1. Sales Force Management I This module covers the concepts of sales territories, coverage, workload, sales goals, performance, and compensation systems. Authors: Stu James and Paul Farris Marketing Metrics Reference: Chapter 6 © 2012 Stu James, Paul Farris and Management by the Numbers, Inc.

2. Considerations in defining sales territories Sales potential Workload Considerations in defining sales force objectives Measuring sales force effectiveness Sales force compensation S ALES F ORCE M ANAGEMENT 2 Sales Force Management MBTN | Management by the Numbers This MBTN Module covers the following concepts:

3. Sales force territories are the customer groups for which a salesperson or team is responsible. A territory may be defined on a basis of geography, segment, industry, sales potential, history or a combination of factors. It is the responsibility of the sales force manager to define their territories effectively, striving to maximize potential and minimize costs while accounting for company objectives and personnel. S ALES F ORCE T ERRITORIES 3 Sales Force Territories MBTN | Management by the Numbers In defining or redefining territories, companies should strive to: Balance workloads Balance sales potential Develop compact territories Minimize disruptions during redesign

4. W ORKLOAD Definitions Workload = Current Accounts (#) * Average time to service account + Prospects (#) * Time trying to convert prospect to sale. 4 Workload MBTN | Management by the Numbers Let’s start by defining some of the major factors* that determine workload. Question 1: The northeast sales territory of Electro-Magma, Inc. has 10 current accounts which require 15 days of support / year and 50 prospects, estimated to take 12 hours in the sales process for phone and on-site follow-up. What is the yearly workload for this territory? Answer: Workload= (10 * 15 ) + (50 * 12 / 8) [Note: presuming 8 hour days] = 150 + 75 = 225 days *Note that salespeople often have additional responsibilities that may contribute to their personal workload which should also be taken into consideration.

5. S ALES P OTENTIAL Definitions Sales Potential = Number of Possible Accounts * Buying Power ($) 5 Sales Potential MBTN | Management by the Numbers Sales potential is more difficult to estimate, but one approach is provided below. Question 2: A pharmaceutical company has determined that there are 240 doctors in 5 cities that could be a source of business. Of those, 140 are cardiologists, with an avg. potential account value of $50K, and 100 rheumatologists with an avg. potential account value of $25K. What is the sales potential of this territory? Answer: Sales Potential= (140 * $50,000) + (100 * $25,000) = $7,000,000 + $2,500,000 = $9,500,000

6. B ALANCING W ORKLOAD AND S ALES P OTENTIAL 6 Balancing Workload and Sales Potential MBTN | Management by the Numbers Question 3a: Carbon Copiers, Inc. is reducing its sales force by 10% and redefining territories. The accounts located in Collegeville are likely to be split between two sales reps, Carlos and Dora, and added to their current workloads. Collegeville has 50 current accounts and 100 potential accounts (prospects). Servicing a current account requires about 10 hours / year and calling on a prospect averages 4 hours. The average potential for a new account is $2,500. Carlos currently has 200 accounts (100 active / 100 potential) and Dora has 120 (20 active / 100 potential). Carlos’ current territory has total sales potential of $500,000 and Dora’s has $1,250,000. If they split the Collegeville accounts equally, what will their new territories workload and sales potential be? Answer (Workload): Collegeville Workload = 50 * 10 + 100 * 4 = 900 hours Divided equally = 450 per rep. Carlos New Workload = (200 * 10) + (500,000 / 2,500) * 4 + 450 = 2000 + 800 + 450 = 3250 hours Dora’s New Workload = (120 * 10) + (1,250,000 / 2,500) * 4 + 450 = 1200 + 2000 + 450 = 3650 hours

7. B ALANCING W ORKLOAD AND S ALES P OTENTIAL 7 Balancing Workload and Sales Potential MBTN | Management by the Numbers Answer (Sales Potential): Collegeville $ potential = 100 * $2,500 = $250,000 Divided equally = $125,000 per rep. Carlos new $ potential = $500,000 + $125,000 = $625,000 Dora’s new $ potential = $1,250,000 + $125,000 = $1,500,000 Question 3b: If, instead, the sales manager wanted to use this redefinition as an opportunity to balance the workload and sales potential, how should the Collegeville accounts be divided? Answer: Clearly, Dora’s current territory has much greater sales potential, which also leads her to have the higher current workload (3200 vs. 2800) even though she has fewer current accounts. If all of the prospects were given to Carlos (representing a workload of 100 prospects * 4 hours = 400 hours, the new workload (not including current accounts) would be even (3200 each). Then the current Collegeville accounts could be divided equally to balance workload. The sales manager would also want to take into consideration the pros and cons of having two sales reps serving the same geographic area.

8. The purpose of setting sales goals or objectives for the sales force is to motivate sales personnel and to establish expectations for evaluating and rewarding their performance. The individual sales goals should be appropriate for their territories and circumstances, and, when aggregated, also match the company’s overall objectives. S ETTING S ALES F ORCE GOALS 8 Setting Sales Force Goals MBTN | Management by the Numbers Insight Jack Wilner, author of Seven Secrets to Successful Sales Management, uses the SMART strategy to underscore the most important aspects of setting sales objectives: SMART = Specific, Measurable, Attainable, Realistic, and Time- bound. The next step is to describe some of the methods of allocating a company’s sales objectives across its sales force and territories.

9. S ALES G OAL A LLOCATION M ETHODS Definitions Sales Goals (could use for salesperson or territory): Historical = Share of prior year sales (%) * Overall objective ($) Sales Potential = Share of sales potential (%) * Overall objective ($) Historical + Inc = Prior year + Share of sales potential (%) * Overall increase objective ($) Weighted = Historical * Weight + Sales Potential * (1 – Weight) 9 Sales Goal Allocation Methods MBTN | Management by the Numbers Let’s examine 4 different allocation methods that take into account the company’s overall goals, historical results, sales potential or some combination of the above factors. Let’s try a sample problem…

10. S ALES G OAL A LLOCATION M ETHODS 10 Sales Goal Allocation Methods MBTN | Management by the Numbers Question 4: Carbon Copiers, Inc. is now setting sales goals for Carlos and Dora. Leaving aside the potential new accounts from Collegeville, here are their results from last year and the sales potential of their territory as values and percent of total. Carlos’s current territory has total sales potential of $500,000 (1%) and Dora’s has $1,250,000 (2.5%). Carlos’s sales last year were $50,000 (2%) and Dora’s were $40,000 (1.6%). The company’s sales objective is to grow by $500,000 next year. What should their goals be, using the various allocation methods? Assume 50/50 for historical/sales potential weights. Answer (Carlos): Company Sales = $50,000 /.02 = $2,500,000 Company Objective = $2,500,000 + $500,000 = $3,000,000 Historical = $3,000,000 *.02 = $60,000 Sales Potential = $3,000,000 *.01 = $30,000 Historical + Increase = $50,000 + $500,000 *.01 = $55,000 Weighted (50/50) = $60,000 *.50 + $30,000 *.50 = $45,000

11. S ALES G OAL A LLOCATION M ETHODS 11 Sales Goal Allocation Methods MBTN | Management by the Numbers Answer (Dora): Company Sales = $50,000 /.02 = $2,500,000 (same) Company Objective= $2,500,000 + $500,000 = $3,000,000 (same) Historical = $3,000,000 *.016 = $48,000 Sales Potential = $3,000,000 *.025 = $75,000 Historical + Increase= $40,000 +.025 * $500,000 = $52,500 Weighted (50/50) = $48,000 *.50 + $75,000 *.50 = $61,500 Based on these results, which allocation approach would you choose and why? (Be prepared to discuss, recognizing there is no right answer)

12. S ALES F ORCE E FFECTIVENESS M ETRICS Sales Force Effectiveness Ratios Sales ($) / Contacts with Clients (# Calls) Sales ($) / Potential Accounts (#) Sales ($) / Active Accounts (#) Sales ($) / Sales Potential ($) Expenses ($) / Sales ($) 12 Sales Force Effectiveness Metrics MBTN | Management by the Numbers In addition to sales, there are many other measures that may be used to measure a salesperson’s effectiveness. Some of the most popular ratios are defined below: Insight These metrics are helpful in comparing salesperson performance in different territories or trends over time. However, be sure to use these measures in tandem with managerial judgment. For example, performance differences would be expected to be different between a new territory and a well established territory.

13. S ALES F ORCE E FFECTIVENESS M ETRICS 13 Sales Force Effectiveness Metrics MBTN | Management by the Numbers Question 5: The sales manager for Carbon Copiers, Inc. wants additional metrics for Carlos and Dora. Compare their performances using the information below and the ratios from the previous page. Answer (Carlos): Sales ($) / Contacts with Clients (# Calls)= $50,000 / 2,000 = $25 Sales ($) / Potential Accounts (#) = $50,000 / 200 = $250 Sales ($) / Active Accounts (#) = $50,000 / 200 = $250 Sales ($) / Sales Potential ($) = $50,000 / $500,000 = 10% Expenses ($) / Sales ($) = $15,000 / $50,000 = 30% Salesperson Sales ($) Sales Potential ($) Active Accounts (#) Potential Accounts (#) Client Contacts / Calls (#)Expenses ($) Carlos $ 50,000 $ 500,000 200 2,000 $ 15,000 Dora $ 40,000 $1,250,000 120 500 1,240 $ 8,000 Now, calculate the same ratios for Dora…

14. S ALES F ORCE E FFECTIVENESS M ETRICS 14 Sales Force Effectiveness Metrics MBTN | Management by the Numbers Answer (Dora): Sales ($) / Contacts with Clients (# Calls)= $40,000 / 1240 = $32 Sales ($) / Potential Accounts (#) = $40,000 / 500 = $80 Sales ($) / Active Accounts (#) = $40,000 / 120 = $333 Sales ($) / Sales Potential ($) = $40,000 / $1,250,000 = 3.2% Expenses ($) / Sales ($) = $8,000 / $40,000 = 20% Salesperson Sales ($) Sales Potential ($) Active Accounts (#) Potential Accounts (#) Client Contacts / Calls (#)Expenses ($) Carlos $ 50,000 $ 500,000 200 2,000 $ 15,000 Dora $ 40,000 $1,250,000 120 500 1,240 $ 8,000 Insight Generally, Dora’s values show weaker performance than Carlos with the exception of the expense ratio. However, the low expense ratio may be a hint at a possible reason for Dora’s results. Perhaps she is trying to save on travel by sacrificing sales activity.

15. S ALES F ORCE C OMPENSATION Generalized Compensation Formulas Compensation ($) = Salary ($) + Bonus 1 ($) + Bonus 2 ($) + … + Bonus N ($) Compensation ($) = Salary ($) + [Sales ($) * Commission Rate (%)] 15 Sales Force Compensation MBTN | Management by the Numbers The purpose of sales force compensation systems is to determine the mix of salary, bonus, and commission that will maximize the potential of meeting overall firm goals. There are five key components to the design of a compensation plan for a sales force: Target level of pay Mix between salary and incentive Appropriate measures of performance Performance-payout relationships Time period for measuring performance

16. S ALES F ORCE C OMPENSATION 16 Sales Force Compensation MBTN | Management by the Numbers Managers may design compensation systems that reward performance based on three types of norms: Past: Compared to previous year(s)’ performance Present: Compared to other salespeople (rank, for example) Future: Compared to sales goals / objectives Insights When designing compensation systems it is important to provide timely feedback on how salespeople are performing relative to their goals. Also, in collaborative sales processes, it is important to appropriately balance team and individual rewards. Finally, it is important to test the system against recent performance, to make sure the designed system works as planned. Scenario modeling can also be helpful in both testing the system and communicating different compensation outcomes to the sales force.

17. S ALES F ORCE C OMPENSATION 17 Sales Force Compensation MBTN | Management by the Numbers Question 6: Seagull Insurance is redesigning their compensation systems from a salary based approach to one that rewards sales growth and persistency (the rate that customers continue to pay their yearly premiums). Under the proposed plan, sales people would be paid a base salary of $10K, plus 10% of new sales, plus two bonuses. The growth bonus would equal 10% of the growth in sales (if positive). The persistency (customer retention) bonus would equal (persistency % - 80%) * 10% of the in force premiums. Salesperson Current Salary New Sales (Premiums) In Force (Premiums) Sales Growth (Premiums) Persist- ency (%) Proposed Base Salary Fran $ 40,000 $ 100,000$1,200,000$-20,00090%$10,000 Pat $ 30,000 $ 200,000$ 400,000$ 60,00080%$10,000 To test the new compensation plan, Seagull wanted to calculate the compensation for two of their salespeople, Fran and Pat. How much would each receive in compensation under the new system?

18. S ALES F ORCE C OMPENSATION 18 Sales Force Compensation MBTN | Management by the Numbers Answer: Compensation = Base + 10% of new sales + 10% of sales growth + (persistency – 80%) * 10% of in force Fran = 10,000 +.10 * 100,000 +.10 * 0 + (.90 -.80) *.10 * $1,200,000 = 10,000 + 10,000 + 0 +.10 * 120,000 = $32,000 Pat = 10,000 +.10 * 200,000 +.10 * 60,000 + (.80 -.80) *.10 * $1,200,000 = 10,000 + 20,000 + 6,000 = $36,000 Salesperson Current Salary New Sales (Premiums) In Force (Premiums) Sales Growth (Premiums) Persist- ency (%) Proposed Base Salary Fran $ 40,000 $ 100,000$1,200,000$-20,00090%$10,000 Pat $ 30,000 $ 200,000$ 400,000$ 60,00080%$10,000 What do you think will be their respective reactions to the plan?

19. Marketing Metrics by Farris, Bendle, Pfeifer and Reibstein, 2 nd edition, pages 186-198. - And - MBTN Module, Sales Force Management II which includes topics further sales force topics such as pipeline analysis, stages of lead, prospect, purchase, and post-purchase, CRM systems, sales forecasting techniques, sales force workload and sales force performance measures. F URTHER R EFERENCE 19 Further Reference MBTN | Management by the Numbers