Measurement Need

To determine the optimal sales force size as a percentage of total sales.

Solutioni

The percent of sales measurement is calculated using the following steps:

Let’s assume that a Sydney-based food manufacturer of classic Fish and Chips had sales of $50 million last year and anticipates 20% growth next year, to $60 million in sales. It sells to retail chains and individual sidewalk vendors, and the industry average for the cost of the sales force as a percentage of total sales is 3.6%. The company’s sales budget is divided into management (20%), field sales (75%), and support staff (5%). Based on this, we can now determine the sales force size by first calculating:

Sales force budget

Where

SFB = sales force budget

PR = projected revenues

FSR = field sales ratio (based on industry average)

SFB = $60,000,000 × 0.036

= $2,160,000

Sales force percent

Where

SFP = sales force percent

FS = field sales percent of budget dollars

SS = support staff percent of budget dollars

SFP = 0.75 + 0.05

= 0.80

Sales force dollars

Where

SFD = sales force dollars

SFB = sales force budget

SFP = sales force percent

SFD = $2,160,000 × 0.80

= $1,728,000

If the average salesperson in this company (or industry) costs $75,000 (including salary, bonus, commission, and benefits, also known as “fully loaded” costs), then we can calculate the number of sales people the company can afford as follows:

Where

SFS = sales force size

SFD = sales force dollars

SFC = sales force costs

If they had twenty people last year, then three additional people can be hired for a total sales force size of twenty-three.

Impact

Sales management may find this tool useful for planning purposes and to justify an expansion in their team. However, management should also consider whether the gain in sales can be accomplished by altering compensation incentives of the existing team, realigning territories, or shifting responsibilities among the existing team members. Hiring new people adds a sizable potential cost to the sales budget and, if the forecast numbers are not met, then the sales organization’s performance will be worse than before since new people were added but no new sales. The pressure will then be on sales management to quickly either increase sales, thereby putting additional stress on the field sales force, or terminate some of their sales reps, potentially hurting morale.

The use of industry standards is rarely a practical benchmark, attractive though it may be for planning purposes. Industry standards use averages, but often companies within an industry have significantly different operating standards, sizes, and financial requirements, distorting the averages. The chart on the following page provides data on the average sales force size across industries. If a company is noticeably different than its industry average, then management would be wise to analyze the possible reasons for the variation, keeping its own context firmly in mind.

iAdapted from W. L. Cron, T. E. DeCarlo, and D. J. Palrymple, Sales Management (John Wiley & Sons, Inc., 2004), 114–115.