control rapidly increasing costs of selling, such as traveling, lodging & food. The objective of setting expense quotas is to control the costs of marketing (or sales) units, such as sales territories & salespeople. Often expense quotas are used along with the sales volume quotas, so that selling expenses are kept in line with sales volume. Therefore, expense quotas are stated as percentage of sales, so that salespeople give importance both to sales volume & selling expenses. In some companies, other selling expenses have a quota.

• Such uniform setting of expense quota has a problem as there are variations in territories in terms of degree of concentration of customers, resulting on variations in traveling, lodging, & boarding expenses of salespersons. There are also differences in product mixs required by customers, market potential, & abilities of salespersons. It is, therefore, advisable to administer the expense quotas intelligently & with flexibility. Sales managers should convey to salespeople that expense quotas aremeant to make them cost conscious, allowing all reasonable expenditure, & not allowing anyone to make money dishonestly.

• Activity quotas. Many companies set activity quotas so as to direct salespeople to carry out important job related activities. These activities are useful for achieving performance targets of salespeople. The process of deciding activity quotas include (a) defining the important activities, (b) finding out the time required for carrying out these activities, (c) deciding the priorities to be given among the various activities, & (d) deciding the quotas or frequency of important activities.

• It should be understood that activity quotas are set when salespeople not only have to carry out selling activities, but also non selling activities. Some of the important non selling activities are payment collection & getting market information.

Sales Quotas• (contd) Activity quotas. One problem faced by sales managers is how to ensure

salespeople perform their activities effectively. One of the methods used is to combine activity quotas with sales volume & financial quotas. That leads us to combination quotas.

• Combination quotas. Companies set combination quotas for goals when they want to control sales force performance on both key selling & non selling activities. Combination quotas typically use ‘points’ as a common measure to overcome the problem of different measures used by various quotas discussed earlier.

• METHODS FOR SETTING SALES QUOTAS. Sales quotas are set by companies by using several methods. The quotas are set based on territory potential, past sales experience, total market estimates, executive judgment, salespeople’s estimates, & compensation plan.

• Territory Potential. This method is commonly used by large organizations for setting sales quotas. The procedure used includes first estimating the marketing potential or industry sales forecast for a product line for a geographical area, using top down approach & sales forecasting methods. The 2nd step is to estimate the multiple factor index for each sales territory. Next, the expected industry sales in each territory (also called as the territory market in each territory also called as the territory market potential is obtained by multiplying the industry sales forecast by multiple factor index . Finally the company estimated market share in the territory is considered out of the territory market potential in order to come up with sales volume quota for the territory.

• Past sales experience. Some companies consider past sales only for setting sales volume quotas. They take the past year’s sales for each geographical sales territory, add an arbitrary percentage and decide the figures as sales volume quotas. Another alternative method is to take an average of the previous 3 or 5 years’ sales of each territory, add a percentage by which the market is expected to grow, & thus set sales quota for each territory. This method is better than the earlier method because it considers the importance of the sales trend.

Sales Quotas• (contd) Past sales experience. Companies that use this method only for setting

sales quotas assume that future sales are related to past sales. This assumption may not be correct. Besides, if past sales were achieved by poor market coverage, the past mistakes will be carried on in future without any correction.

• Total market estimates. Some companies set quotas for sales territories based on total market estimates also called market potential or industry sales forecast. Then they decide the company’s estimated market share from the total market estimate to arrive at the company sales forecast. The next step is to find out each territory’s percentage share of te total company sales in the previous year.

• However, if the company is new & there is no information on past sales, the management first determines the market potential or total market estimate for its products. The company then estimates what portion or share of the market it could achieve in the first year. Thus, the company sales forecast, is calculated by multiplying market potential by estimated market share. Thereafter, the company sales forecast or sales budget is broken down to individual territories by multiplying it with multiple factor index for each territory. This procedure is used by new companies for setting sales volume quotas for its newly establishment territories.

• Executive judgment. Some times companies use executive judgment method when the company is new, the product & territories are new or very little information is available. In these situations, senior executives or managers use their judgment , based on their past experience, to predict not only the company sales, but also sales quotas for territories.

• Salespeople’s estimates. Some companies ask their own salesperson to set sales quotas in situations , such as starting a field sales operation, & expanding sales into new geographic regions or territories . Asking sales people to set their own quotas happens rarely, because salespeople either overestimate their abilities to set very high sales quotas, or set too low sales quotas to earn high commissions or incentives

Sales Quotas• (contd) Salesperson’s morale is down when they find that they could not achieve their

sales quotas, which were set too high. When the sales quotas are set too low, salespeople are not motivated to put forth maximum selling efforts. To ensure effective quotas, increasing number of sales managers discuss sales quotas with their salespeople. Sales managers use forecasting methods , past sales figures& combine these with the inputs from salespeople, before coming up with final sales quotas.

• Compensation plan. Some companies set quotas to fit their sales compensation plan. For instance, the sales quota for this year is based on the past year’s sales. If the last year’s sales was Rs12 million , the sales quota for this year is set at Rs 12 million, & the sales person is paid an incentive of a percentage of sales achieved over he quota of Rs 12 million. Another method used by some companies is based on salary plus commission plan. For example, the company wants to pay a monthly salary of Rs 5000 plus a commission of 3% on all monthly sales over Rs 1,00,000. The sales quota of Rs 1,00,000 is set in such a way that it is very difficult for the sales person to exceed a total compensation of Rs 800 (Rs 5000 salary plus Rs 3000 incentive) per month.

• Although the compensation plan is often tied to the degree of quota achievement, sales volume quota should not be based on the compensation plan alone, because that would “ put the cart before the horse “.

• Companies not using quotas. Some companies do not use sales quotas for different reasons. Companies such as Nortel & Siegel think that sales quotas drive salespeople to achieve sales volumes, ignoring customer service & customer satisfaction, which have long term impact of repeat business. These companies want to user more number of parameters for evaluating & rewarding salespeople. Some other companies have difficulties in setting accurate quotas by combining various factors like territorial potential , salesperson’s abilities & territory coverage difficulty.

Territory Management• Defining sales Territories. A sales territory consists of existing & potential

customers assigned to a salesperson. The territory may or may not have geographic area consisting of present & potential customers. For instance, a salesperson is asked to look after customers located in Mumbai territory.

• The basic concept of a sales territory is that a territory or a market is made up of present & potential customers, rather than a geographical area. Hence, in defining a sales territory the keyword is customers, instead of geographical area. For example, in life insurance policies, salespeople sell mainly to relatives, friends or known people, without thinking of their geographic locations. Similarly, small companies do not use geographic divisions. Such examples of not using geographical territories are very few. In most organizations, it is beneficial to allot salespeople to geographic territories, consisting of present & potential customers.

• Procedure for designing sales territories. The design of sales territories is very important to salespeople & management of an organization, as sales & profit performance are linked to the well designed sales territories. The ideal objective in territory design is to have equal opportunity or sales potential & equal sales force workload for all the sales territories. Typically this objective is difficult to achieve in practice, although sales managers make great efforts to achieve the same. Any differences in sales potential & workload of sales force in different territories, which remain at the end, can be taken care of when sales quotas are set up for salespeople & sales territories.

• Select a control unit. The first step in territory design is to select a geographical control unit that will be used in the territory analysis. Commonly used control units are states, metros,, cities, districts, towns, pin-code areas, industrial estates & major customers. In general, the sales manager should select the smallest control unit. The reasons are: (a) the control units’ market potential & the company sales potential should be possible to calculate.

Territory Management• (Contd) (b) adjustments (additions or deletions) of control units should be possible

when tentative territory boundaries are modified to make final territories. For example if a company wants to reduce one control unit (say, Nashik Industrial Estate) from Mumbai territory & add it to Pune territory, for minimizing the cost & time of contacting customers, it can be done if the control unit is small (such as industrial estate or trading area).

• States. A few companies may consider building their sales territories around states, by selecting the same as a geographical control unit, if they have a few salespeople for covering the entire national market, with a selective distribution strategy. However, most companies would not consider states (like Andhra Pradesh, Karnataka, Maharashtra) as a control init, because it is a large area & adjustment of territories will be very difficult, for any specific reasons like minimization of time & cost of traveling of salespeople.

• Metros. These are also called as metropolis or metropolitan area, with large populations in urban & suburban area. They have a large number of households, with high levels of buying incomes & retail sales. These are concentrated markets for many consumer & industrial products. The information on market forecast of metros is also available. Some of these metros in India are Mumbai, Delhi, Chennai, & Kolkata. However, metros are too large for consideration of geographical control units.

• Cities / Towns / Districts. The administrative set up varies from one country to another. In USA, cities & postal zip code areas are used as control units. However, in India, the administrative control consists of districts, tehsil / taluk, towns & villages. It is possible to get statistical market data for various products at town or district levels. But below the district level (tehsil / taluk or village) it is difficult to get statistical market data. Hence, in India, district or towns can be used as a control unit.

Territory Management• (contd) Find location & potential of customers. The next step is to find the location &

sales potential (or business potential) of present & prospective customers in each control unit. Information of present customers should be available from the company’s sales analysis. However, the information on prospective customers can be obtained not only from the company’s salespeople, but also from telephone directories, & market research studies.. For industrial products & services where often there are a few buyers, identification of business customers is desirable & possible. However, for consumer products & services, it is unnecessary & expensive to carry out identification of final customers.

• After the present & potential customers are identified, the company should estimate the total sales potential for all customers in each geographical control unit. For this, first market potential or market forecast should be estimated, based on the use of one or two of the forecasting methods discussed earlier. The sales potential or business potential for the company is decided by estimating the company’s share of the market potential in the control unit. The estimation of the company’s share depends on the present market share, strengths & the weaknesses of the company in comparison to competitors & the company’s relationships with existing customers.

• After the sales potential of control units are calculated, it is necessary to classify the customers based on their sales & or profits potential. One of the commonly used methods is ABC analysis. In this method, all the customers are entered in the reverse order of their sales / profit potential, by first entering the name of the customer whose sales / profit potential is the highest. Then the name of the customer with 2nd highest potential is entered. The process is repeated till the names & potential figures of all the customers are entered. The total sales / profit potential is calculated by adding the potential of all the customers. ‘A’ customers are those whose sales / profit potential add up to 70% of the total. Next customers whose business potential add up to 20% are classified as ‘B’ & the balance 10% potential is accounted by ‘C’ customers.

Territory Management• (contd) Decide basic territories. The third step in designing sales territories is to

decide basic or fundamental territories. This can be done by using either build-up method, or break-down method. Buildup method equalizes the workload of sales people & is commonly used by manufacturer of consumer products & services or by companies that want intensive distribution strategy. Break down method equalizes the sales potential of territories, & is popularly used by manufacturers of industrial products & services or by firms that want to adopt selective or exclusive distribution strategy. We shall first discuss the build up method & then the breakdown method.

• Build-up method. In this method, the basic territories are set up by building up from the control units. The objective to be achieved is to equalize the workload of sales people.

• STEP1. Decide call frequencies. STEP 2. Calculate total number of calls in each control unit. STEP 3. Estimate work load capacity of a salesperson. STEP 4. Make tentative territories. STEP 5. Develop final territories.

• 1. Decide call frequencies. It means how many times a customer should be visited by the company’s salesperson per year. The factors that influence call frequency are the customer’s sales / profits potential, cost of visiting the customers, buying behavior of the customer, & the nature of the product or service offered. The optimum call frequencies, for different types of customers can be decided by using computer hardware & software or by managerial judgment.

• 2. Calculate the total number of calls in each control unit.• 3. Estimate workload capacity of a salesperson. A salesperson’s normal workload

capacity is estimated by multiplying average number of calls a salesperson make in a working day by number of working days in a year. For instance, the average number of calls a salesperson makes per day works out to be 5, based on the average travel time of 30 minutes per call, the average length of one hour for each call, & 8 hours

Territory Management• (contd) per day working. If the number of working days in a year is 250, then the

estimated workload capacity for the sales person per year works out to be 1250 calls (250 x 5).

• 4. Make tentative territories. In this step, the company should group or gather adjoining control units (which share their borders) until yearly number of calls needed in those control units equals the total number of calls a salesperson can make (work load of a salesperson). In our example districts x & y together need (552 + 720) 1272 visits or calls per year, which is almost equal to 1250 calls of normal workload of a salesperson.

• Develop Final Territories. In cases where work loads of salespersons are not equalized, adjustments of tentative territories are made by adding or removing certain control units. The objective is to achieve equalized work load for each salesperson. Before a sales manager finalizes the sales territory design, he should discuss with salespeople, who are familiar with customers & the territories. This may bring out certain changes, which need to be carried before making final sales territories.

• Breakdown method. As mentioned earlier, this is another method of territory design that is used by companies who have decided to have selected or exclusive distribution strategy, mostly for selling industrial products. The objective is to equalize the sales potential of territories.

• STEP 1. Estimate company sales potential for total market. STEP 2. Forecast sales potential for each control unit. STEP 3. Estimate sales volume expected from each sales person. STEP 4. Make tentative sales territories. STEP 5. Develop final territories.

• 1. Estimate the company sales potential for total market. The first step in the procedure is to estimate the company sales potential or company sales forecast for its total market by using the sales forecasting methods.

Territory Management• (contd) 2. Forecast sales potential of each control unit. In order to forecast or

estimate the sales potential of the company by a multiple factor buying index of each control unit. The multiple factor index concept was discussed earlier. This, the total sales potential of the company is broken down to the individual control units.

• 3. Estimate the sales volume expected from each salesperson. Here the sales manager must estimate how much each a salesperson must sell, in order to ensure profitable operation. For this, the sales manager studies the past sales as well as the cost & profitability analysis as shown in the following example. The direct selling cost for next year is estimated as Rs. 6,00,000, the cost of goods sold is estimated as 60% of sales, & expected profit at 15% of sales, then the minimum sales expected from each salesperson is calculated as follows.

• Profit = sales - cost of goods – Direct selling cost• 0.15x = x – (0.6x) - 6,00,000. where x = sales.• By solving the above equation, x = Rs 24,00,000• Using his judgment, he sales manager decides the sales per salesperson to be little

over twice the above sales figure, at Rs 50,00,000 per annum.• 4.Make tentative sales territories. In this step, the sales manager makes tentative

territories by combining adjoining control units (which share a border) until the sales potential of each territory is equal to or greater than the expected sales volume from each salesperson. Continuing with the example discussed above, the sales potential of each territory should be equal to or greater than Rs 50,00,000(Rs 5 million). Care should be taken to ensure that the boundaries of each territory coincide with the border of the control units.

Territory Management• (Contd) 5. Develop final territories. The tentative territories need to be adjusted

due to special considerations such as geographical locations of customers, or unequal sales potential of some territories, the adjustments are done by moving specific customers or control units from one territory to another territory. The objective is to achieve equal sales potential of territories.

• Assigning salespeople to territories. Once the sales territories are designed, the sales manager is ready to assign or allocate individual salespeople to each territory. In designing the sales territories , we assumed implicitly that the salespeople have equal selling abilities & that each salesperson would perform equally well in any territory. However, these assumptions are not realistic. The assumptions are used only for territorial design purpose, but cannot be accepted when salespeople are assigned to sales territories.

• In any given sales force, salespersons differ in selling abilities & effectiveness. A salesperson may succeed in one territory & fail in an another territory, even though sales potential & work load are the same in the two territories. This happens because interactions of the salesperson with present & potential customers are affected by factors like social & cultural characteristics of the customers.

• In assigning sales people to territories, the sales manager should consider two criteria: (a) relative ability of salespeople, & (b) salesperson’s effectiveness in a territory.

• Relative ability of salespeople. A sales manager should evaluate the relative abilities of salespeople based on key factors, such as product & market knowledge, past performance in achieving sales quotas, ability in verbal & written communication, & selling skills. By either giving equal or different weightages, the sales manager evaluates each salesperson on relative ability & decides an ability index with a maximum score of 1.

Manpower planning• (contd) 3. Class ‘A’: 500 customers x 36 hours / year = 18000 hours.• Class ‘B’: 1000 customers x 06 hours / year = 6000 hours. Total: 24000 hours. • 4. Decide the total work time available per salesperson. Suppose the company

decides that salespeople should work 40 hours per week, 45 weeks per year (allowing 7 weeks for casual & earned leave & holidays), then each salesperson has 1800 hours / year (40 hours/ week x 45 weeks per year) for selling, non- selling & traveling time.

• 5. Divide the total work time available by different activities per salesperson. Suppose the management decides that salespeople should divide their work time as follows:

• Selling activities: 40% = 720 hours• Non-selling activities 30% = 540 hours• Traveling 30% = 540 hours• Total 100% = 1800 hours• 6. Calculate the total number of sales people needed. This is done by dividing the

total market work load by the total selling time available per salespersons:• 24,00,000 / 720 = 33.3 = Sales people needed.• Work load method is relatively simple to apply with managerial judgment. The

method is also conceptually sound, as the size of sales force is based on the selling efforts needed. It can be adopted for all types of selling situations. However, the methods needs accurate information on prospective customers & sales potential of existing & prospective customers. The disadvantage of work load approach is that it neglects sales productivity in terms of sales per salesperson & also sales force.

Manpower planning• Size of the sales force. Once the company decides its sales organization structure,

it is ready to determine the size of the sales force. The decision on how many sales people are required to meet the company’s sales volume & profit objectives is a key decision. Salespeople are the company’s very productive & expensive assets. If the company has less than the optimum size of sales force, there will be a loss of sales & profits, & if it has more than required numbers, there will be an increase in sales & costs. The methods available to determine optimum sales force size are: (a) Workload. (b) sales potential, & (c) incremental.

• Workload method. The assumptions made in this method are that all salespeople will have equal workload, & that the total workload in covering the market includes customer size, customer’s sales volume potential, & travel time. The steps involved in this method are :

• 1. Group present & potential customers according to their sales potential. Suppose the company estimates 500 numbers ‘A’ class (large sales potential) & 1000 numbers ‘B’ class customers (medium sales potential) to be covered by salespeople in the entire nation. Customers with small sales potential (class ‘C’) will be looked after by telemarketing people or the company’s dealers.

• 2. Decide time per sales call & desired call frequencies for each customer class. Assume that both present & prospective customers require the same time per sales call & the same call frequencies per year, as follows,

• Class ‘A’: 60 minutes per call x 36 calls a year = 36 hours / year.• Class ‘B’: 30 minutes per call x 12 calls a year = 06 hours / year.• 3. Calculate the total (market) workload necessary to cover the entire market. In

the above example, this calculation is as follows:

Manpower planning• (contd) Sales Potential / Break down method. In this method, the sales manager

assumes the productivity of the average salesperson & that the company sales forecast is accurate. The method also considers the anticipated sales force turnover in terms of resignations, retirements, & promotion. The basic formula is: N = S / P (1 + T), where N = Number of salespeople needed, or sales force size., S = Annual sales forecast for the company in Rupees, P = estimated productivity of the average salesperson in Rupees, T = Estimated percentage of annual sales force turnover.

• The advantage of this method are that it is simple & straight forward. However, this method is conceptually weak, as its calculations show that sales forecast decides the number of salespeople. Another limitation is that a lead time is needed for recruitment & training the salespeople to the desired levels of sales productivity. In spite of the method’s limitations, it is often used for deciding sales force size.

• Incremental method. This method is based on marginal – analysis theory of economics. Its basic concept is that profits will increase when additional salespeople are added, if the incremental (increase in the amount of) sales revenues exceed the incremental costs.

• This method is conceptually accurate, as it quantifies important relationships between sales force size, sales, costs, & profits. But it is also difficult to apply in practice, since the needed historical data are not always available. Thus, this method cannot be used for new salespeople where historical data & accurate judgments are not possible.

Staffing The Sales Force• Sales force staffing process. This consists of 5 major stages• 1. Planning the recruitment & selection process. 2. Recruiting sufficient number of

applicants. 3. Selecting the most suitable applicants. 4. Hiring those candidates who have been selected. 5.Socialisation & assimilation of the new recruits into the firms.

• The Planning stage. 1. Planning (a) Establish responsibility. (b) Decide the number of salespeople needed. (c) Outline the type of salespeople needed 2. Recruiting (a) identify sources of sales recruits (b) evaluate the sources of recruits 3. Selecting (a) Develop tools & procedures for measuring applicants (b) Select the salespeople (selection decision) 4. Hiring (a) make the job offer (b) acceptance of the job 5. Socialization (a) socialization (b) Assimilation.

• Deciding the number of salespeople needed. The decision on how many salespeople are needed by the company is an important part of planning. It forces the regional & branch sales managers to plan their manpower requirements well in advance, before the beginning of new financial year. This helps the HR department to program the various stages of staffing process.

• For calculating the number of salespeople needed, each territory sales manager should consider the following points.

• 1. Decide the optimum sales force size by using one or (preferably) more of the three (workload, sales potential, & incremental) methods, discussed earlier.

• 2. Add number of promotions , retirements, transfers out, terminations, resignations expected from existing salespeople.

• 3. Subtract expected transfers into the branch & existing sales force.• 4. Make a total of the sales force needed & submit it to the senior sales manager.• After receiving the number of salespersons needed from each territory sales

manager, the national sales manager calculates the total number of new salespersons to be hired.

Staffing The Sales Force• (contd) Outline the type of sales people needed. As a part of planning stage, a company

should prepare a detailed description & specifications of the salespeople needed. This will be useful at the time of selecting the salespeople. Otherwise, it will not be clear what to look for. The steps involved in the process of developing a profile or outline of the type of salespeople are shown:

• 1. Conduct Job Analysis - > 2. Prepare job description - > 3. Develop Job Qualifications / Specifications.

• New companies will have to go through the 3 steps as shown above. Even existing firms need to review these steps from time to time to ensure that the job specifications represent the current activities & responsibilities of salespeople.

• Conducting a job analysis. Before the company goes to the selection stage it should conduct a job analysis. The analysis should identify job duties & responsibilities as well as critical activities to be performed for the job success. A job analysis consists of the following steps.

• 1. Analyze the environment in which the salesperson is to work. This includes nature of the customers, competitors, & knowledge & skills required for the job.

• 2. Determine the duties & responsibilities that are expected from the sales person. This information can be obtained from the sales manager, salespeople, customers, advertising & promotion managers.

• 3. The person conducting job analysis may be a person from the sales team, or human resource department, or an outside consultant. This person should also spend time for making calls with some sales people, observing & recording the various tasks or activities performed.

• Preparing a job description. Companies use job analysis to develop job descriptions. Job descriptions are formal, written statements describing detailed account of the job. Most well prepared job descriptions generally cover the following points.

Staffing The Sales Force• (contd) 1. Title of job: A complete description so that there is no vagueness. This is

particularly important in an organization having many types of sales jobs. Some of the examples of sales titles are sales representative, marketing representative, & sales engineer.

• 2. Reporting relationship. To whom will the salesperson should report. For instance, branch manager, district manager, regional sales manager, or sales / marketing manager.

• 3. Types of products & services sold. For example, office equipments like photo copiers, fax & multifunctional devices, courier services.

• 4. Types of customers called on. For instance, administrative managers in various organizations, or proprietors / Partners,/ managers in large retail stores.

• 5. Duties & responsibilities: For instance, visit planning, selling, information collection & communication, customer service, report preparation & payment collection from customers.

• 6. Job demands. Mental & physical demands of the job, such as traveling, achievement of sales & other targets.

• 7. Technical requirement. The degree to which salesperson needs to understand the technical aspects of the products & services that are sold.

• 8. Location & geographical area to be covered. The present location of the place of work & the geographical area to be covered by the salesperson (which may change in future). For example, the location of the job is at Bangalore & the area to be covered is the state of Karnataka.

• A job description is almost certainly the most important tool that is used in managing the sales force – for instance in recruiting, selecting, training, compensating & evaluating the salespeople. It is therefore, important that the job description should be in writing & in great detail.

Staffing The Sales Force• (contd) Developing job qualifications / specifications. Duties & responsibilities

mentioned in the job description should be converted into job qualification, or job specifications (also called hiring specifications). A sales recruit should have these traits (or specifications) in order to perform well on the job. However, determining the job qualifications is probably the most difficult part of the entire staffing process. This is because there is no generally accepted traits & abilities of salespeople for success across various selling positions.

• Many studies have been attempted to determine which to determine which qualifications are most important for a sales position. A few studies are mentioned below.

• 1. Charles Garfield: Super achievers show the following traits. Risk taking, powerful sense of mission, problem solving bent, care for the customer, & careful call planning.

• 2. Mayer & Greenberg: Effective salesperson has two basic qualities: empathy (the ability to feel as the customer does) & ego drive (a strong personal need to make the sale).

• Avlontis & Karayanni concluded in their study that the salesperson of the future must be able to work with electronic communication & technology.

• GE & AT & T: ‘Ability to work in a team’ is a job requirement.• There is no single satisfactory method available for every company for deciding the

qualifications or (specifications) needed for selecting its salespeople. This is because, there are many types of sales jobs & there is a corresponding variance in job qualifications for different sales jobs. However, some of the methods used for developing job specifications are as follows:

• 1. Study job description. Some companies develop job specifications based on the carefully prepared job description statements. This is particularly a useful method for the new company, which does not have personal histories of past salespeople.

Staffing The Sales Force• (contd) 2. Analyze personal histories of salespersons. A large company, which is

in business for a many years, can decide the job specifications of its salespeople by analyzing the personal histories of its present & past salespeople. The procedure is to analyze various traits or characteristics of good & poor performing salespersons to find out if there are certain characteristics that are present in good (performing) salespersons & absent in poor (performing) salespeople. For example, Accenture company discovered that students with part time jobs & extra curricular activities were more likely to succeed than those with higher grade-point averages.

• 3. Ask customers. Another method is to ask customers. Most customers say they want the salesperson to be knowledgeable, reliable, helpful, & honest.

• Based on these methods, each company should develop its own job specifications, including sales experience, education, skills, & personality traits for selecting salespeople.

• Recruiting Sales Force. This stage includes (a) Finding or identifying the sources of sales recruits, (b) evaluating & selecting the recruiting sources, (c) contacting candidates through the selected source.

• Recruiting includes activities to get individuals who will apply for the job. The general purpose of recruitment is to provide a pool of job candidates from where a company selects the right persons. This means recruitment activities do not include the selection of people. If a company wants to recruit a large number of salespeople, recruiting & selection process should be done continuously. To maximize the chances of finding the right person, some companies take two specific actions: (a) for selecting one right salesperson, they get 20 applicants, & (b) they offer the benefits that sales recruits want. Sales managers & human resource executives should update their information on government employment regulations on continuous basis.

Staffing The Sales Force• (contd) Identify the sources of recruiting salespeople. For identifying or locating

prospecting candidates, companies use internal & external sources. Internal recruitment sources come from inside the company. They include (a) employee referral programs, (b) current employees, & (c) promotions & transfers. The external sources of recruitment include (a) advertisements, (b) the internet, (c) educational institutions (d) employment agencies, (e) other companies (competitors, customers), non-competitors, & (f) job fairs.

• Internal Sources. 1. Employee referral programs. Basically a referral is a recommendation. By one individual that another person be hired for a position. The employee referral program includes the company employees referring or recommending known persons for hiring for sales positions. This is now one of the most popular methods of locating sales recruits because it is very effective, relatively quick & less expensive compared to other recruiting methods like advertising & employment agencies. In the employee referral scheme, many companies have incentive schemes to give monetary rewards to employees who provide successful referrals. Talent crunch across the sector is prompting both MNC’s & Indian companies to turn to their employees to fill in vacancies in the mid-managerial posts, for a price. Existing salespeople & purchase executives within the company are good sources for referral programs in identifying prospective sales candidates. The major disadvantage of using the employee referral scheme is that the company may not get enough of them & therefore, the company uses other sources as well.

• 2. Current employees. This is a source of job applicants in 2 ways: (a) Current employees can recommend friends & relatives to the company, & (b) they also can be applicants by applying for the sales job. Many organizations like to recruit within their own companies because of two reasons (a) the cost of recruitment is less & (b) it improves employee morale.

Staffing The Sales Force• (contd). 3. Promotions & Transfers. Internal promotions & transfers generally result

after the company announces sales job openings through newsletters, in meetings, or on the bulletin board. One study found that employees of the company who were internally transferred to the sales positions gave more long term profits than salespersons from any other source.

• External Sources. 1. Advertisements. By advertising in newspapers & trade journals for sales jobs, a company can produce a large pool of applicants in a short time. Advertising is generally less expensive on a cost-per-applicant basis. However, a large number of applicants may not be qualified for the job due to below average quality of many applicants.

• 2. The internet. Many companies use their own websites to approach the applicants for various positions including sales. The advantage of this web-based recruiting is very low cost of getting applicants resumes. However, the company has to bear the cost of screening the large number of resumes to find the applicants who qualify for the sales position. Many companies use the internet recruiting websites such as www.naukri.com, www.jobsearch.com, & www.jobsahead.com. As a large number of job seekers accessing the internet are college students, advertising on bulletin boards or in job banks will help reaching the college market.

• 3. Educational Institutions. Large companies use colleges & universities as a popular source for sales recruits. Small firms are less likely to recruit in college campuses because many graduates prefer large & well known companies, who have extensive training programs & company benefits. Large companies not only find educational institutions as a cost effective source, but also that college students usually can e hired at lower salaries than experienced salespersons. Often companies searching for future managers , look at educational institutions for sales recruits. In order to do an effective recruiting job, recruiters should focus on job satisfaction, salary, opportunities for job advancement, & company’s financial stability

Staffing The Sales Force• (contd) 4. Employment Agencies. A commonly used source is the private

employment agencies. They usually work from a job description provided by the sales managers & can be asked to do initial screening of candidates based on specific job qualifications. These agencies charge fees, usually ranging from 10 to 20 percent of the 1st year earnings of the person hired through the agency. The employer’s cost for the employment agency’s fees is offset by the savings in the advertising & initial screening tasks done by the agency. Professionalism of private employment agencies varies to a great extent, but there are good agencies who give useful service to sales managers by referring qualified candidates.

• 5. Other companies (competitors, customers, non-competitors) A salesperson recruited from a competitor knows the products & markets well , has selling experience, & requires little training, However, it may be difficult for such salesperson to make adjustments to the new organization. Besides, some sales managers consider the practice of hiring competitors’ salesperson as unethical, as the salesperson may use confidential information of the former employer.

• Customers’ purchase executives have some knowledge of the abilities of salespeople who call on them. However, hiring the good employee of a customer has disadvantages & this should be done, if it is a must, tactfully without loosing the customer.

• Sales people working for non-competing firms are another source, if they are selling similar or related products or selling to the same markets. These salespersons have selling experience & need relatively less training.

• 6. Job fairs. Many employers are brought at one location for recruiting with the arrangements of job fairs. Candidates visit the booths of the employers they are interested in. The employer may also ask a particular candidate for a meeting based on the candidates’ resume received earlier. Job fairs generally are held in the evening or on Sundays so that presently employed salespeople can attend them.

Staffing The Sales Force• (contd) Evaluation of recruiting sources. After identifying the sources of recruiting

salespeople, a company selects those sources tat are effective based on the past database. This data base is built over a number of years, as per the evaluation format. However, for a new company, selection of the recruiting source depends on its cost. Once the source is selected, contacting the candidates is a normal practice of implementation, which is done by HRD.

• The focus in the evaluation of recruiting sources is on 3 factors: (a) Performance rating of the sales force (excellent, good, average, & poor) at the end of two years working, (b) percentage retained (after 2 years working with the organization), & (c) the cost of recruiting, which should include the total cost of recruiting, including travel, hotel, proportionate salary & so on. Once the data is built over a period of one year, it can be used for the subsequent year for selecting the most effective source of recruiting at the least cost. However, this data needs to be updated every year to ensure continuous improvement in the recruiting stage.

• Selecting sales force. The selection stage consists of the following 2 steps. (a) Developing the selection process consisting of tools & procedure to measure the applicants against the job specifications or qualifications, & (b) selecting the salespeople. In other words, there are two activities in the selection stage. First the company should develop a system or process of tools & procedure for measuring applicants against the job specifications or qualifications that was developed in the planning stage. The second activity is to make the decision on selection.

• We shall first identify the major selection tools, which are used by companies for selecting salespeople.

• The selection process. This process consists of a number of steps. These steps are like filters, at any of these steps, an applicant may be dropped from further consideration.

Staffing The Sales Force• (contd) The selection process. The major steps in the selection process are:• STEP 1. Screen resumes. - > STEP 2. Application blank - > STEP 3. Initial Interview -

> STEP 4 Intensive interview -> STEP 5 Testing - > STEP 6. Reference check - > STEP 7. Physical examination.

• At every step rejection is done to short list salespeople.• Step 1. Screening resumes. This tool is used when a company receives a large

number of resumes, based on the recruitment sources like newspaper advertisements, or campuses of educational institutions. To reduce the number of applicants, initial screening of resumes is done by the sales the sales managers, based on comparison with job specifications (or qualifications) that was developed earlier in the planning stage. This tool need not be used, if initial screening of resumes was done earlier by employment agencies or somebody else.

• Step 2. Application Blank. It is one of the widely used selection tools. Application blank, which is also called formal application form, or personal history record, is a convenient & methodical method of collecting relevant information from the applicant. The relevant information may include education, work experience , physical & personal characteristics, membership of social & business organizations, offices held in organizations, hobbies & other interests. However, However, questions such as age, religion or marital status should be asked only if such questions are in accordance with local laws & regulations.

• Step 3. Interviews. The purpose of a personal interview is to decide a person’s fitness for a job. The interview takes place between a recruiter & an applicant to see if a match exists between what the company is offering the applicant & what the applicant is offering the company. Another purpose of interviewing is to get more information about the facts stated in the application blank.

Staffing The Sales Force• (contd) Initial Interviews are used to clarify questions about applicants’ job

qualifications, such as graduation level grades or marks & type of the products & services sold in previous jobs. The interviewer makes preliminary judgment whether a similarity exists between the job specifications & the applicants’ characteristics. The purpose of initial interviewing is screening candidates. Some companies conduct initial interviewing by asking questions over the phone or using computer assisted interviewing. In the computer assisted interview, for example, applicants are shown a video with 3 alternative scenarios for helping a customer& then applicants, are asked to select the best one. The computer indicates applicants’ strengths, weaknesses & other areas that need further investigation.

• Step 4. Intensive interview. To get an in-depth view of the candidate, one or more intensive interviews are conducted. In many cases, intensive interviews include many managers conducting interviews in a particular order. To achieve depth & usefulness, when several managers conduct interviews in sequence, proper planning & coordination is required.

• In the stress interview, the interviewer deliberately places the applicant under stress, to find how the applicant might cope with the stress when selling. For instance, the applicant may be handed an object such as a pen or mobile phone & asked to sell to the interviewer. In some stress interviews, the interviewer may ask a number of rapid questions, even before the applicant could reply. This puts the applicant under stress.

• Step 5. Testing. Many firms use tests as a part of selection process. The purpose of testing is to decide whether applicants have traits or characteristics that lead to success in sales job. This results in improved performance and lower sales force turnover. Selection tests are designed to measure aptitude, intelligence, interests, knowledge & personality of salespeople

• Aptitude tests measure natural ability for selling, learning, ability & general suitability

Staffing The Sales Force• (contd) These tests are very common. Intelligence tests measure mental intelligence

or IQ. Interests tests measure the level of interest in a sales career. Knowledge tests measure knowledge of applicants on subjects like marketing terms, product, & Information technology. Personality tests measure traits or attitudes, such as extrovert, self confidence, & empathy. Polygraph tests or lie detector test are not used often to screen applicants.

• The main problems with testing are that tests are not understood & also misused. Applicants can fake their responses, particularly for personality tests. Tests must have reliability & validity, otherwise they cannot be used successfully. Another problem is that tests are sometimes used as the sole deciding factor. If an applicant has done welll in interviews & reference checks, but his tests scores are low, management may not hire this person.

• Step 6. Reference check. Applicants who have successfully come out of screening resumes, application blank, interviews, & testing may then become the subject of a reference check, or back ground investigation. Reference are the name of persons from whom information can be obtained on an applicant’s ability & character. In conducting reference checks or background investigation. It is advisable to request job-related information only & to get a written release for confirmation from the applicant. A reference check makes sure the true identity of an applicant & may confirm his / her employment history.

• Most candidates list as references only those persons who are certain to give them a positive reference. In order to get a more balanced picture of the candidate, a company can ask reference names of other people who would be familiar with the applicants work, such as the candidate’s previous employers or previous customers Background investigations are also carried out by some investigating agencies , who specialize in pre employment investigative interviews with formers employers, & co- workers of applicants.

Staffing The Sales Force• (contd) Step 7. Physical Examination. Most companies want their prospective

employees to undergo physical examinations. The objective is to find any physical problem that may prevent the job performance of an applicant. A general rule in most companies is that if an applicant gets this far in the selection process, he / she has the job unless health problems are found. However, a few companies think that physical examinations are not reliable for predicting the applicant’s future health.

• SELECTION DECISION. When all the steps of the selection process have been completed, one thing is yet to be completed that is selection decision – which applicants are to be selected? For making a selection decision, the sales manager should decide the important selection criteria, which are necessary for performing the duties of the sales job. When selecting the salespersons for rural markets in India, the company should decide the selection criteria, such as willingness to work in rural areas, knowledge of local language & cultural congruence to adapt to rural environment & ethos. The sales manager should then evaluate each applicant’s qualifications & potential in relation to the selection criteria. Sometimes the sales manager has to decide whether an applicant’s strength in one selection criterion can compensate for a weakness in another criterion, whether the applicant should meet certain minimum levels against each criteria, so as to be successful. After evaluating the available candidates, the company makes a list of candidates according to preference.

• Hiring stage. The hiring process should be implemented properly so as to give a positive impression of the company to the candidates, who look for good work environment, where people are made to feel important. There are 2 activities in the hiring stage: (a) the company making the job offer, & (b) acceptance of the job offer by the applicant.

Staffing The Sales Force• (contd) The company making the job offer. The important part of the job offer is the

compensation that the salesperson will be paid. The job offerfor salespersons include any or all of the following salary, performance-based incentives, company vehicle, house-rent allowance, medical expense reimbursement & any other fringe benefits. Some companies even offer reimbursement of relocation expenses to the new employee for moving residence from one lace to another. While communicating with selected salespersons, sales managers do the selling to get these salespeople join the company. Some firms show consideration of helping the potential employee’s spouse find a job. This becomes an important factor for the candidate to accept one company’s offer over another.

• Acceptance of the job offer by the applicant. In some companies, job offers are made by the human resource managers & in some other firms the offers are made by the sales manager to whom the candidate will be reporting. Often, the job offers are first made over the telephone & only after the telephone offer is accepted by the candidate, a formal letter is sent . A fairly large number of candidates who are offered a job do not accept it. One reason is that the candidate finds the job not suitable to meet with his other requirements. Another reason is that the candidate has received another company’s offer & the other company continues to follow till the candidate accepts the offer. When initial job offers are made on telephone, the sales manager should tell the candidate how much time will be allowed for acceptance & also give decision if the candidate wants to negotiate some terms. Some managers prefer to make job offers in person, instead of over the telephone. This puts pressure on the candidate to respond immediately by signing the duplicate copy of the letter. The wording of the formal letter of appointment should be done carefully since it is a contract between the company & the candidate.

Compensating The Sales Force• Financial compensation or pay was given the highest value by salespeople as a

tool for motivation. It is therefore, a widely used method or tool for motivating salespeople. Companies should review their compensation plans once a year to make certain that they are in tune with the company’s plan. The structure of sales force compensation is as follows:

• 1. Financial compensation, which includes (a) Direct payment of money such as salary, commission, & bonus. (b) Indirect payment, which includes fringe benefits or perquisites, such as retirement plans, medical reimbursement, & leave travel assistance (LTA). It also includes various insurance plans.

• 2. Non-financial compensation. We shall first discuss financial compensation.• Objectives of a compensation plan. A good compensation plan should consider

objectives from the company’s view point & also the salesperson view point. Sales managers should recognize that some of the management objectives may conflict with the salesperson’s objective.

• The company viewpoint. The company wants to attract, retain & motivate competent salespeople. A good compensation plan should attract & keep top quality salespeople. It should also motivate sales people to reach & exceed their sales goals.

• To control salespeople’s activities. The compensation plan should offer incentives to control several key activities of sales force, such as selling, prospecting, payment collection, & customer relationship building. Of course these key tasks will vary from company to company. For instance, Compaq computer’s sales managers use 20-40% of their salespeople’s compensation on individualized sales objectives & goals, like improving specific customers’ relationship or introducing a new product.

• To be competitive, yet economical. Most companies want to keep their salespeople’s expenses at the same level as those of the competitors. At the same time, the company wants its compensation plan economical. It is difficult to balance these two objectives.

Compensating The Sales Force• (contd) To be flexible. A good compensation plan should be flexible to adapt to new

products, volatile markets, & differing territory sales potential. Some companies use individualized compensation plans, in which each salesperson is allowed to choose what percentage of his or her compensation is fixed (that is, straight salary) & what percentage should be variable (that is, commission based).

• The salesperson’s viewpoint. We now consider objectives from the salesperson’s viewpoint.

• To have regular & incentive income. The salesperson wants the compensation plan to provide a regular income every month that is fixed & secured against any problems or emergencies. If the salesperson is sick & cannot work for a period of time, or if the sales are down due to various factors, he/she should get some fixed salary to take care of living expenses. An extra reward, in addition to fixed income, should be included in the compensation plan to produce above average performance.

• To have a simple plan. The compensation plan should be simple for the salespeople to understand easily. Even most company management prefer to have a simple compensation plan. This objective may be in conflict with the objective of flexibility.

• To have a fair payment plan. The compensation plan should ensure fair or just payment to all salespeople. This can be done by selecting those factors which can be measured & controlled by salespeople.

• Designing an Effective Sales Compensation Plan. Designing or developing a new compensation plan, or revising an existing plan consists of a number of steps which is considered as the framework.

• Step1.Examine job descriptions. -> Step 2. Set up specific objectives Step 3 -> Decides level of pay/compensation -> Step 4. Develop the compensation mix. ->

Step 5. Decide indirect payment plan.-> Step 6. Pretest, administer, & evaluate the plan. .

Compensating The Sales Force• (contd) Examine Job Descriptions. The first step is to examine the existing job

descriptions, which were prepared earlier in the staffing process for all sales positions. Various sales positions, such as missionary sales people sales engineers & driver salespeople are called horizontal positions or jobs. They may be vertical positions like sales trainee, senior sales person,& key account executive. Each of these positions needs a separate job description, with detailed job responsibilities & key performance standards, to decide how much the company should pay.

• Set up specific objectives. An effective compensation plan should have specific objectives for the salespeople. These sales force objectives should be derived from the company’s sales & marketing objectives. Also, sales managers should include those specific objectives over which salespeople have maximum control, such as number of sales call made to ’A’ &’B’ class customers, selling expenses, & new customers developed. Achievement of objectives like customer satisfaction & sales volume depend on various factors, such as product quality, pricing policy, after sales services in relation to competitors & therefore, salespeople have some control but not maximum control. Besides, the specific objectives should be those that can be measured by the company, like selling expenses, sales volume, & number of sales calls made.

• Decide levels of pay or compensation. It is an important task to decide levels of pay for various sales positions, A level of pay means the average pay or money earned by the sales people per year or per month. The level of compensation or pay should be competitive to attract & retain good quality salespeople. Firms decide the levels of pay based on the following factors.

• 1. the levels of pay for similar sales positions in the industry. 2. the levels f pay for comparable jobs in the company, & 3. education experience, & skills required to do the sales job.

Compensating The Sales Force• (contd) When the information on the average levels of pay in the industry is obtained ,

it should be checked if indirect pay or benefits, such as pension & insurance, are included or not. The company should also consider the cost of living in different metros, cities, & towns. In some companies, company-wide job evaluation programs are done, which are used to establish compensation levels for sales positions.

• The annual pay or income levels varies to a large extent between industries, within the same industry, & sometimes within the same company. The supply / demand balance varies across industries. In high growth industries, such as computer software, demand exceeds supply & therefore, the pay levels are high. Another factor driving pay levels is industry profitability. High profit industries can afford to pay more & low profit industries pay less.

• Sales jobs differ widely, as we have seen earlier. Pay levels are higher for more difficult jobs, like selling CNC (computerized numerically controlled) machines. While deciding levels of pay, companies should decide a range of pay, instead of a specific average pay. The income range states clearly what salespeople can earn, depending on their performance as well as the company’s performance.

• Developing the compensation mix. One of the key tasks in designing an effective sales compensation plan is to develop the compensation mix or the method by which the salespeople will be paid. The most widely used elements of compensation mix are salaries, commissions, bonuses, & benefits or indirect monetary benefits, such as paid vacation (or leave travel assistance), sickness (or medical reimbursement) , pensions, accident & life insurance, which are also called fringe benefits, perquisites, or perks. Usually expense allowances or reimbursements, which include travel, lodging, dining, & customer entertainment, are not included in the compensation plan.

Compensating The Sales Force• Basic Types of Compensation Plans. There are 3 widely used methods of

compensating salespeople. (a) Straight salary. (b) Straight commission, & (c) Combination of salary, commission, & / or bonus. Only about 32% of all firms use either a straight salary or straight commission method. Balance 68% of all companies use a combination method to pay their salespeople.

• Straight-salary plans. A salary is a direct monetary reward paid for carrying out certain duties over a period of time. Is is related to a unit of time, & not a unit of work. In a compensation plan, salary is a fixed component (or element), which means the same amount of money is paid to a salesperson, without any concern for sales performance or efforts of the salesperson.

• Advantages of a straight salary plan. 1. It provides sales people a secure income, since their living expenses will be covered. 2. It helps to develop a sense of loyalty to the company, resulting in lower turnover of salespeople. 3. It makes sales people willing to perform non-selling activities, such as payment collection from customers, obtaining & reporting market information. 4. It helps to increase customer loyalty, as salespeople have less incentive to overstock customers. 5. From the company’s view point, it is simple to administer.

• Disadvantages of a straight salary plan. 1. It provides no financial incentive to salespeople to exert more effort & to improve performance. 2. Fixed salaries may be a burden to new firms or to those firms which are in declining profitability phase. 3. May lead to adequate, but not superior performance.

• Situation suited to a straight-salary plan. 1. Sales trainees, who are involved in learning about the job, until training is completed. 2. Missionary sales activities, involving in spreading information widely instead of asking for order. 3. The company wants to introduce a new line of products or enter a new geographical territory.

Compensating The Sales Force• (contd) Straight-commission plans. Unlike straight-salary plans, straight-

commission or commission only plans present strong financial incentives in order to ensure superior performance. Straight commission plans are diametrically opposite to straight-salary plans. In contrast to the straight-salary plan, which is a fixed payment for a unit of time, a commission is a payment for the performance of a unit of work.

• The sales manager has to decide on the following factors in developing a straight commission plan.

• Commission base. The base on which the salesperson’s performance is measured & commission will be paid. The most popular commission base is sales volume. However, the companies are gradually adopting profitability-based commission plans, in order to improve sales force productivity.

• Commission rate. It is the rate to be paid per unit, usually expressed as a percentage of sales or gross profit. Commission rates vary to a large extent, & it is a very difficult decision to decide the suitable rate.

• Commission start The starting point of the commission payment, i.e, after selling the 1st unit or after reaching a sales quota.

• Commission payout. It is the time when the commissions are paid. Many companies pay commission to salespeople after the customer is billed & payment received, & not after the order is obtained.

• Advantages of a straight-commission plan. 1. It gives strong financial incentive or motivation to the sales force to improve results. 2. It attracts high performance & removes ineffective salespersons. 3. It controls selling costs, as a commission is a variable cost which is incurred only when a sales is made. 4. It requires less supervision from the sales manager.

• Disadvantages of a straight-commission plan. 1. The focus is on getting the sales rather than building customer relationship. 2. Less control of the sales manager on the non-selling activities to be performed by the salespersons.

Compensating The Sales Force• (contd) Less control of the sales manager on the non-selling activities to be

performed by the salespersons. 3. Little loyalty of salespeople to the company, which may lead the salespeople on commission to leave the company if sales drop or business environment becomes worse. 4. If commissions are not limited by a cap on the money earned, then salespeople may earn more than their managers, who would resent this outcome & the salespeople may not respond to directions from such managers.

• Situations suited to a straight-commission plan. 1. In certain industries like real estate & insurance the major responsibility of the salespeople is to get sales & other non-selling activities like getting payments & market information are not important. 2. The direct-sales industry, including Tupperware, Amway, & Avon, pays by straight commission to a large number of salespeople, who are called as independent distributors. 3. Wholesalers, who have limited working capital, pay their salespeople by commission. Similarly, manufacturers’ representatives (also called as agents) are paid by commission.

• Combination plans. As mentioned earlier, 68% of all companies use a combination plan to pay their salespeople. A combination plan has the advantages of both the compensation plans (namely, straight salary & straight commission), while at the same time reducing their disadvantages. There are 4 types of combination compensation plans that are used by most companies.

• 1. Salary plus commission. 2. salary plus bonus.

Compensating The Sales Force• (contd) 3. Salary plus commission plus bonus, & 4. Commission plus bonus.• Effective combination plans offer a balance of incentive, control, & flexibility to

reward important sales force activities. However, the most difficult part of structuring the combination plans is to decide the salary (fixed component) & incentive (variable component of commission & bonus) mix. The incentive portion of combination plans has been increasing over the past 20 years & is now around 40 percentage. However, the salary & incentive mix for a company depends on the sales & marketing objectives of the company as well as the nature of its selling activities. For example, if the company’s short term objective is to increase its sales & profits substantially, then the tentative portion should be more. The salary part should be large if the company wants to focus more on advertising customer service, & team selling to achieve sales volume objective.

• Bonus. A bonus is a lump sum payment (i.e. a single payment made at one time) for an above-average performance. Typically bonuses are used to direct sales force effort towards short term objectives, such as adding new customers, introducing new products, or collecting overdue outstanding payments from customers. Bonuses may be offered in the form of cash, merchandise, or free travel. There are many examples; Infosys paid bonus of $1000 to each employee to celebrate $1 billion sales revenue. Because of its nature, a bonus cannot be used alone, but is used strictly as a supplementary to a salary or commission.

• Salary plus commission plan. This plan achieves the balance between the fixed salary & variable commission components of a salesperson’s pay. Some companies link the variable portion of a salesperson’s pay to the achievement of strategic goals like customer satisfaction & customer retention. For instance, IBM partly rewards salespeople on the basis of customer satisfaction as measured by customer surveys. This plan is most suitable when the company wants to get increased sales as well as superior customer service or customer satisfaction.

Compensating The Sales Force• (contd) Salary plus bonus plan. Usually this plan is used by the companies who

want to control selling & non-selling activities of the sales force with a larger portion of fixed element of salary, & still present some incentive to achieve either a short term or a long term objective. For example, short term objectives could be introducing new products, minimizing slow moving stocks, or prospecting for new customers. The long term strategic objectives may be achieving a higher level of customer satisfaction & customer retention. Some companies use bonuses to reward team performance of sales reams, if the team goals are achieved particularly for major customers.

• Salary plus commission plus bonus plan. Some companies use all the 3 components namely salary, commission, & bonus in their compensation plans. This plan allows a company an adequate control of sales force activities, an incentive to increase sales to the expected level, & a bonus to achieve specific goals like developing new customers & introducing new products. This plan is also suitable for companies who sell seasonal products like fans & air conditioners, which have high inventory during off-season & low inventory during the peak season. The company wants to minimize the inventory imbalances by using the incentive scheme.

• Commission plus bonus plan. This is not a popular plan for compensating salespeople. It is used when team selling activities are practiced by companies for selling to major customers.

• Advantages of a combination compensation plan. (1).The company management can have a control over the activities of salespeople. (2) There is a flexibility to reward the desirable activities of sales force. (3) Feeling of security of salespeople as fixed salaries take care of living costs plus incentives to earn more by producing superior performance. (4) Allows reward for frequent & specific sales behavior, such as selling excess inventory, introducing new products, & obtaining new customers. (5) Different combination plans can be developed for sales trainees, senior sales persons, & key account executives

Compensating The Sales Force• (contd) Disadvantages of a combination compensation plan. (1) The plan is more

complex & difficult to administer. (2) If too many short term & firefighting type objectives, such as liquidating excess inventory & collecting overdue payments are achieved, more important long-term objectives can be delayed. (3) It may not achieve the desired objectives if not carefully planned & implemented, & understood clearly by salespeople.

• Decide indirect payment plan. Indirect payment plan, which is also called fringe benefits, perquisites, or perks, range from 25 to 40 percent of the total sales compensation package. These are medical reimbursements& payments, group life insurance, travel insurance, accident insurance, pension plan, social security (or provident fund), profit sharing, paid vacations (or leave travel allowance), & so on. Fringe benefits helps satisfy safety & security needs, although some (such as payment of social club fees & automobile) contribute to fulfillment of higher order needs like esteem needs. They help prevent job dissatisfaction, but do not add to job satisfaction. Most companies provide some of these benefits in order to remain competitive with other companies in the industry. Indirect payments or benefits help in attracting applicants. These benefits give a degree of security to salespeople & make them loyal to the company.

• Pretest, administer, & evaluate the compensation plan. • Pre-testing. Before a new or proposed compensation plan is adopted, the company

should pretest & evaluate it. Pre-testing the proposed compensation plan is a simulation exercise that can be done on a computer. However, to understand how much harder the sales force would work & to know its impact on sales force activities, some companies pretest the proposed compensation plan on one or more branch sales offices for adequate duration (of 6 to 12 months) in order to evaluate to what extent the company’s sales & marketing objectives are achieved. Pre-testing should be done with the involvement of all concerned people like salespersons, sales managers, human resources & finance executives.

Compensating The Sales Force• (contd) Administering. The company should introduce the proposed or new

compensation plan to salespeople carefully. The new compensation plan should be announced well in advance of the date of implementation. If the proposed compensation plan is announced at a national or regional sales meeting, the company should explain the reasons for changing the previous plan. Each salesperson should even be asked to calculate the salary, incentives at te various sales levels. The company should either conduct protesting in or more branch sales offices, as mentioned earlier, or carry out field testing of the plan in a few district sales offices, under actual selling conditions for about six to twelve months. These tests would help the company to make some changes in the proposed plan, based on the feed back from salespeople & the results obtained. As the companies are changing their compensation plans frequently & compensation plans are becoming more complex, some companies like Johnson & Johnson & HP are outsourcing the administration of their compensation plans. Some of the companies that provide these services are Oracle, Synergy, & Trilogy.

• Evaluating. After the new plan is established, it should be evaluated on quarterly, half yearly or yearly basis. Whether the objectives of the compensation plan have been achieved or not is the main question to be answered. If it has achieved the objectives , the plan can continue. If the objectives of the plan are not achieved, the management of the company has to determine if the reasons are related to the compensation plan, in which case some changes need to be carried out. Some companies audit their compensation plans annually. This is a good practice, as it makes certain that the compensation plan is in line with the company’s strategic plan.

Evaluating & Controlling The Performance Of Salespeople

• One of the most important responsibilities of the sales managers is to evaluate the performance of their salespeople. However, performance evaluation process is time-consuming. It is also a difficult process, particularly for the sales manager who has to tell poor-performing salespersons how & why their performance is not up to the expectations.

• We shall first look at the purposes or objectives of evaluating the sales force performance, & thereafter, discuss the procedure & different methods of sales force evaluation.

• Purposes of Sales Force Performance Evaluation & Control. The basic objective of the performance evaluation of salespersons is to determine how these salespersons have performed. The outcome of sales force performance review can be used for other sales force management purposes like: 1. To improve the salesperson’s performance by identifying the causes of unsatisfactory performance. 2. To decide the increment in pay & incentive payment based on the actual performance of the sales person. 3. To identify the salespersons whose services may be terminated, after giving adequate chances for improvement. 4. To motivate salespeople through adequate recognition & reward for good performance. 5. To find out their strengths & weaknesses.

• The salesperson’s performance appraisal should be carefully developed & implemented in order to make available different types of information that are needed for several purposes mentioned above. For example, if the purpose of performance evaluation is to identify salespersons for promotion to the 1st level of sales management positions (such as district or branch sales managers), then the performance evaluation should focus on those criteria that are relevant to the effectiveness as a sales manager. This should be done in addition to the current performance as a salesperson.

Evaluating & Controlling The Performance of Salespeople

• (contd) Procedure for Evaluating & controlling Sales force performance. • Set policies on performance evaluation & control. Before evaluating the

performance, the company management should establish the basic policies. Several studies have generated information on general policies followed by most sales organizations. Some of the policies are as following:

• Step 1. Set policies on performance evaluation & control. - > Step 2. Decide the bases of salesperson’s performance evaluation. - > Step 3. Establish performance standards - > Step 4. Compare actual performance with the standards. - > Step 5. - > Review performance evaluation with salespersons. Step 6. - > Decide sales management actions & control.

• Frequency of evaluation. Many sales organizations evaluate salespeople’s performance once a year, although some firms conduct evaluation six-monthly or quarterly, & a few firms evaluate salespeople’s performance monthly or weekly.

• Who conducts evaluation? Most salesperson’s performance evaluations are conducted by the field sales manager (that is, a district or branch manager) who supervises the salespersons. In some firms, in addition, the boss of the field sales manager is also involved in the salesperson’s performance evaluation.

• Over 25% of companies use an increasingly popular assessment technique, known as 360-degree feedback, involving multiple raters, including sales managers, internal & external customers, team members (in team selling situations), & salespeople. In other words, it involves getting evaluative feedback from an employee , his or her peers, subordinates, superiors, & customers.

• Management by objective (MBO). In some companies, the sales manager & the salesperson discuss & agree on the salesperson’s specific objectives or goals. They also develop an action plan for the achievements of the objectives/ performance standards.

Evaluating & Controlling The Performance of Salespeople

• (contd) MBO. Involvement of salespeople in setting their performance standards or quotas increases their commitment & responsibility. The sales manager & the salesperson review actual performance against objectives periodically & take corrective actions.

• Sources of information. Most firms use several sources of information in elevating the salespeople performance. The most important sources is sales report, which includes work plans (or call plans), call reports, expense reports, new-business reports, lost business reports, local business & economic condition reports. In addition, computer print outs, supervisory calls, prospect & customer files, customer letters & complaints, customer surveys, & peer feedback are some of the common sources of information.

• Decide the bases of salespeople’s performance evaluation. Before deciding on bases or criteria for performance evaluation of salespeople, a sales organization should decide whether it will give importance to (a) outcome or results based view point, (b) behavior or activity / effort-based view point, or (c) both outcome & behavior-based measures, when evaluating salespeople’s performance. Once this general category, out of the 3 alternatives, is selected, the company can then select the specific criteria or bases for evaluating salespeople.

• Outcome / result-based view point. This perspective concentrates on the salesperson’s results with little direction or supervision by the sales manager. Outcome or output bases use quantitative criteria, & therefore, they minimize biases & subjectivity of evaluators. They are also relatively easy to measure. For example, sales volume achieved & number of orders received.

• However, since this view point considers “results only”, it may not give an equal to compare the performance of one sales man with that of the another salesperson.

Evaluating & Controlling The Performance of Salespeople

• (contd) This is because the salesperson who is assigned a high sales potential territory can achieve the sales goals or quotas easily, compared to another sales person whose territory sales potential is average or low & therefore, finds it difficult to achieve the sales quotas. Another reason may be the difference in competitor’s efforts in different territories. Due to such uncontrollable factors, salesperson’s results-based performance may get affected.

• Behavior/activity/effort-based view point. This perspective focuses on the salespersons behavior & characteristics, with substantial direction & supervision of the first level sales manager. It uses both quantitative criteria (like product knowledge & customer relations) for evaluating of the salesperson’s performance. The likely consequences of giving more importance to behavior-based (as compared to outcome based) viewpoint are mentioned below.

• The more customer oriented, team oriented , & professionally competent salespeople will be.

• The more committed to the company salespeople will be.• The more likely salespeople will accept authority, participate in decision making, &

welcome management performance reviews.• The more innovative & supportive the culture is likely to be• The better salespeople will perform on both selling & non-selling activities.• The better the sales organization will perform on sales organization effectiveness

criteria (such as sales volume, profitability, & customer satisfaction).• The greater salespeople’s job satisfaction will be. • The above mentioned consequences give strong support for inclusion of some

behavior-based criteria. If these are not included & only outcome or result based criteria are considered, as done by some sales organizations, then salespeople may

Evaluating & Controlling The Performance of Salespeople

• (contd) focus on short term results (like sales volume) & long term objectives (like customer relationships) may suffer.

• Both outcome based & behavior based viewpoints. Sales organizations should use both outcome based & behavior based criteria when evaluating performance of salespeople. Some companies use a hybrid approach (of using both outcome based & behavior based viewpoints) for controlling the sales force. The hybrid approach has given importance to quantitative results, attitudes, efforts (or activities), paperwork, & supervision. Another research by the same researchers has shown that an evaluation system that gives importance to the behavior criteria, more than outcome or results criteria, has many positive effects on the salesperson’s overall performance.

• Criteria / bases for Salespeople’s Performance Evaluation. For a comprehensive evaluation of salespeople’s performance, companies should use as many bases as possible. In other words, companies should use multiple criteria, as the typical salespersons job is multidimensional. Salespeople usually sell various products to several customers & carry out many selling & non-selling activities.

• Although specific bases or criteria for salespeople’s performance evaluation for a company depend upon the company’s viewpoint on performance evaluation & the selling situation, the selection is made from a list of (a) quantitative results criteria, (b) quantitative behavioral criteria, & (c) qualitative behavioral / activity criteria. Which ever criteria a company may choose from this list, it is important that the company communicates the same to salespeople in the beginning of the financial year, so that they know & understand the criteria for achieving the expected performance.

• Common Ratios. Some of the quantitative criteria can be combined into common ratios , which sales managers can use to evaluate & compare performance of salespeople.

Evaluating & Controlling The Performance of Salespeople

• (contd) Sales = Days worked x Calls/Days Worked x Order/Calls x Sales/Orders.• Sales = Days worked x call rate x batting average x average order• Criteria / Bases for Salespeople’s Performance Evaluation. • (A) Quantitative result / Output criteria / bases• 1. Sales Volume. (a) In value (Rupees) (b) In units (numbers, tons) (c) To previous

sales (d) As a percentage of quota & market potential (market share) (e) By products & customer groups

• 2. Accounts (customer) (a) Number of new accounts (b) number of lost accounts • 3. Orders (a) Order / Calls (b) Sales / Orders• 4. Groups margin by products. Customer groups• (B) Quantitative Behavioral / Activity Criteria Bases.• Customer Calls (a) Number of customer calls (b) Number of calls per day (c) number

of calls per customer.• Non-selling activities. (number of reports sent (b) number of days worked (c)

Selling & non selling time (d) Number of customer complains (e) dealer meeting held (f) service calls made (g) E-mails/letters to prospects (h) Overdue payments collected.

• Direct Selling Expense (a) as a percentage of sales. (b) as a percentage of quota.• (C) Quantitative Behavioral / Effort / Activity Criteria / Bases• Personal Efforts / skills. (a) Communication skills. (b) Selling skills. (c) Team

Player. (d) Time management (e) Planning ability.• Knowledge. (a) Product (b) competition & customers (c) Pricing (d) Company

policies.

Evaluating & Controlling The Performance of Salespeople

• (contd) Customer relation / goodwill generation.• Personality & attitudes. (a) Cooperation (b) enthusiasm, resourcefulness (c)

Initiative & aggressiveness (d) punctuality.• Appearance & Health.• If a salesperson’s performance on sales volume is unsatisfactory, the reasons or

causes can be traced to one or more of the factors mentioned above.• Establish performance standards. These are generally called sales quotas. Some

companies call them sales objectives, sales goals, or sales targets. Setting performance standards is a difficult, but an important task. Salespeople’s actual performance is measured against the performance standards.

• Performance standards for quantitative output or results criteria have a close relationship with the company’s objectives & goals for territories, regions, branches, products & salespeople. This is because the sales quotas are derived from the company’s sales budget, which depends on the company’s sales forecast. Performance standards for results are same as sales quotas. However, performance standards for qualitative & quantitative behavioral or activity criteria are difficult to set. For this companies either carry out “time & duty analysis” of sales jobs or use of executive judgment.

• Sales managers must ensure that performance standards are fair & reasonable. They should not be too high or too low. If these guidelines are not followed then salespeople are demotivated & it will have harmful effect on the sales performance. After the standards of performance are established, it is equally important to communicate the same to the sales people. This will remove misunderstanding about the performance standards against which the actual performance of salespersons are compared.

Evaluating & Controlling The Performance of Salespeople

• (contd) Compare actual performance with standards. In this step, the individual salesperson’s actual performance is measured & then compared with the predetermined performance standards. Sales managers can use different methods for measuring the performance of salespeople. Periodically, sales managers are required to evaluate (that is measure & compare) the performance of each salesperson in a permanent record for the benefit of the salesperson in tracking his or her progress & the review by other sales & marketing managers. For this, various types of rating forms or evaluation methods are used.

• Performance Evaluation Methods / Forms. Companies use different forms or methods for evaluating salespeople. Some of the commonly used norms are (1) graphic rating scales (2) ranking (3) behaviorally anchored rating scale (BARS), (4) management by objectives (MBO), & (5) descriptive statements. Sales managers are supplied with these evaluation or appraisal forms for evaluating each salesperson. No one method or form provides a perfect evaluation. Therefore, it is necessary to understand the strengths & weaknesses of each method so that some of these methods can be combined to produce an effective evaluation system for a sales organization

• Review performance evaluation with salespeople. Once the salesperson’s performance has been evaluated, the sales manager should conduct performance review or appraisal session with the salesperson. This is a very challenging part of the sales manager’s job, because it can be a very sensitive occasion. The sales manager should contact the salesperson & set a time & place for the performance review meeting. Before the meeting the sales person should be asked to review his or job description & the past performance, by using the company’s evaluation forms.

Evaluating & Controlling The Performance of Salespeople

• (contd) It is important that both the salesperson & sales manager should consider performance review as a positive method, which helps the salesperson to solve existing problems & perform better in future. Thus, both should have positive attitudes towards the review.

• Research has indicated that usually salespeople evaluate themselves better than their manager does. The following guidelines are useful when reviewing performance:

• First performance criteria or bases should be discussed.• The salesperson should be asked to review his or her own performance.• The sales manager should present his view on the salesperson’s review

performance. Mutual agreement on the performance must be established.• If disagreement or serious differences of opinion occur, the sales manager should

carefully explain the reasons to the salesperson.• The sales manager should now review the evaluation of each criterion, by first

reviewing the high ratings of the salesperson & then going down to other ratings. The manager should then summarize the total performance evaluation. Thereafter, the sales manager & the sales person should develop mutually agreed objectives & action plan for the future period.

• Immediately after the evaluation session is over, the sales manager should write a letter to the salesperson restating the performance evaluation results & the objectives for the future period. A copy of this letter to be sent to the sales manager’s immediate boss. In today’s litigious society, it is important to document such reviews.

• Decide sales management actions & control. The performance evaluation procedure followed so far gives a very important information about performance of salespeople.

Evaluating & Controlling The Performance of Salespeople

• (contd) It is the responsibility of the sales management to use this information for improving the performance of individual salespeople, sales teams, & the operations of the sales organization. Another use of the performance information is to identify problem areas, find the causes of the problem, & decide sales management actions to solve the problems. The following are the steps:

• Identify the problem areas. The sales manager should review the performance of each salesperson against each performance criteria. The manager should then summarize the results across all salespeople who are supervised by him. This shows whether there are common areas of low performance. For instance, if most salespeople are not meeting their sales quotas, the situation is different than when only one or two salespeople are not achieving their sales quota.

• Find causes. After identifying the problems, such as poor performance areas, the sales managers should work backward to find the causes of poor performance. For example, if the problem is that some salespeople have not achieved their sales quotas, then the sales manager should review all factors that contribute to the achievement of sales quotas. Some of these factors that may cause, poor sales performance could be less sales calls made, poor coverage of market / customers, & superior performance of competitors on important areas of product quality, service or pricing.

• Decide sales management actions. After finding the causes of poor performance, the sales manager should decide suitable action to minimize or remove the cause of the problem, so that in future the salesperson’s performance will improve. The sales manager’s action , for example, may be to train salespersons on selling & negotiating skills, redesign sales territories, review the compensation plan, or review the company’s sales & marketing strategies.

Evaluating & Controlling The Performance of Salespeople

• (contd) The problem may affect many salespeople or one individual salesperson. The basic approach in deciding the actions of sales management remain the same. In fact, in many companies step 5 of performance review is combined with step 6 of sales management actions. The sales manager, during the performance review meeting with each salesperson, should analyze the salesperson’s performance on each performance criteria, identify the problem & cases, & suggest ways to improve performance in future. This is very important to salespeople & the sales organization.