How Much Is Your Cost of Sale


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English: Cost-Volume-Profit diagram, decomposi...

Does cost of sale figure in your sales strategy, or operations model? Unlikely! But should it? And if so how would you calculate it?

Sales managers typically don’t get too involved in cost management. It’s the revenue number which works for them. Make it, and they’re readily forgiven a few extra expenses. Miss it, and no amount of savings in expenses will keep their job. But an understanding of cost of sale can be a very useful tool in the sales manager’s kit bag.

Accountants, CEOs and stock market analysts can get very excited about costs. As one CEO said “you know Steve, I can’t control revenues, but I can control costs” which probably explains why didn’t last too long in the job. CEOs see cost control as their primary tool for managing profit. Naturally they’re very interested.

Accountants very existence depends on bosses wanting to control costs. They can tie themselves in knots measuring one type of cost versus others.

Stock analysts are the ones who really get into cost of sale. They understand its the one ratio revealing how appropriate the business sales strategy is in the current market, and how well its executed by sales operations. Of course they want to see increasing revenues and earnings each quarter. They also want to see the cost of sale reducing, quarter by quarter. That shows the management is getting the business model right.

So, understanding cost of sale helps the sales leader relate to his executive team in terms they understand. Which has to be good news, especially when times get tough.

Familiarity with the concept helps the manager do a better job choosing his sales strategy and operations model, as well, which is more interesting.

Quite how the various combinations of volume, margin, product or service variations, customer demands, and competition influence cost of sale, and which decisions are best in which circumstances might justify a whole book on its own. But for now we’ll offer a taster, and come back to the subject in more detail, sometime in the future.

The cost which catches the attention of CEOs, analysts and accountants will be what you’d expect – real, measurable, cash spent, costs for the sales team, technical support, and maybe even marketing. Divide the total by the number of sales to get an average $ cost for a sale. A very helpful number when making decisions about products and pricing, discount and pre-sales consulting.

Express the total costs of sale as a proportion of total revenue for a number the analysts want. They might be happy with 30%, depending on the industry, whereas 40% suggests there are problems with the market, or the business model. On the other hand 20% is a sign of a very hot proposition.

Accountants have a different type of cost they like to measure. They call it marginal cost, and its a very interesting number for sales managers. The marginal cost of any sale is that cost which directly relates to the deal. Assume the sales team and support will be paid whether or not this deal is won. If there are no other costs directly arising, then the marginal cost of this sale is zero. A deep discount might be justifiable, but only if all the fixed costs (payroll etc.) are already covered by better deals.

Be careful. Marginal cost is a powerful tool to help with difficult decisions, but in the hands of the wrong people it can be extremely dangerous. Make every decision based on marginal cost and the business won’t survive long.

Economists are very fond of opportunity cost, a complex theory enabling comparisons between unrelated decisions. The question posed by opportunity cost is “what value would you have achieved with that resource if you’d decided to deploy it in other projects. Which of the two opportunities would have achieved the highest return?”

The smart sales manager is familiar with the dilemma – choosing between sales projects for one to get technical support while the other goes without. But does she stop to think about assigning sales people to individual deals? Is this deal worth me committing a sales rep, or would we do better by walking away and focusing on one with a higher chance of success?

In the days when customers were around every corner and product was in short supply, the traditional model for sales management worked rather well. Margins were high, sales people were cheap, and customers were naive, sales leaders could focus on driving calls per day, presentations per week, proposals and closes. That doesn’t work too well now the customer is better informed and competition is everywhere.

Understanding complex theories about cost of sale helps the modern sales manager refine her approach to driving more results from fewer resources, just like everybody else in the business. That’s what Reengineering Sales Management is all about.

Why doesn’t the traditional approach to selling and sales management work so well any more? What can the modern sales professional do to stay relevant in today’s customer driven markets? Check out our eBook Reengineering Sales Management for ideas on how to embrace the new order of customer driven buyer/seller relationships.

Republished with author's permission from original post.

Steven Reeves
Consultant, author, software entrepreneur, business development professional, aspiring saxophonist, busy publishing insight and ideas. Boomer turned Zoomer - thirty year sales professional with experience selling everything from debt collection to outsourcing and milking machines to mainframes. Blogger at Successful Sales Management. Head cook and bottle washer at Front Office Box.


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