Below is a blog post from the Harvard Business Review by Andris A. Zoltners, PK Sinha, and Sally E. Lorimer. I’m interested in your thoughts on hiring salespeople this year?
For sales managers, this is not an easy question to answer. The number of salespeople affects profitably by impacting both revenues and costs. It’s easy to estimate costs by looking at historical compensation, benefits, field support, and travel costs per salesperson. But it’s much more difficult to predict revenues, as it requires understanding how complexities such as customer needs, the economy, and the effectiveness of your and your competitor’s salespeople, influence a sales force’s ability to generate sales.
Most companies use financial decision rules to determine how large their sales forces should be, but regrettably, these rules often lead to poor decisions. Consider three commonly-used rules.
Add a Salesperson when there are Enough Sales to Pay for that Person
This “wait and see” approach to adding salespeople views the sales force as a cost item justified by sales, rather than as an investment that drives sales. An “earn-your-way” strategy is sometimes necessary in markets with high uncertainty or when a company is cash-strapped. But when leaders take this conservative growth approach even when there is reasonable certainty of success and available financing, they undersize their sales forces and forfeit opportunity. One pharmaceutical company’s overly-cautious sales force expansion strategy resulted in too little support for a new product launch and cost the company 17% of profits over three years.
Split a Territory as Soon as Its Sales Hit a Threshold Level
At one company, when a territory hits $3 million in sales, sales leaders split the territory and give a portion of it to a new salesperson. The current salesperson’s “reward” for working hard to build business is to have his territory reduced. Over time too many salespeople are placed in geographies where salespeople were successful initially and too few are placed in other geographies where considerable market potential remains untapped. Another downside is that salespeople in territories with sales approaching $3 million have incentive to stop selling in order to keep their territories intact.
Keep Sales Force Costs at a Constant Percentage of Sales
A sales force stays affordable by keeping costs in line with industry or company benchmarks for a sales force cost-to-sales ratio. But this is not the same as maximizing profits. Although it’s counterintuitive, when a sales force is undersized, adding salespeople increases the cost-to-sales ratio and also increases profitability. You can always reduce the cost-to-sales ratio by cutting headcount, but the impact on profitability is positive only if the sales force is already too large. Maintaining an industry average cost-to-sales ratio is especially harmful to small-share companies that want a competitive share-of-voice. Sustaining a historical ratio is also dangerous during a business downturn; it may result in excessive downsizing that amplifies the impact of the downturn and leaves the company poorly positioned for a turnaround.
A Better Approach
Financial decision rules alone are not enough for figuring out the right size number of salespeople. A better approach requires three steps.
Step 1. Look at four sources for signs that the sales force is under- or over-sized. If customers complain about inadequate service, if salespeople protest about too much work and travel, if sales activity focuses mostly on order taking instead of prospecting, and if competitors are expanding their sales forces, it’s likely that your sales force is smaller than it should be. On the other hand, if customers avoid returning your salespeople’s calls, if salespeople feel they don’t have enough opportunities, if sales activity emphasizes too many non-critical tasks and low-value customers, and if competitors are downsizing their sales forces, it’s likely your own sales force is too large.
Step 2. Do analysis that focuses on customers, not financial constraints. This requires understanding and segmenting customers according to their needs and potential, and determining what sales process and how much sales force time is required to meet those needs and realize the potential. By aggregating time required across customer segments, you can estimate the number of salespeople required to effectively cover your customer base.
Step 3. Look at financial ratios (such as sales force cost-to-sales) as a final check. Adjust as needed to ensure affordability. Often, by shifting coverage of lower-value customer segments to more efficient channels such as telesales, it’s possible to improve financial ratios while giving up minimal coverage of market potential.
Finally, keep in mind that changes in sales force size have both short-term and long-term impact. The cost impact is immediate, but the revenue impact accrues slowly and accelerates with time. When expanding the sales force, it takes new salespeople time to get acclimated and make sales, and for the new customers they acquire to make repeat purchases. Alternatively, when downsizing a sales force, loyal customers may continue to buy for a while despite reduced sales force coverage. But eventually, repeat business dwindles away. The best sales force sizing decisions look at profitability over at least a three-year time horizon. If leaders under pressure to deliver short-term results focus only on the first-year impact, they will under-size the sales force – our research indicates by 18% on average. As a result, they sacrifice long-term profitability.
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