Sales teams have historically been tasked with driving top line revenue to fuel growth and market expansion. They have within their control several strategic levers to affect sales outcomes. Among them are value propositions, product selection, pricing, selling strategies and negotiation tactics. Sales performance hinges on the effective execution of these levers. Companies invest heavily in their people to improve selling skills and effectiveness. In fact, U.S. businesses spend $20 billion annually on sales training programs to improve sales execution. The goal is to sell more.
Levers available to drive revenue also drive profitability. While managers commonly turn to costs or other functions to drive profit, sales organizations have more impact over profitability than other business functions. For example, consider three fundamental profit drivers: unit volume, price and cost. Sales teams certainly are charged with increasing sales volume which remains their primary responsibility. And, when sales reps have even the slightest authority to adjust pricing through discounting, they have a strong influence over two of the three fundamental profit drivers. Even the smallest changes in price have dramatic impact on profit. Additionally, changes to customer and product mix lie within the control of the sales team as well. Mix can have measurable effect on margins over time.
Sales organizations are in a strong position to significantly boost profitability. Let’s define profitability as not only increasing gross profit by selling more but, in addition, the ability to lift gross margin. For example, gross profit can be increased from $500,000 to $600,000 by increasing sales while gross margin may remain unchanged at 37%. But, even more desirable is to increase gross profit and improve gross margin to say, 38.5% by improvements in customer mix or lifts in price. Simply selling more may increase profit dollars but not necessarily improve margin percentage. Sales teams are in position to improve both gross profit and gross margin.
Several profit levers are available to front line teams. For example, the ability to recognize and sell economic value counters buyers efforts to commoditize offerings and thereby provides opportunities to close more deals and capture higher prices. Measuring and comparing product and customer mix across sales reps reveals targets for improvement that drives margin. The ability to defend prices through better negotiations and avoid unnecessary price discounts has a direct impact on profitability.
Measuring customer profitability identifies low margin accounts requiring remediation and high margin accounts that provide a target profile for enhanced margins. The awareness of price leverage on profitability, where even the smallest improvement in price impacts margins, opens the door for reps to identify sales with low price sensitivity where selectively higher price points can be captured. (A price increase of just 1% lifts earnings for the average U.S. company by over 11%.)
Companies that leverage the profit power in the sales function typically gain 1 to 3 margin points. That’s $500,000 to $1.5 million on $50 million in revenue. Outcomes will vary depending on current margin performance and industry margin levels.
For manufacturers, wholesale distributors and business service companies that have exhausted cost reductions the sales organization provides an additional channel to realize profit enhancement and is well worth exploring.