Managing Your Selling Expense by Paul Taccini
There are a number of key elements in every company’s overall profit structure. The expenses which fall between gross and operating profit lines (the sales expenses) are an area which may not receive as much scrutiny as it should. While companies have different structures for selling expense accounting, advertising, promotion, public relations, sales force and rep force expenses, commissions and other like expenses usually fall into this category.
At least semi-annually, possibly as part of the planning process, companies should take an in-depth look at what is included in sales expense category and the way it is managed. A check list of some questions you might ask include:
How do my competitors go to market?
What type of sales force is common in the industry? How are we structured?
If commissions are used, what is the industry norm.
Where do we fit in comparison?
What is the role of advertising and promotion in our industry? In my company?
Is promotional pricing frequently used?
If so, are we accurately capturing the effect?
This is hardly an all-inclusive list. Rather, it presents the type of question which need to be asked. You may find that you are spending more promotionally than the norm, or your commission expense is greater. The answer isn’t just in knowing the absolute facts, rather it is understanding the why of it. At this point, you can decide whether changes are necessary. You may just find that you are doing a great job here.
Several years back, I was involved with a mid-sized consumer products company. At one point, we took a hard look at our selling expense and the way we went to market. While on the surface everything looked fine, we did a deep dive into the numbers and what we found was surprising. Our 6 top accounts were receiving a tremendous amount of attention. Not only were the sales reps and sales managers calling on them, senior management was also spending a great deal of time and effort as well. Key accounts deserve extra attention, but we found that senior management along with the sales management team were doing most of the real selling not our sales reps. The accounts knowing how important they are to the company expected senior management to do the major work. This close attention was having a very positive effect but a major issue for us was that we were still paying full commissions to our reps for basically picking up the “paper”. To reflect the reality of our situation, we restructured our sales responsibilities and modified our commission base. Over two years, we gradually reduced our commission rates for these top accounts. It wasn’t easy or pleasant and our rep force didn’t like it, but it was worth it. As a result, our overall commission expense decreased by two full parentage points. When fully implemented, this amounted to an annual savings of almost $2.0 mm with no interruption of sales. This may have been a unique situation but there are opportunities. Look for them!
It is worth remembering that understanding and fine tuning what is happening in the selling expense area might be a quick and easy way increase your bottom line.
Senior Business Consultants, LLC