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Driving Profitable Revenue Growth
August 20, 2008
Using SPM metrics to drive strategic decisions
By Leslie Stretch
You're a sales leader with a singular focus of driving profitable revenue growth. You realize that to maximize sales and profit margins, you must have instant access to key information, allowing you to quickly assess opportunities and risks and make on-the-the fly strategic and tactical adjustments in your sales plans.
But how do you find such information? More and more leading companies are relying on Sales Performance Management (SPM) software solutions to supply the raw data that is transformed into the knowledge they demand. At the heart of SPM is state-of-the-art sales compensation technology, which, in its data mart, holds bountiful information about revenue, expenses, incentives and profit margins.
Driving Profitable Revenue Growth
What can your sales division do to drive profitable revenue growth? The sales function influences three forces: 1) total sales revenue, 2) sales related expenses, including sales compensation and 3) profit margins and product mix of products sold.
Total Revenue and Sales Expenses together make up the sales division P&L statement. But the sales division also can strongly impact the profitability of the entire enterprise by selling the planned product mix with the planned profit margins in those products. Excessive discounting or selling too many of the low margin products can seriously erode company profit.
In order to manage and maximize these key sales performance variables, organizations must track metrics regarding these variables and be prepared to make quick mid-course corrections. Metrics derived from trusted SPM data both supply answers to key questions and opens the door to more questions. Having a wealth of data means the ability to drill down in the information until the answer is found.
Revenue and Cost Metrics
Since a sales division's success is at least partially evaluated on is P&L, the starting point for metrics is always revenue and cost. That means the most important overall metric for sales is total sales spend to total revenue: Reflects the overall efficiency of the sales division, taking into account all revenue and all expenses.
This metric is most meaningful when viewed over time. Whether results are better or worse over time, the real insights lie in analyzing what contributing forces may be at work. Some secondary sales/spend metrics include:
• Total Incentive Spend to Total Quota Achieved: Reflects if incentive spend is aligning with the success of quota achievement.
• Percent of Quota Achieved by Region: Shows region differences in sales success and may highlight the effectiveness of pricing or promotional strategies.
• Percent of Quota Achieved by Market Segment: Shows sales success in different market segments, and how they respond to product design, pricing and promotion.
• Sales Rep Expenses to Territory Revenue: Indicates if a sales rep territory is paying for itself, and may reflect poor territory design or poor decisions on discretionary spend.
Profit and Product Mix Metrics
After revenue and cost, the sales division's top focus must be on product profitability. Selling the right product mix at the right margins maximizes profitability. Once again, insights lie in drilling down through product mix and profit margin information, allowing for quick adjustments to sales plans and performance. Some key profit and product mix metrics include:
• Profit as Percent of Revenue by Product: Shows the overall profit picture of each product against the sales plan. Differences from plan require further analysis.
• Percent of List Price Achieved by Product: Indicates if low profit margins are due to excessive discounting off list price, or if list price may not be competitive in the market.
• Product Mix Compared to Sales Plan: Shows if profit erosion is due to a product mix being sold that is different from the sales plan. May indicate a poor incentive plan design.
• Product Mix Sold by Sales Rep: Shows which reps are selling an inappropriate product mix, and can be used by managers to coach sales reps towards a better mix.
Make SPM Data a Priority
Apply sound analysis to great sales data and you have the makings of invaluable information and knowledge. Use that knowledge to make strategic decisions and tactical adjustments to sales plans. Your best source of sales data is from robust SPM software solutions. It is trusted data on what has really happened, and is available now, not weeks or months from now. As one sales V.P. said, "Before SPM we had to wait weeks to get the information needed for changing our plans. Now, with SPM, we adjust on the fly daily…What a difference!"
Leslie Stretch is president and CEO for Callidus Software
Sales & Marketing Management Magazine
This article is brought to you by Sales & Marketing Management, the leading authority for executives in the sales and marketing field.
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