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The financial test provides sales rep contribution data that is a reflection of how well the size of the sales force is sized against market opportunity.   The financial test is particularly insightful when you can assess historical data and perform the test year over year the past five years.  Many companies made cuts to their sales staff the past 2-3 years and by comparing the contribution rate of a sales rep before and after the cuts you can certainly gauge effectiveness, and more importantly get insights into the degree to which the sales staff is sized.  A dramatic increase in the contribution rate certainly indicates a leaner, stronger team but also reveals the high potential of a sales force that is undersized where reps are able to focus on low hanging fruit or maybe even “white elephant hunting” large profitable deals bypassing harder gained mid-sized deals.  

 

Financial Test

Part I: Estimate the annual cost of a sales person
1. Calculate total annual sales staff compensation including total salary, commission and bonus amounts
2. Determine value of benefits
3. Determine Administrative and field support costs
4. Determine annual T&E, travel, auto, phone, laptop costs for the sales people
5. Establish the total cost of a sales person by summing costs from points (1-4) and adjusting for number of sales people

 

Example:
Number of Sales People = 10

 

Total Salary and Incentive pay for sales representatives  $1,500,000 Benefits value $   150,000 Administrative and Field Support $   600,000 Annual T&E, auto, phone, laptop costs $   200,000 Total costs    $2,450,000

 

Total costs of $2,450,000 divided by 10 sales people = $245,000 annual cost of a sales person

 

Part 2: Estimate the gross contribution margin
1. Determine variable product costs (all costs that vary with how much product is sold)
2. Determine total annual sales
3. Subtract variable product costs from total sales to establish the gross contribution
4. Divide gross contribution by total sales to determine gross contribution margin

 

Example:

Variable Product Costs   $9.0M Total Annual Sales   $27M Gross Contribution   $18M Gross Contribution Rate $18M/$27M = 67%

 

Part 3: Calculate break-even sales
1. Divide the cost of a sales person by the contribution margin rate

 

Example:

$245,000 cost of a sales person divided by 67% contribution margin rate = $365,671.60

 

Part 4: Calculate average annual sales per sales person
1. Divide total annual sales by total number of sales people

 

Example:

Number of Sales People 10 Total Annual Sales $27M

$27M annual sales divided by 10 sales people = $2.7M

 

Part 5: Compare break-even sales with the average sales per sales person.
Compute the Average Sales/Break-even Sales Ratio

 

1. Divide average annual sales per sales person by the break-even sales amount

 

Example:

Average annual per sales person $2.7M Break-even sales amount $365,671.60

Average Sales / Break-even Sales Ratio for a sales person is $2.7M divided by $365,671.50 = 7.38.   In this example case, a sales person generates gross margin of 7.38 times their annual costs to the company indicating the likelihood that the sales force is undersized. 

 

Summary
Don’t leave money on the table with a sales force that is too small and the financial test provides a data point and also aids you in understanding the expected contribution rate and breakeven of additional sales reps. World class sales forces optimize their sales force for maximum revenue and the financial test is a key part of your analysis. 

 

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ABOUT THE AUTHOR

Vince Koehler

Help clients drive a strong marketing return on investment.

Prior to SBI, Vince served as the VP of Marketing for Integer and led e-commerce Agency of Record account teams at VML, a full service digital marketing agency. During his tenure, VML became a market leader, growing from 72 to more than 700 employees. Prior to VML, Vince was the President of Propeller Interactive, a digital marketing agency with clients such as Koch & Sprint.

Vince was the primary author of the latest SBI Magazine focused on Revenue attribution. Marketers are always looking for ways to demonstrate that their investments are connected to revenue generation. Attribution modeling is a data-driven approach to measure the monetary impact on lead conversion, opportunity creation, and revenue generation. To see how revenue attribution fits into your overall marketing strategy, download our SBI Magazine Special Issue: Revenue Attribution.

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