You’ve been asked to calculate the cost of each sales rep. Put another way, how much would a sales rep need to sell for your organization to break even?
First reaction would be to calculate salary, commissions and benefits and call that the break-even. What about all of the overhead, travel and training expenses?
In this post, we’ll look at all of the costs on your Sales P & L and build those costs back into the final sales cost. That way we’ll have a complete picture of all costs associated with having a rep sell your product.
Are your sales reps profitable? Here’s how to find out.
Before we get started, take a moment to download our free Break Even Analysis Guide. Your team can use this tool to evaluate the size and profitability of your sales team. You can download it here.
The Cost Buckets: A Look at the Sales Profit and Loss Statement.
A look at the Sales P & L helps to understand what costs need to be allocated back to get the total cost. Let’s look at the cost buckets that make up the total cost of sale and then review at an example.
- OTE (On Target Earnings): This bucket includes compensation and benefits — salary plus commission plus benefits. This generally captures between 60 to 80% of the total cost of sale.
- Office Overhead: This is often referred to as the “load.” This percentage fluctuates between 10% and 40%, depending on the environment.
- Travel Expenses: This bucket includes airline, hotel, car, per diems. This category can fluctuate widely. A national sales rep will have much higher expenses than an in-house rep.
- Training and Enablement: This includes training and enablement expenses, including sales kick-off events.
Let’s take a look at a sample calculation:
OTE 200,000 Load at 30% 60,000 Travel and Expenses 10,000 Training and Enablement 30,000 Total 300,000 Additional Considerations
Some organizations may have additional costs that should be included in the total cost of sale. This is especially true with technology and more complex products. Your organization might not include all of these.
- Sales Support: Consider the costs associated with the “deal team.” This includes people like pre-sale analysts and technologists. Their costs should be fully loaded with costs allocated calculated the same as the sales rep.
- Management Overhead: In organizations that include regional management, for example, these costs may be allocated back to the cost of sale.
- Sales Operations: This includes support functions like resources in pricing, proposal generation, strategy, and commission tracking and preparation.
- Marketing Lead Generation Costs: Capture costs associated with lead generation referencing the Marketing P & L. Only include expenses that are true sales support – not branding or global PR.
So you’ve burned up your 10-key with this calculation. How can this number help improve the profitability of this organization?
Well, we now understand how much it costs to sell products. And we also know how much it should cost to keep a sales rep at break-even. From that, we can:
- Plan and generate revenue to arrive at a break-even point
- Determine item pricing on a cost-plus basis.
- Identify profit and loss objectives.
- Establish individual and organizational benchmarks.
- Determine A, B and C player talent for performance and salary evaluations.
- Design territories, considering if each territory has enough opportunity
- Determine headcount. If your existing heads exceed the cost of sale, it may be time to add to headcount.
- Use the benchmark to “fix” the expense or revenue side. If your cost of sale exceeds revenue, you’ll need to either reduce expenses or increase revenue
Cost of Sale: A Powerful Metric:
Yes, this number takes a bit of perseverance and discipline to calculate. But here’s the deal: once you have this number you have a metric that supports planning and forecasting. You’ll know exactly what it costs to sell that product. You’ll have a benchmark for evaluating sales rep performance. And you’ll have an expense/revenue lever to pull when results don’t measure up.
Can you afford not to know this number?