To recap our predictions; prices will be low, almost everything will be price sensitive, growth will be muted unless you can take it away from a competitor, and winning will depend on your ability to reduce process costs and take savings to the customer. In this environment, the cost of serving the customer will come under scrutiny and nothing - repeat, nothing - will look like the up cycle from 2003-2008. So, if you are managing like you did in the last up turn, don’t read this because it won’t help and you won’t like what you hear.
Where The Money IsIn the 1930s, dapper bank robber Willie Sutton was asked why he robbed banks and he said “cause that’s where the money is.” Similarly, if you buy our logic that the cost to serve will be a strategic necessity, then you will need to attack sales expenses because that’s where the largest expense is. How large are sales expenses for the average distributor?
In our studies over the years, we estimate that 30% to 40% of operating expenses are in sales and solicitation efforts. This includes outside sales, inside sales, marketing expense and e-commerce. That means that a distributor that has 20% of sales in operating expenses has 6% to 8% of sales in sales or solicitation expenses.
Furthermore, our work finds that, on average, distributors have a 25% to 30% overcapacity in these efforts. In essence, there is upwards of 2% to 2.7% of operating margin that is wasted in most distributor sales efforts. Why does this exist and what can be done are common questions and I’ll finish this installment shedding light on these questions.
Measurements, Old Knowledge, and New StuffSales force management in distribution is a constant topic. Unfortunately, our research finds that most of work and literature is about sales effectiveness or doing things well and not efficiency and effectiveness, which means doing things well at the least long run cost. The biggest problems and opportunities with distribution sales management are as follows:
Confusion of sales with solicitation: Distributors too often have a mindset that everything needs a sales call, everyone can afford a sales call, and everyone wants to be sold. This is of course bunk and our work finds that many customers would be glad to trade less calls for a better price. Distributors should think of solicitation which is using the entire range of ways to contact customers including inside sales, outside sales, e-commerce, telesales, catalogs, etc.
A sales call is not a sales call: There are different models of outside sales including geographic territories, new product sellers, consultative sellers, enterprise sellers, missionary and segment-based sellers. Most distributors go for a geographic outside seller and hope that fits the bill. For inside sellers there are several models including generalists, personal account managers, and technical specialists. Most distributors have generalists which, again, are effective but not all that efficient. Unless the distributor understands these models and how to use them, they typically get a one-size-fits-all sales effort that gets things done but is very costly.
All margin dollars are the same: Paying sellers on margin dollars for any significant part of their compensation typically spells trouble. Unless the margin dollars are balanced by other metrics including customer profitability, transaction profitability, or something that allocates operating expenses to customers, then margin-dollar-only compensation systems typically yield 40% of territories that don’t contribute to operating profit. The big problem here is that traditional accounting measures aren’t all that good in driving profitability in distribution businesses. The problem has to do with where the expenses are in the measures. In manufacturing cost accounting, the cost of goods sold has direct labor, direct overhead, and direct material in the number. In distribution, the cost of goods only has the cost of material. Labor and overhead are treated as operating expenses and are below the gross margin line. Hence, using margin dollars in distribution gives a distorted view of profit and it can be ruinous to the business. So, unless you have a method to allocate operating expenses to accounts, transactions, branches, sales territories, etc. Then, in our view, you don’t have sufficient metrics to measure seller progress, reward them, and drive operating profit.
Sales Managers are product driven: Most sales management in distribution is product driven. That is they know product functions and applications and this knowledge is important. However, many customers know the products as good or better than the sales talent which means sales managers should know the sales and solicitation process. Process management means that sales managers have crisp measures and concise definitions or answers for things such as:
- How many
sellers do we need?
- What is the capacity
of my current sales force?
- What is territory
- How can I use various
solicitation efforts to make my sales force more productive?
- Why does typical compensation fail and what do I do about it?
Unfortunately, most product driven sales managers don’t do real well when asked these questions. If your sales management is trying to B.S. you with answers to the previous questions, then they really don’t know what’s going on and need to be educated or reassigned. Again, this is process knowledge and not product knowledge, which is the domain of the majority of distributor sales management.
Much of today’s distribution sales managers take knowledge from research and practice that is decades old. Not all the knowledge is obsolete, but much of it is. And new knowledge can help greatly in sales force productivity.
I really don’t expect a distributor to compete well in the next five, and possibly ten years, with bloated sales efforts that are based on old knowledge and practice. Good sales management takes an understanding of new topics including capacity planning, new models of inside and outside sales, hybrid marketing, and balancing compensation metrics. Without an understanding of the new knowledge, it will be increasingly difficult to compete in tomorrow’s environment.