The Top Six Forgotten Costs That Can Test Your Ability to Turn Sales Into Profitable Growth
Companies focused on growth usually start by implementing a myriad ofnew high-powered sales programs, new marketing blitzes, and new strategic plans. When a company makes all the right moves (or just gets lucky) and sales begin to flood the organization, little thought has usually been given to the downside potential of this sudden growth. Too many times, we have seen companies that have done all the right things to fuel their growth later suffer intense organizational pain as they try to meet all the demands brought on by the sudden influx of deals they’ve closed.
Having helped a large number of companies to grow, we can attest to the fact that growth can be exhilarating. It’s downright heady--sales escalating, managers empowered, employees energized, everyone busy--growth feels ever so right. However, our experience has shown that there are six forgotten, or unanticipated, costs that will test an unsuspecting organization’s ability to turn sales into profitable growth.
1. Sales teams cost more than you think.
A not-so-hidden cost is the cost of a sales force. But what may be surprising to many companies is the magnitude of the "real costs" of hiring and maintaining a staff. For starters, of course, you need dynamic, productive salespeople. The cost: anywhere from $30,000 to $300,000 per salesperson in base compensation. Then of course, with their success, you’ll have bonus and commission costs that will perhaps more than double that substantial base compensation figure. Each salesperson will require funding for benefits, equipment, transportation, mileage, and other travel and living expenses. Keep in mind that these costs will rise as sales success increases. In fact, these costs will tend to rise at a faster rate than your top line will grow. Hiring the sales team costs money--usually 20-33% of each salesperson’s compensation package. Early on, there will be additional training costs as your new sales person learns the ropes, often at the cost of distracting someof your most precious and busy people--your sales leadership team. And if any new hire doesn’t work out, there may be substantial firing costs--usually one or more months of severance to ease exit and assure non-solicit and non-compete protections.
These costs are real and tangible, and often just a cost of doing business. But they need to be evaluated thoroughly before the organization decides on its best options for generating sales growth. Expect that your natural reaction to the high cost of the sales team will be to downscale the salary you are willing to pay, possibly resulting in a downscale in the quality of the candidates you will see. Compromising the quality of your sales team is the wrong place to start if your goal is to drive sales.
2. The cost of the sales process goes far beyond the sales team.
If the sales process is working, you’ve probably also invested in supporting your sales team with lead generation tools that may include direct mail, telemarketing, promotional events, and so on. You’ve probably created marketing communication materials, and disseminated them. Perhaps you’ve invested in special sales training and special sales tools like customer relationship management and sales force automation. All of these activities are costly and the leads produced are precious. These costs are of course acceptable if competent hands turn the leads into sales. But in inept hands, the leads can be easily turned into little more than wasted time and money.
How long it takes for sales activity to pay off can vary widely. If you’re offering something that many need constantly, and if yours is the superior choice, you can probably spike sales in a relatively short period of time. But if your offering depends on a more sporadic event--say a new hire, court filing or an open enrollment season--and if there are fewer buyers and if the value is less urgently compelling, you may find a sales cycle time that takes many, many months for the first "payoff".
Your business has to understand its cycle time and set its expectations and investment horizon accordingly. Otherwise, you may be in for a continuous cycle of disappointment, driven more by management naiveté than by sales force non-performance.
Pull the trigger on the sales team too fast, and you may be destroying the investment you’ve made before it has had a chance to prove itself. On the other hand, waiting too long for results that will never happen is a similarly naïve waste of time. A clear understanding of the sales process will help you know what to expect, what action to take and when to take it.
3. New growth requires new staffing.
Managers sometimes seem surprised by the fact that, with new sales streaming in the door, the company may need employees to deliver the heightened volume of new work being sold. Adding these employees has a price--you have to recruit them, hire them, train them, equip them, and get them started. All of these are real, tangible costs. But almost more onerous is the distraction and weight you’ll pile on your existing workforce. Once again, at a time when the pressures and demands are already immense, you’ll be asking them to train, oversee, and mentor new people. All the while, you’ll need your team to deliver its normal highquality output.
Keep in mind you’ll be asking much of your workforce, and you should be prepared to encourage and reward them every step along the way.
4. Pressures and distraction can jeopardize service excellence.
Even if you anticipate the need to add staffing, you might miss on the timing. When a customer signs an order, they expect delivery--now. So the work gets piled on your best and brightest people, who quickly begin to experience fatigue, frustration and overwork in trying to deliver on the company’s promises.
Already working "night and day," managers struggle to chip in and help, quickly becoming inundated with the "day-to-day" issues that an overburdened business and its workforce can face. The risk: managers focused on the daily minutia find it difficult to keep the business on track on the larger strategic issues.
5. Receivables can be a crushing cost.
With all these pressures on the business, and the associated mounting costs, there’s another unfortunate reality of gearing up to tackle this new business. Customers don’t necessarily pay as fast as you’d like. And when they’ve signed your big deal, you’ve just started your own time clock. You have to ramp up, deliver what you’ve promised, generate a bill, and wait for payment. Depending on your business, this cycle of "order to cash" can take weeks to many, many months. And if that cycle is measured in months, you may be required to pay your sales people, your delivery people, and other
expenses associated with a sale long before you’ve collected a dime.
Too often, managers don’t begin worrying about "growth" until they’ve had too little of it for too long. Their bankers have lost faith. Their employees have sunken into malaise. Too much cash has drained out of the business. Alarm bells sound, and the focus shifts to driving sales. And if sales come, sometimes they come late enough to generate even heavier, more debilitating financial pressures.
6. Underutilized investment can be a crushing cost, too.
A significant cost that gets forgotten with growth is the cost of underutilized resources. Often, new sales growth will require incremental new delivery capability in the form of new people or equipment. Adding a person, or adding a machine, has a fixed cost associated with it. But in the early goings, that person, or that machine, will likely be only partially utilized. So the business will bear the full cost of the new resource capable of doing much work, while it only realizes revenue and profit from partial utilization of that new resource. The unused, unabsorbed capacity of that person or machine represents a cost that can quickly sap any profit you might realize from the new investment.
Our Conclusion
Driving sales growth is one of the most important and rewarding activities in business. But driving sales will generate significant, new, and often underestimated costs that have to be anticipated, and managed carefully and sensibly. Unless the organization has a goal to "buy customers," and has the funding to go along with that strategy, new sales should be pursued and accepted based on the overall fit into the profitable mix and operation of the company. New business should be added, and served, according to a pro forma plan that works with the realities of the economics and capitalization of the company. Sometimes, particularly in times of heady growth, new sales should be gated--with contribution to profit being a clear arbiter of what gets accepted and what does not. Most of all, when a business decides to undertake an aggressive initiative to drive sales, it needs to anticipate these costs, and prepare to fund and to manage them. If it does these things well, the sales growth will indeed be rewarding, and the business will climb the scale to its next level of potential. If it fails, growth itself can easily create the next real crisis for the company.
