Ch7: Controlling the Salesforce

SDM-Ch.7 1

Chapter 7

Controlling the Salesforce

SDM-Ch.7 2

Learning Objectives

• To know criteria and types of salesforce expense plans

• To understand salesforce audit and its evaluation process

• To learn evaluation of effectiveness of a sales organisation through sales, cost, profitability, and productivity analysis

• To know purposes and procedure for evaluating and controlling the performance of salespeople

• To understand ethical, social, and legal responsibilities of sales managers and salespeople

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Salesforce Expense Plans

• Salesforce expenses include travel, meals, lodging, telephone, and customer entertainment

• Firms have salesforce expense plans to ensure proper spending

• Objectives / Criteria of effective expense plans are:

It should be• Fair to the salesperson and company• Simple and economical to administer• Clear to prevent misunderstanding• Reimbursed without much delay• Allowing differences in expenses among different

territories

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Salesforce Expense Plans (Continued)

Four types of salesforce expense plans

• Salespeople pay all expenses

Merits: Simple, less cost for company, salespeople get income tax advantage

Demerits: Less control on salespeople’s activities; non-selling activities not done properly

• Company pays all expenses / Unlimited payment plan

Merits: Good control on salespersons activities; no anxiety for sales people on spending money

Demerits: Salespeople spend more and may make money unethically

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Salesforce Expense Plans (Continured)

• Company partially pays expenses / Limited payment plan

Merits: Useful in budget planning; less disputes; better

control on salesperson’s activities

Demerits: Needs more time to set expense limits and

administer; Inflexible plan, not liked by good salespeople

• Combination plan / Expense-quota plan

• Combines limited and unlimited plans

• Advantages of both plans

• Company has control on selling expenses; salespeople

have flexibility within total expense budget

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Salesforce Audit

• Salesforce or sales management audit is a part of marketing audit

• A marketing or salesforce audit is a comprehensive, systematic,

diagnostic, and prescriptive tool, to be used periodically

• Purpose. To assess adequacy of process, improve performance,

recommend changes

• Evaluation process of salesforce audit. It has 3 stages. Company

management should find out:

• What happened by comparing actual performance with goals

• Why it happened by identifying factors contributing to negative

variance. Difficult and time consuming task

• What to do about it by taking corrective actions

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Evaluation of Effectiveness of Sales Organisation• To know “what happened”, companies analyse their

sales, costs, profits, and productivity• Effectiveness model of a sales organisation

Effectiveness of a

SalesOrganisation

Sales Analysis

Cost Analysis

Profitability Analysis

Productivity Analysis

• We shall examine each of the above factors

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Sales Analysis

• Sales analysis of a company can be done in different ways:

• Different alternatives are shown in a framework below:S

ales

An

alys

is

All levelsIn Sales

Organisation

DifferentType of

Sales

Different Type of Analysis

National and/or international levels sales organisation

Regional level

Branch /district level

Territory level

Individual level

Total sales of the company

By type of products

By type of distribution channels

By type of customer classifications

By size of orders

Comparisons with sales quotas / targets

Comparisons with previous periods

Comparisons with industry / competitors

Comparisons within sales organisations

Comparisons with sales forecasts

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Sales Analysis (Continued)• Sales analysis is done at all levels of the sales organisation• Reasons

(1) For evaluation and control: sales analysis needed at different organisation levels like regional, district, territory

(2) For identifying problems:

Use hierarchical sales analysis. E.G.• Sales performance at national level below sales volume budget• Find which regions have problems in achieving sales quotas• Focus sales analysis of branches reporting to problematic regions• Do sales analysis of territories under problematic branches• Further analysis of problematic territories to be done by talking to

salespeople, customers, branch managers• Corrective actions can then be taken to improve sales

• Extend hierarchical sales analysis to different type of sales• Out of different type of analysis, comparisons with sales quotas are

widely used

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Marketing Cost and Profitability Analysis

• Purpose: To measure profitability of company’s marketing units such as territories, market segments, products, channels, & customers

• This information helps to decide which marketing units to be expanded, reduced, or eliminated in future.

• Procedure• State purpose of the analysis• Identity major functional (or activity) expenses• Convert natural accounting expenses into functional

expenses• Allocate functional expenses to marketing units• Prepare profitability of marketing units, by using “full-

cost approach”, or “contribution approach”

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Purpose of the Analysis• Before starting cost and profitability analysis, it is necessary

to know for which marketing units the analysis would be done

• This helps to classify costs into direct and indirect. E.G. Salesperson’s salary is direct cost for territory analysis, but indirect cost for analysis of products or segments

Identify Major Functional Expenses• The company should prepare a list of major functions or

activities with respect to marketing expenses

• E.G. Personal selling expenses, order processing expenses, packing and delivery expenses, warehousing and inventory expenses, administration expenses

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Convert Natural Accounting Expenses into Functional Expenses

• Natural or traditional expenses are to be converted to functional expenses, for doing marketing cost analysis

• An example will make this point clear

Natural / Traditional Expenses

Total Functional Expenses

Personal Selling

Adv. and Sales

Promotion

Warehousing & Inventory

Administration

Salaries 20,000,000 10,000,000 4,000,000 2,000,000 4,000,000

Rent 10,000,000 2,500,000 1,000,000 5,000,000 1,500,000

Travel 5,000,000 5,000,000 __ __ __

Adv. and Sales Promotion

15,000,000 __ 15,000,000 __ __

Total 50,000,000 17,500,000 20,000,000 7,000,000 5,500,000

• A better method for allocating costs is activity-based costing (ABC), which allocates costs based on cause of expenses

Note: All figures are in Rupees

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Allocate Functional Expenses to Marketing Units

• Functional expenses are allocated to the marketing unit under study, depending on several bases shown below, as examples

Function Bases of allocation of expenses

• Personal selling • Directly to sales territories• Selling time given to each product and market segment• Sales calls x average time per call to customers & channels

• Advertising and sales promotion

• Circulation of media to sales territories• Media space for each product & market segment• Equal charges to customers & channels

• Administration • Equal charges for all marketing units

• Above allocations are done to find marketing costs and profitability of marketing units

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Prepare Profitability of Marketing Units

• This is done by preparing profit & loss statements for the marketing units under study

• Two approaches are available in allocating marketing costs for profitability analysis: (1) Full-cost, (2) Contribution

• Full-cost approach: All marketing costs, both direct & indirect, are allocated to the marketing unit

• Useful for long-term profitability studies of products and market segments

• Contribution approach: Only direct marketing costs are allocated to the marketing unit

• Useful for short-term decisions like profitability of branches / regions

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An Example of Profitability Analysis

SNo Particulars Full-cost

Approach

Contribution Approach

Western Region Branch A Branch B Branch C

1 Sales 400 150 130 120

2 Cost of good sold 300 112.5 97.5 90

3 Gross margin (1-2) 100 37.5 32.5 30

4 Branch selling expenses

12.7 4.5 4.2 4

5 W. Region direct selling expenses

12.0 - - -

6 Contribution (3-4-5) 75.3 33.0 28.3 26.0

7 Allocated indirect expenses

36.3 - - -

8 Net profit (6-7) 39.0 - - -

Note: All figures are in Rupees million

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Productivity Analysis

• Productivity is generally measured by ratio between output & input

• Some of the productivity ratios in sales management are:

• Sales per salesperson (used by many companies)

• Selling expenses per salesperson

• Sales calls per salesperson

• Improvement in productivity leads to increase in profitability

• Some of the methods used by firms to improve productivity

• Reducing salesforce size

• Hiring manufacturer’s reps. or agents on commission basis

• Using the internet, telemarketing, direct mail to reach customers

• Increasing sales volume substantially

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Evaluating & Controlling Performance of Salespeople

• Purposes / objectives / importance of performance evaluation of salespeople are:

• Mainly to find how salespeople have performed• This information is used for other purposes, such as:

• Improving salespersons’ performance, by identifying causes of unsatisfactory performance

• Deciding salary increments and incentive payments• Identifying salespeople for promotion• Determining training needs• Motivating salespeople through recognition and

reward• Understanding strengths and weaknesses of

salespeople

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Procedure for Evaluating and Controlling Salesforce Performance

The steps involved in the procedure are:

• Set policies on performance evaluation and control

• Decide bases of salespersons’ performance evaluation

• Establish performance standards

• Compare actual performance with the standards

• Review performance evaluation with salespeople

• Decide sales management actions and control

We shall describe above steps briefly

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Set Policies on Performance Evaluation & Control

Most companies establish basic policies. Examples are:• Frequency of evaluation. Mostly once a year.• Who conducts evaluation? Mainly immediate

supervisor• Assessment techniques to be used. E.G.

Management by objectives (MBO), 360-degree feedback

• Sources of information. Sales analysis, new business reports, lost business reports, call plans, etc

• Bases of salesforce evaluation. (next slide)• Conducting performance review sessions with

salespeople

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Decide Bases for Salespersons’ Performance Evaluation

• A firm should decide which of the following bases / criteria it would use: (1) result / outcome based, (2) efforts / behavioural based, or (3) both results & efforts based

• A company selects performance bases or criteria from a list of alternatives, some of them shown below:

Quantitative results / outcome bases / criteria

Quantitative efforts / behavioural bases / criteria

Qualitative efforts / behavioural bases / criteria

• Sales volume

• In value / units

•Percentage of quota

• by products & segments

• Accounts / customers New accounts nos. Lost accounts nos.

• Customer calls No. of calls per day No. of calls per customer

• Non-selling activities overdue payments collected No. of reports sent

• Personal skills Selling skills Planning ability Team player

• Personality & Attitudes Cooperation Enthusiasm

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Establish Performance Standards

• Performance standards are also called sales goals, targets, sales quotas, sales objectives

• Performance standards for quantitative results are related to the company’s sales volume or market share goals

• Performance standards for efforts / behavioural criteria are difficult to set

• For this, companies do “time and duty analysis” or use executive judgement

• Performance standards should not be too high or too low

• After establishing standards, salespeople must be informed

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Compare Actual Performance with Standards

• Salesperson’s actual performance is measured and compared with the performance standards

• For this, sales managers use different methods or forms:

• Graphic rating scales

• Ranking

• Behaviourally anchored rating scale (BARS)

• Management by Objectives (MBO)

• Descriptive statements

• Companies combine some of the above methods for an effective evaluation system

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Review Performance Evaluation with Salespeople

• Performance review / appraisal session is conducted, after evaluation of the salesperson’s performance

• Sales manager should first review high / good ratings, and then review other ratings

• Both should decide objectives / goals and action plan for future period

• After the review, sales manager should write about performance evaluation & objectives for the future

• Guidelines for reviewing performance of salespersons

• First discuss performance standards / criteria / bases

• Ask the salesperson to review his performance

• Sales manager presents his views

• Establish mutual agreement on the performance

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Decide Sales Management Actions and Control

• Many companies combine this step with the previous step – i.e. performance review

• During performance review meeting with salesperson, sales manager does the following:• Identifies the problem areas. E.G. Sales quotas not

achieved• Finds causes. E.G. less sales calls, poor market

coverage, or superior performance of competitors• Decides sales management actions E.G. train

salesperson, redesign territories, or review company’s sales / marketing strategies

• If a salesperson’s performance is good, he / she should be rewarded and recognised

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Business Ethics and Sales Management

• Sales managers and salespeople have ethical

responsibilities

• Some of the ethical situations are:

• Relations with the company. EGs. Expense

statements, credit for damaged merchandise

• Relations with customers. EGs. Gifts, false

information to get business, customer entertainment

• Ethical guidelines

• A code of ethics developed by the company would be

effective if it is enforced by top management

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Social Responsibilities

• Corporate social responsibility means distinguishing right from wrong and doing the right

• Social responsibility is the management’s responsibility to take decisions and actions for welfare and interests of society and the company

• A company has following four responsibilities to its eight stakeholders: Customers, Community, Creditors, Government, Owners, Managers, Employees, and Suppliers, acronym: CCCGOMES

• Ethical responsibilities. Deal with fairness, equity, impartiality

• Legal responsibilities. Follow laws and regulations

• Economic responsibilities. Produce and market goods / services that society wants, and make reasonable profits

• Voluntary responsibilities. Make social (EG philanthropic) contributions

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Legal Responsibilities and Sales Management

• Laws and regulations by local, state, or central governments have impact on sales management

• Price discrimination. As per MRTP act, 1969, seller should not discriminate prices among similar buyers (e.g. retailers)

• Price fixing. Under MRTP act, it is unlawful for suppliers to fix prices

• Consumer protection. As per Consumer Protection Act, 1986, it is illegal to make false or misleading claims about products / services

• Bribes. Payment of money or giving gifts to gain a customer is illegal under Indian Contracts Act 1872 and Sale of Goods act, 1930. Sales managers must take responsibility that laws are not violated

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Key Learnings

• Salesforce expenses include travel, meals, lodging, telephone, and customer entertainment

• Salesforce expense plans consists of (1) salespeople paying all expenses, (2) company paying expenses partially, (3) company paying all expenses, (4) combination plan

• Salesforce audit is done to access process adequacy, improve performance, and recommend changes

• For evaluating effectiveness of a sales organisation, the company analyse sales, costs, profits, and productivity

• Sales analysis is done at all levels in a sales organisation, for (a) evaluation and control, and (b) identifying problems

• Purpose of marketing cost and profitability analysis is to measure profitability of company’s marketing units

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Key Learnings (Continued)

• Two approaches for profitability analysis are: full-cost and contribution

• Most commonly used productivity ratio in sales management is sales per salesperson

• Main purpose of performance evaluation of salespeople is to find how salespeople have performed

• Sales managers have ethical, social, and legal responsibilities

• Corporate social responsibility is distinguishing right from wrong and doing the right