Sales Costs

When they start a business, many people think sales cost nothing. Often they are right, technically. The CEO does the selling as part of his role, and usually very successfully. People love buying from a senior executive or founder. Who wouldn't like to buy their next Dell from Michael Dell? The other reason that top people are frequently such effective salespeople is they know their product inside out and give immediate, first-rate answers to every reservation. This gives doubters confidence and quickly wins them over.

The transition occurs when you start employing people just to sell. You then need to know exactly what they have to achieve to break even. You'd be amazed how many people don't know how many sales each one has to achieve per month before the company profits. However, the odds work just the same whether management knows them or not, and you are better off being aware of what they amount to. In the end you are the person who is going to have to find the money to pay for it all. There are essentially three figures to watch:

♦ The selling cycle

♦ The monthly cost of sales

The selling cycle is usually considered a calendar month, which is why bills are normally invoiced and paid monthly all over the world. In retail outlets it can be much shorter, sometimes a day, though more usually a week. When selling in units of exceptional value (government contracts and so on) the cycle may be quarterly, bi-annually, or even a year.

One of the biggest factors that affect the length of the cycle is unit cost. Another is the time it takes to evaluate the product. A $25 utility program is likely to be bought on the spur of the moment, whereas a multicurrency, pan-organizational accounts suite is difficult to evaluate properly in less than a year. When you begin to develop your program, you can only guess what the selling cycle is likely to be. If in unknown territory, the best bet is to be guided by similar products.

Unfamiliar products and those introducing new thinking are particularly hard to predict. When Stac Software's Stacker disk compression software got going in 1993 (a point at which program sizes were growing faster than affordable disks to store them on), it took some time for even big names in the IT industry to latch on. The harder a product concept is to appreciate, the longer the sales cycle will inevitably be. Statistically, there is invariably some client who is an exception to any rule, a product evangelist who buys a new, unknown, and conceptual program quickly. Don't be misled by exceptions, however desirable. Sales cycles are averages, not Guinness Book records.

Knowing the true sales cycle, or rather the type of sales cycle your product is likely to achieve, is critical to the survival of your company. Most conservative guesses fall short of the mark. Companies can die, not because the product is flawed, but because the selling cycle is so long they go broke before customers sign the purchase order. If your products don't have any competitor against whom you can gauge your sales cycle, look for similar or cousinly products and find out theirs.

Note With the Internet it's easy to establish your own sales cycle. It's the average time between downloading and purchasing.

The best selling cycle to adopt is the shortest meaningful interval across which you can effectively monitor progress. It's self-evident that the average interval between the first contact and handing over the money varies. Going into a newsagent to buy a magazine might take less than a minute; but a major airline might take years between evaluating the latest navigational system and placing an order, after which there's often several years before they take delivery.

Consider a three-man sales team that costs the firm $10,000 per month. Assume that the average monthly profit they bring is $20,000. Table 16-1 shows how the length of the selling cycle affects a firm's cash flow.

Table 16-1 Impact of Selling Cycle on Cash Flow

Sales Cycle

1 month

2 months

3 months

4 months

5 months

6 months

Cost of sales operation

$60,000

$60,000

$60,000

$60,000

$60,000

$60,000

Sales profit

$100,000

$80,000

$60,000

$40,000

$20,000

0

Balance

$40,000

$20,000

$0

-$20,000

-$40,000

-$60,000

If the selling cycle is six months, you need $60,000 in cash to fund it before you start. It is a critical issue. Most software firms rely on regular sales for survival. If yours is one, you need to engineer as short a sales cycle as possible. The evaluation period provided will critically affect your sales cycle.

Individuals always make faster decisions than companies. The larger the company and the more decision makers it needs, the longer selling will take. Further confusing the issue, it is inevitable that sales cycles will alter between countries and market sectors.

When you are doing your sums remember expenses. Travel, recruitment, training, and expenses are all costs that have to be factored in. Probably the best way to stop expenses from going through the roof is to allot salespeople $X per month on expenses providing they make their basic sales target; anything left goes in their salary. You'd be amazed how expenses fall and pay packets increase.

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