Do the Math
Now that you have the costs fully identified, you need to create a report that sums them up and offers you a monthly cost of your sales and marketing system.
Once you have the absolute dollar costs, compare that to the absolute total dollars of gross margin produced by the company for the same period of time. So, at this point, you’ll have two numbers: Absolute dollars of costs, and absolute dollars of gross margin.
Now, express your costs as a percentage of gross margin by dividing the larger number (gross margin) into the smaller cost number. You’ll produce a percentage. That percentage is a powerful measurement of the effectiveness of your sales and marketing system.
Here’s an example. Your total sales and marketing system costs are $115,000 this month. Total gross margin is $400,000. Divide the $400,000 into the $115,000 and the result is 28.75%. We call this process “Kahle’s Kalculation of Sales Productivity.”
(Download Kahle’s Kalculation, including a line-by-line explanation.)
You can use this number to compare one month to the next and chart trends in the effectiveness of your sales system. It is most helpful in determining the impact of various new elements on the system. For example, if you hire a new salesperson for a new territory, the impact will be reflected in an increase in the percentage.
What should the number be?
One question almost everyone asks at this point, is this: “What should that number be?”
My answer: In a business with annual sales of +/- $20 Million, the sweet spot is a range from 26 to 34 percent.
~ In a business with annual sales of +/- $20 Million, the sweet spot is a range from 26 to 34 percent. ~
If your business is smaller than that, your percentage can trend upward a bit. If your business is larger than that, your KK number should trend downwards. That single number can shine a light on the impact and effectiveness of your sales system. For example, if your number is higher than that, you are probably investing very heavily in the future growth of your business (maybe you just opened a new sales branch, for example), or your system is not very efficient. You have a significant amount of under-performance aspects to your system. It is very difficult, for example, to be profitable at 40% or more.
If your number is too low, that indicates that you are probably not growing at the rate that you could or should be, because you are not investing appropriately in the growth of your business. It could also be that you are a very mature company in a mature market where there is little or no growth expected, and you are taking profits out of the business via a reduced investment in sales.
Here are some additional resources to shed more light on this issue:
- Free Download of “How to Kreate Kahle’s Kalculation.”
- Blog Post: “Is it time to concentrate on sales productivity?”
- Blog Post: “Sales Leader’s Q & A: No Budget”
- Blog Post: “Why a Sales System May be the Missing Link in Your Organization.”
- Blog Post: “Do You Have a Selling System?”
- On-line course: “The Short Course in Creating a Sales System.”
- Free E-book: “Sell Better!”