Chapter 13

1. Chapter 13 Sales Volume, Costs, and Profitability Analysis PowerPoint presentation prepared by Dr. Rajiv Mehta New Jersey Institute of Technology

2. Chapter Outline • Framework for Sales Force Organizational Audit • Sales Volume, Marketing Costs, and Profitability Analysis • Increasing Sales Force Productivity and Profits Source: Flying Colours Ltd.

3. Learning Objectives After reading this chapter, you should be able to do the following: • Understand the framework for a sales force organization audit. • Discuss the sources of information and need for sales volume, costs, and profitability analyses. • Outline the procedures for conducting sales analyses by territory, sales representative, product line, and customer. • Describe the procedure for marketing costs and profitability analyses. • Articulate the arguments for using contribution costs versus full costs. • Illustrate the concept of and ways to improve return on assets managed (ROAM).

4. Framework for Sales Force Organization Audit • A sales force audit is a “comprehensive, systematic, diagnostic, and prescriptive tool designed to assess the adequacy of a firm’s sales management process and to provide direction for improved performance and the prescription for needed changes.” • The audit entails an analysis of the overall sales organization performance.

5. Conceptual Model for a Sales Force Organizational Audit

6. Sales Volume, Costs, and Profitability Analysis

7. Sales Volume Analysis: Key Considerations Collecting, classifying, comparing, and evaluating an organization’s sales figures is a process referred to as sales volume analysis. (a) when an order is taken, (b) when it is shipped, or (c) when the customer pays in dollars or physical units invoices, cash receipts, accounts receivable sales in prior periods, the fiscal period’s sales forecast, sales quota, competitors’ sales analysis by region, district, territory, or overall organization by territory, product line, customer type

8. Sources of Sales Information • sales invoices • salesperson’s call reports • salesperson’s expense accounts • individual prospect/customer records • internal financial records • warranty cards • store audits • consumer diaries • test markets

9. Websites of Firms Specializing in Sales Volume Analysis • Peruse the websites of various firms that specialize in conducting sales analyses at • http://www.seatab.com/Solutions/Forecast?gclid=COL7_7PplpACFRGCGgodCGVl8w • http://www.figtree.com/sf-sa.htm • http://www.cosmic-solutions.com/content/salesanalysis.php • http://www.ncodeconsultant.com/case_04jc.html

10. Major Types of Sales Analysis • sales analysis by salesperson • sales analysis by territory (geographic area) • sales analysis by product/product line (autos, motorcycles, generators, lawnmowers, jet skis) • sales analysis by customer type (airlines, banks, government agency)

11. Subcategories of a Sales Territory

12. Hierarchical Analysis of Sales Volume by Market Segments

13. MicroComputer Solutions Corporation: Illustration of Minimum Average Costs

14. MicroComputer Solutions Corporation: Illustration of Minimum Average Costs

15. Cooperation Between Marketing and Accounting Departments: Average Per Unit Sales Cost Curve for Direct Selling average cost curve unitcost C1 C3 C2 S3 S1 S2 sales calls

16. Software for Conducting Sales Volume Analysis • Peruse the following websites to learn about software for conducting different types of sales analyses at • http://www.dynamacs.com • http://www.hornungllc.com/salesanalysis.htm • https://www.lucidera.com • http://www.vai.net/Products/Distribution/Features/Sales-Analysis.html • http://www.microstrategy.com/Software/Applications/SAM/

17. 1. Specify the purpose of the analysis. 4. Allocate functional costs to segments. 3. Convert natural expenses into functional costs. 5. Determine profit contribution of segments. 2. Identify functional cost centers. Marketing Profitability Analysis Procedure

18. Specify the Purpose • Costs tend to be specific and directly related to volume output; aka production costs. • Expensesare more general or indirect expenditures; aka marketing expenses. • Classify expenses as direct or indirect costs and as fixed or variable costs. Source: C Squared Studios

19. Functional cost centers 2. Order-filling costs 1. Order-getting costs Identify Functional Cost Centers • product packing and shipping • transportation and delivery • customer service • warehousing • inventory control • material handling • accounts receivable • sales promotion and publicity • product and package design • advertising • sales discounts and allowances • sales administration • credit

20. Convert Natural Expenses into Functional Accounts • Natural accounting expenses (traditional expense categories like salaries, rent, depreciation) must be reassigned to expense categories. • With this data, a basic profit-and-loss (or income) statement, can be calculated using this formula: sales − cost of goods sold gross margin − expenses_______ net profit (loss)

21. Allocate Functional Costs to Segments • For profitability of each unit or market segments, allocate the functional costs incurred by the unit in serving the segment. • Full costs or contribution margin? • Since marketing costs contain direct, indirect, fixed, and variable amounts, allocate full costs or only marginal costs (direct and variable) to the segments. • Costs that are fixed and indirect are usually impossible to assign to segments except arbitrarily. • The contribution margin (the sales price less direct costs and variable costs equals the amount the sale contributes to profits) approach entails allocating uncontrollable costs, thus not considered in marketing decisions.

22. Determine Profit Contribution of Segments • Identify unprofitable customer accounts, products, or territories that can be served less frequently or dropped. • Profit contributions can be examined by segments in two basic ways: • by individual segments • by cross-classification of segments Source: C Squared Studios

23. Return on Assets Managed (ROAM) • ROAM measures how productively the assets have been employed. • When applied to segment analysis on the basis of the contribution margin, the formula becomes

24. Improving Return on Assets Managed (ROAM)

25. Return on Investment (ROI) • Learn about using another financial measure, ROI, in sales analysis at • http://www.justsell.com/salestools/returnoninvestment.aspx • For articles and case studies on ROI visit • http://www.customer.com/ccgsite/pages/roi_measurement.html#articles

26. Articles on Sales Volume Analysis • To read various articles on sales analysis, go to • http://www.contentspool.com/tag/measuring+sales+performance/ • http://www.destinationcrm.com/articles/default.asp?ArticleID=2668 • http://www.comportone.com/score/articles/analysis.htm • http://ezinearticles.com/?Sales-Analysis-and-How-They-Can-Benefit-Your-Business&id=843938 • http://ezinearticles.com/?Sales-Metrics-Tell-More-Than-You-Know&id=723644

27. Sales Force Training That Pays • To see a video on how to determine the effectiveness of training salespeople, go to • http://www.sellingpower.com/video/index.asp?date=11/7/2006

28. Ethical Situation: What Would You Do? Discussion Question As the national sales manager for a medium-sized electrical parts manufacturer, you have a lot of pressure on you to make the company’s annual calendar year sales forecast, which is set by the CEO and the vice president of marketing with some input from you. They always push together for an ambitious sales forecast, and you feel you have no option but to go along with them. It is now the end of September and you’ve just gone over the sales data for the past three quarters. Sales are running about 10 percent behind what will be necessary to make the year’s sales forecast. Last year, you missed achieving the company sales forecast by nearly 12 percent, and you realize that your job may be in jeopardy if your sales force isn’t able to reach this year’s sales forecast. The CEO may come under fire himself from the executive board if company sales again miss forecasts, and he will most likely blame you for the failure. Normally, a sale isn’t tabulated until the product is actually shipped to the customer, but about 85 percent of all customer orders move on to the next stage and are shipped. Only about 15 percent are cancelled for various reasons. You recognize that your sales force could still make the annual sales quota if (1) salespeople are ordered to start aggressively pushing inventory onto customers and (2) you change the way a sale is booked from the date the product is shipped to the date the order is received from the customer. Before making these two decisions, you try to think through the potential pros and cons.