True sales planning is one of the most important things that a business can do each year. It forces business leaders to think through – in significant detail – what is necessary to accomplish their business goals.
Sales planning is more than a tactical plan set from on high: “Your quota is $1MM, now go sell!”
Instead, it’s about planning to sell profitably.
Selling profitably is something that is not as straightforward as it seems. We see examples all the time, in companies big and small, that believe they are selling profitably and selling well–but simply are not.
There are examples of strategic decisions to sell certain products or services at lower margins or even at a loss. These may include gaining traction in a new market, gaining a marquee client in a new industry, or an initial sale with high likelihood of highly profitable add-on services.
But these examples should be few and far between and only done based on a specific plan, not because you didn’t realize it was an unprofitable sale.
The vast majority of the time you should be turning down unprofitable sales (just say no!) and focusing on those customers that value what you offer and are willing to pay a fair price. To do this you must truly understand both your financial numbers and your sales plan.
To give some examples of how to think through your sales planning and to ensure you are selling profitably, consider Who, What, Where, When & How:
Who do you want to have as customers?
Don’t just take any deal that comes in the door. Have a plan about which customers you want to sell to.
If you are B2B:
- How big are they?
- Will they be repeat customers?
- Do you want one-time customers?
- What is their need?
If you are B2C:
- What demographics?
- What psychographics?
- Where do they live?
Often, certain groups are much more profitable and willing to pay a fair price for your products or services than others. If you are providing more than just the base product/service, be sure to charge for that.
What are you selling?
Most business are confident they can answer the question “what are you selling?” They know that they sell product “x” or service “y” and at what price they sell it for. But many would be stumped if they were asked to provide the true Gross Margin generated by each product or service line.
Most businesses are not calculating Gross Margin correctly. For instance, if you are a manufacturer, are you including an overhead allocation in your Cost of Goods Sold calculation? It can also be the case because many business owners do not check their assumptions – once the project is complete how did we do versus our original estimates?
Gross Margin is one of the most important financial metrics that business owners should monitor. This – even more than revenue for most businesses – is the driver or your profitability. It works like a multiplier.
Using some general business assumptions, a 2.5% increase in Gross Margin can generate a 17% increase in Net Income. That is profitable selling.
The best businesses pay commissions not on revenue but on Gross Margin. This forces sales representatives to sell profitable deals and not to be so quick to discount, since it has a much greater impact on their personal compensation.
Where do you find and sell to your customers?
There are two questions we typically ask clients about where they sell to customers.
1) Can you effectively service clients that are not local?
2) Are you including appropriate charges for shipping, freight, travel, etc?
For many companies, serving clients locally or remotely is no problem. But for others, serving companies farther afield means unexpected costs and inefficiencies.
If you incur a greater percentage of these costs on a given customer/project and do not appropriately charge for this service, you will see your margins and profitability quickly decline.
When do you sell to customers?
Time has a price. Consider this the next time a customer calls and says they have an emergency and need your services asap. Sure you want the business – maybe you have been working on closing this client for 18 months and here they are ready to do business.
But think about what servicing them immediately will require:
- Will you need to have people work overtime?
- Will you need to move people from other projects?
- Might you impact the client service of other customers that you de-prioritize to focus on meeting the tight deadline of this new customer?
- Will you need to pay your vendors extra for rush delivery?
- Will you need to pay expedited freight?
All of these may be reasonable trade-offs that you decide to make in order to take on this job and client. But it is not the time to discount prices. In fact, urgent jobs should usually be priced at a premium. They should be opportunities to upsell your ability to meet tight deadlines that your competitors could not.
By understanding the trade-offs and the numbers, you can make the right profitable, pricing decisions.
Alternatively, there are times when taking a last-minute project may not require premium pricing and may even be done at a discount. These opportunities come when companies have idle capacity, either machines or people, who would otherwise not be providing any return for the company.
For example, a professional services firm may have a couple of consultants who have just finished a job and not be assigned to the next one yet. If an immediate two-week project came in, it would make sense to price to win the project since incremental revenue is better than no revenue.
How are you sourcing your sales?
Most business owners know their salespeople’s salaries, the commission rate, and how much they are spending on marketing. And they probably think through these sales and marketing costs vs the total sales goals.
But are you considering all of the other costs? Good sales planning means taking into account hidden costs.
The biggest hidden costs are travel, meals and entertainment. These tend to get buried because they are lumped into General & Administrative costs and combined with all Travel and M&E costs from employees across the company. It is also where there tend to be thousands–often tens of thousands–of dollars of savings.
First, does your company have a T&E Policy? If not, and you have employees that travel, TGG can help you create one today.
Second, review expenses carefully and consider if they are necessary and reasonable. How many trips should a salesperson be making to visit a prospect? Are in-person meetings required or could some be done by video conference or call? Is one representative taking clients to very expensive steakhouses on a regular basis? Are people choosing the most cost effective airfare or spending hundreds of dollars extra to rack up personal miles on their preferred airline?
Again, the most important thing is to understand your numbers and factor these into your sales planning and pricing decisions. Give your team a T&E budget at the beginning of the year and ensure they stick to this budget.
Review expense reports (at least intermittently) to let people know that you are tracking this. And consider the costs, including pre-sales costs of servicing each client in your pricing.
You might need to price higher or require more volume from a customer that prefers monthly visits and wining and dining. You can consider slightly lower prices for those clients that are fine with work being done remotely.
Sell smarter, not harder
Sales are the lifeblood of most businesses. Most of the firms that we consult who are struggling are doing so because of a sales planning issue.Their general internal diagnosis is that they are not selling enough. Instead they are not selling as profitability as they should.
There is no doubt that sales is hard work and that some amount of sales is simply getting out there and doing it, as they say “activity begets results.” Still, there can be another option – sell smarter!
If you know your numbers, you can sell more profitably. More profitable sales mean you don’t need to sell as much to make the same amount of profits. This is a win-win for many business owners.
This post was reviewed by our team of accounting and financial experts. TGG’s mission is to make business owners’ lives better through excellent financial management. We strive to provide the most up-to-date and objective information on accounting-related topics so our readers can make informed decisions based on factual content. All posts undergo a review process with at least one member of our Leadership Team to ensure accuracy.
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