Chapter 75
Cost Per Sales Dollar

To measure the cost per sales dollar of each credit sale.

Solutioni

Cost per sales dollar is measured as follows:

Where

CSD = cost per sales dollar

Coi = total departmental operating costs in period i

Sci = total credit sales in period i

To illustrate, let’s assume that a food supplier receives an order from a grocery customer for five cases of canned peaches. The supplier sends the five cases to the retailer, along with a bill with net thirty terms (meaning that the retailer must pay the bill within thirty days or an interest penalty will be charged in addition to the principal amount owed). If the retailer does not pay, then the supplier incurs collection costs from the effort to retrieve payment, ranging from a simple letter (the cost of the labor, letterhead, and postage) to the retention of a collection agency at a substantially higher cost. In a one-year period, the departmental operating costs incurred to collect credit sales can be significant. Total departmental operating costs are the sum of annual fixed and annual variable costs. In our example, the supplier’s costs are as follows:

Annual Fixed Cost = $80,000

Annual Variable Cost = $70,000

Therefore, total departmental operating cost are $150,000. If the annual revenue expected by the food supplier is $200,000, then we can calculate the cost per sales dollar:

It costs our food supplier $.75 per dollar of credit sales generated.

Credit sales occur both online and at the retail level. Since credit purchases are cashless, mechanisms exist to verify that the buyer has the funds (known as a credit limit) and that the seller can accept the electronic funds transfer once the transaction is approved. The benefit to sellers is that credit transactions are credited directly into their bank accounts once the buyer is approved. However, this costs the seller processing fees since the credit issuers charge sellers for the convenience and security of electronic transactions. Another form of credit sales is the individual account established between sellers and buyers whereby sellers provide buyers a specific credit limit that allows the buyers to acquire products now and pay for them in the future, based on a regular billing cycle (usually monthly). Credit sales can turn into bad debt if a buyer does not pay their bills, costing the sellers a collection fee, which raises the cost per sale.

Marketers want to minimize the costs per sales dollar for a simple reason: profits improve as the costs decline. A high cost per sales dollar may not necessarily be cause for alarm, however. Industry practices may impose a higher cost structure, so your company should compare its costs to those of the competition to determine if the result is within reason for the industry. However, marketers would be well-served by understanding the sources of the higher costs before concluding that it is acceptable to be at cost parity with the competition. Perhaps the industry is in decline and arcane practices need to be phased out.

The sources of the costs are more than the processing and collection fees. Marketers must step back and review the entire customer selection process. High costs may indicate changing segment and customer needs. High costs may also suggest that a more effective customer audit process is needed to determine whether the highest quality customers pay on time versus those who are regularly late. Even marketing’s communication efforts may need revamping since high costs may signal that customers are not clear about payment terms. Higher costs could also result from mislabeled or inaccurate billing, perhaps resulting from hastily prepared invoices or unclear writing from the salesperson. Finally, high costs may also indicate unevenly enforced policies, allowing customers to infer that the supplier is relaxed about payment terms. Each of these scenarios suggests potential problems, even if the industry norm indicates otherwise.

iRob Olsen, Performance Measures for Credit, Collections and Receivable, CRFonline. Retrieved May 10, 2017 from http://www.crfonline.org/orc/ca/ca-7.html; Victor Cook, Cost Per Dollar of Sales—Gerstner’s Rule, Customers and Capital, May 11, 2007. Retrieved May 29, 2017 from http://www.customersandcapital.com/book/cost_per_dollar_of_sales/