Why Your Sales Process Cost Matters, and What You Need to Know to Get It Right

One of the most important management systems for the senior executive is the one that measures the costs of production. Executives must know not just the total cost of production, but also the costs of the stages of their production. Sales and marketing organizations need this every bit as much as production manufacturers. Unfortunately, sales and marketing organizations typically are not even aware that such a system is possible, much less of the profound effects it could have on management decision-making.

Examples of this are playing out right now in a marketing department near you: their goal? To increase the quantity or reduce the cost of the leads they produce for their sales force. They may do it by offering some reward or a contest, for example, to individuals who agree to talk to a salesperson. How are their results measured? Increased quantities of leads or reduced costs per lead, of course.

Unfortunately, as hard as they may be working, instead of improving things, their attempts may actually have a detrimental effect. This is because while they can measure their local results, their company has no way to measure the impact of their work on the overall "system."

This can easily happen when there is a disconnect between what marketers are producing and what the sales department needs. Marketers often define a "lead" to mean "contact information from someone who downloaded something on the website (or attended our webinar)." The sales department's definition of a lead is usually very different: "someone who has the ability and the interest to buy what we sell within 90 days," for example.

This common mismatch causes a condition in which marketing believes it is improving productivity, whereas the sales department is suffering from starvation. Needless to say, such a frustrating situation needs to be resolved. But how can it be done? Who is to say whether this is a real problem or a "he said/she said" sort of thing? Is this the most important bottleneck to making the numbers, or is some new market channel or product a higher priority?

Without the facts provided by a production cost measurement system, the argument is impossible to resolve.

The Missing Link: Measuring the Creation of Value
Once the sales process is defined in terms of the Customer's Journey, it is possible to provide managers with the facts and data they need to understand incremental costs of production, as well as its impact on the entire system. It also provides a means to measure the cost of waste in the system.

Table 1: Incremental Costs

Table 1 illustrates the first step of how this is done. The left column lists the stages of the Customer's Journey, expressed in terms of the customer's actions. The Operational Cost column is the direct and indirect costs of implementing the work processes, which produced (and measured) the customer's actions. A simple employee time study technique (described in Chapter Three of "Sales and Marketing the Six Sigma Way") was used to determine how to distribute indirect costs to the stages of production (the Customer's Journey).

The Quantity Produced column is the count of prospects who moved into each stage over a period of six months. With the operational cost by stage and the quantity of individuals who moved into each stage, it is easy to calculate the incremental cost of each unit of production (Incremental Cost per Unit).
This makes it possible to measure changes in the cost of leads, for example. A marketer might increase the number of prospects who agree to talk to a salesperson from 6,435 to 10,000 without increasing expendititures beyond $310,494. Would she be doing her company a favor?

Table 2: Absorbed Cost per Unit (click to see full table)

 

To find out, you have to take the costing model a step further to consider the Absorbed Cost per Unit. Incremental cost measures the cost required to produce the next incremental stage of production. Divide it by the units produced, and you have the incremental cost. Absorbed cost accumulates total costs through each successive stage of production. This is the real cost accumulated by the system. Divide the absorbed cost by the number of units at each stage, and you have the total cost of production (system-wide).

The absorbed cost enables the senior executive to understand several important things. First, the sum of the incremental costs (ie, value added to each unit) is $2,185.85 less than the value added in the fully absorbed model. This represents the cost of "Inquiries" that did not move to the "Interested" stage, "Interesteds" that did not move to the "Qualified" stage, and so forth. This was production that was paid for, but did not yield results and thus can be classified as waste.

Second, the absorbed cost enables the senior executive to understand the impact of changes on the overall system. For example, it would be one thing if the marketing department could increase the quantity of leads while holding costs steady, and no other changes to the system took place. The cost to the entire system would stay constant, and no harm would be done. However, that is not what happens in the real world.

Table 3: Cost of Increased Leads (click to see full table) 

In the real world, all those so-called "leads" need to be followed up. This could easily require additional manpower and expenses. If the additional volume can be handled and does not contain any more qualified leads than previously (as often happens), it is actually less productive, and increases net system-wide costs. 

The example in Table 3 illustrates this in detail. Here, the incremental cost of the "Interested" stage has been substantially reduced. This could be done, for example, by offering some enticement that causes prospects to be willing to talk to a salesperson. Yet, if the enticement is an iPod or a chance for a vacation package (ie, unrelated to the value of the company's offer), the results can be disastrous. Salespeople may have to talk to more people to find the ones who are qualified, thereby increasing their costs.

Summary
Analyzing costs in this fashion once or twice per year provide a powerful set of data for senior executive decision-making and can prevent them from making costly mistakes in allocating resources. Such systems do not show marketing departments how to produce the right kinds of prospects, but they do provide the feedback necessary to determine whether the expected results are actually happening. They provide the information that can prevent expensive mistakes. Such mistakes go unnoticed when firms do not have the management systems in place to detect them.

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Michael J. Webb
September 25, 2007

Comments

[sue]

Sales and Marketing Productivity by Chet Holmes

Two furniture stores open up in a town on nearly the same day. One is totally tactical and the other is very strategic. If you go in to look at couches in store one the salesperson tries to sell you a couch. Tactical. Over a four-year period, this store grows at about ten percent per year, mostly driven by the increasing costs of furniture.
In store two, of course they try to sell you a couch, but the management constantly trains the salespeople to sell the store. “First time in our store? Well, let me tell you about it.” And while the salesperson is on their way to the couches, they pitch the heck out of that store. They tell you about the history, the owner’s devotion to service, why they have lower prices than their competitors, how well trained they are on furniture construction and how that benefits you as the consumer.
The purpose of this buyer education is to create brand loyalty. Over time, this store builds a large and loyal following of customers who automatically come to them first when they are interested in any type of furniture. When you shop for furniture, you probably go to various stores with little or no brand loyalty. Or you may see a sale in the newspaper and go because of the sale. But if you had a relationship with a store that stood behind their product like no other and could thoroughly explain the differences in furniture quality (and there’s quite a bit to know) and even offered expertise in decorating, you might have an affinity, a loyalty, a preference for that particular store. When you needed furniture, you would go there first because of the relationship that they purposefully built with you. Over a four-year period the tactical store remained a one-store location and the strategic store opened six locations.
People will even pay more if they perceive there is a greater value or a deeper reason for buying from one provider over another. I cannot tell you how many times I’ve helped companies step up out of the commoditizing world in which they live by being more strategic. In a moment I’ll have you do an exercise that will really pound this idea home. Let’s do a little more set up so you get as much as possible out of the exercise to follow.
Here’s a question I want you to answer: When your buyer looks to purchase your type of product or service how much of an expert are they? When I ask this question in front of a large audience, everyone pretty much admits that in any given purchasing situation, the average buyer is not much of an expert. For example you are probably not much of an expert at all about carpet cleaning, are you? If most of your buyers are not experts at what to look for in your product or service, this opens a gaping strategic opportunity for the brilliant strategist to capitalize on.
I call this the science of setting the market’s buying criteria. Basically it means that every

buyer can be taught how to be a better buyer of your type of product or service. Using the

carpet cleaning example, the buyer calls in with loose or little buying criteria at all. The

salesperson then resets that buying criteria by educating that consumer about the EPA

studies on the importance of clean carpets to the quality of the air and life in your home.

You can do this for your company with profound results.

Chet Holmes has worked with over 60 of the Fortune 500 companies as America’s top marketing executive, trainer, and strategic consultant. Chet is the author of the best selling book, The Ultimate Sales Machine (#1 business book on Amazon, #1 Sales and Marketing book on Amazon, and also on NY Times best seller list). Chet has identified and developed the 12 core competencies that are proven to provide the main structure of truly great companies and he has developed more than fifty proprietary methods to implement them. To learn more about how to double the sales of your company, go to www.howtodoublesales.com

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