Topic 7
Budgeting and Sales Force Size
I. Budgeting Overview
For many companies the sales force is the single largest expense in the marketing budget. There
are two basic questions in the budget allocation process. How much should we spend? How should our
budget be allocated? Without clear objectives this is seldom a rational process. We must know the target
market, the cost to reach them, specific sales/profit goals.
If the projected budget exceeds the actual amount available something has to give. Either the
budget needs to be cut and the goals changed or more money needs to be found. Warn of danger of
budget/goal divergence.
Sales budgets can vary dramatically if there is a lot of performance incentive pay for the sales
force. Sales staffs should be generating a strongly positive unit contribution – so higher sales levels bring
about more incentive pay (bonus or commissions) but also a lot more revenue coming into the firm.
A profit analysis of 1742 PIMS businesses found a negative relationship between sales force
expense ratios and return on investment. Business units that kept their sales force expense ratios under
2.1% of sales had a ROI of 24% and those with sales expense ratios over 7.3% had an ROI of only 19%.
Although greater sales force expenditures increased sales revenues, they are also a cost that reduces profit
margins. Sales managers must balance the revenue enhancing activities of spending more on sales with
the costs of gaining those sales. [Dalrymple and Thorelli (1984), Business Horizons, July-Aug, 34.]
II. Budgeting Methods
A. Marginal Revenue = Marginal Cost Budgeting
This uses marginal analysis on incremental costs and revenues of sales expenditures. When your
goals are direct sales effect over the short term then this type of budgeting is quite feasible. You put
more money into what is working and less into areas having lower results. Although your firm will be
working within an overall budget constraint, funds can be accurately allocated to what is working and
away from what is not working.
If your sales spending is not trying to gain a direct sales effect over the short term, then MR =
MC is an unrealistic goal and intermediate steps to sales goals should be used. This also makes the
budgeting a much more difficult process since the actual dollar results are far harder to measure (and thus
relate back to the budget). Sales budgeting for capital items is extremely hard for this reason.
B. Easier Methods of Sales Budgeting
1. Set budget to meet the competitors (or industry averages) - problems with this
2. Set the budget equal to the amount of funds available - problem with this.
3. Percentage of Sales Method [Past or Expected Future
Example: Suppose your total sales last year were $5,374,000 and your sales forecast for next year is
$5,900,000.
a] If you used a 8% sales, what would your budget be next year?
b] If you used a 8% of expected sales, what would your budget be next year?
Answer: a] 8% x 5,374,000 = $429,920
b] 8% x 5,900,000 = $472,000
4. What is complicated to explain is what is probably used by astute marketers in practice. First, start
with your budget constraint (this is the last stage in the task method). Then, look at your sales force
goals. Determine how much it will cost you to meet those goals. Compare what you need to make your
goals with the budget. If there is no fit between the goals in the budget you will need to either a] revise
your goals or b] revise your budgets.
5. New products usually have far higher sales budgets than existing brands. A new product often needs to
gain channel penetration, target awareness and trial to be successful.
III. Where is the Budget Allocated?
Generally the sales budget is allocated to certain accounts. There is general flexibility to transfer
money between accounts (except for retirement, social security and other mandated expenses) but far less
flexibility to overspend your budget without permission. The exception to this is incentive pay when
sales results exceed expectations.
Some common accounts are
Sales force salaries, commissions and bonuses
Sales manager salaries, commissions and bonuses
Employee benefits (social security, retirement plans, hospitalization, life and medical insurance)
Travel Expenses (including lodging, meals and entertainment).
Samples and other sales aids
Recruiting and training
Clerical and secretarial support
Office rent and utilities, supplies and postage
Sales Promotion Accounts
Cooperative Advertising
Trade Shows
Discounts and Allowances
Displays
And often, advertising and direct mail (especially for industrial and channels marketers).
Some firms paying straight commissions have the sales people cover most travel expenses. However,
usually the commission rates are far higher.
IV. How Many Salespeople Are Needed?
A. Why Have A Sales Force At All? - A firm can contract their sales force out by using
independent reps or distributors that supply a marketing/sales force. This really gets into cost versus
control. This can also get into the area of fixed versus variable costs and the amount of cash available.
Discuss. Generally hiring a sales force outside of the company employees means using independent reps
who are paid on commission.
B. How Many Salespeople? - The size of the sales force directly relates to cost. The size of the
sales force depends on sales revenues, percentage of selling revenues devoted to sales costs and cash
available. It also takes a lot more time (and salespeople) to launch a new product and gain initial
customer trial than it does to maintain existing brands.
The decision on how many salespeople are needed is complicated by variations in territories,
salespeople, customers and compensation plans. The three methods discussed provide starting points, but
not a "best solution." Some techniques used are:
1. What Can I Afford? - Take expected sales and multiply that by the field sales expense ratio. Then
multiply that by the percentage of the sales budget allocated to the sales force. This gives you an
aggregate dollar amount available for salespeople. Divide this by the wages and expenses per person and
this will tell you how many you will hire (or retain).
Example: Say your field sales expense ratio is 9%. 80% is used for the sales force. Expected sales are
$35,000,000. You spend $65,000 in total benefits (salary, bonus and benefits) per salesperson. How
many can you hire?
$35,000,000 Expected sales
x .09 Field sales expense ratio
$3,150,000 Sales Budget
x .80 Percent for sales force (20% for selling aids and supervision)
$2,520,000 Available for salespeople
Dollars Available/Wages and expenses per person = (2,520,000)/65,000 = 38.77 or 38 salespeople
(always round down with budget numbers or you will go over budget).
2. Work Load Approach - is based on decisions regarding the frequency and length of calls needed to sell
to existing and potential accounts. It uses the formula:
# of salespeople needed = (number of existing customers + number of potential customers) x (ideal
frequency of calls) x (length of call) / selling time available from one
salesperson.
Providing better service (more sales calls or spending more time with the customer for each sales call)
will increase the number of salespeople that you need.
Below are examples of using the workload strategy to determine how many salespeople you need:
A firm has 4,200 existing customers and 3,100 potential clients to be called on an average of 4
times per year for 2 hours (including travel) and available time per salesperson is 1800 hours per year.
The size of the salesforce would be:
[4,200 + 3,100] x 4 x 2 = 32.4 or 32 salespeople (round to nearest whole number).
1800
The major problem with the work load strategy is that there is no consideration of the costs and
profits associated with different levels of customer service.
But this formula also forces a manager to realize the tradeoffs between different service levels.
Let’s take the information above with one change - the manager decides that optimal service requires
seeing accounts 5 times a year instead of 4 - but does not have the budget to increase the number of
salespeople. We now have:
[4,200 + 3,100] x 5 x 2 = 40.56 or 41 salespeople.
1800
But there is only a budget for 32 salespeople. Something will have to change. The manager
could adjust the number of accounts called on, the number of potential accounts visited or the length of
the visit if they cannot increase their sales budget or increase the available selling time per salesperson.
The manger decides to cut the number of potential accounts called on. This would change our number of
potential accounts to:
[4,200 + y] x 5 x 2 = 32 salespeople.
1800
We solve for y (the number of potential accounts to be called on):
Using algebra we get: 57,600 = 42,000 +10y
10y = 15,600
y = 1560. You can check your work by substituting back into the equation:
[4,200 + 1560] x 5 x 2 = number of salespeople. Which equals to 32. So our math is right.
1800
Although the equation is pretty simple, a manager can use it to get a clear answer to the trade-offs
necessary on different aspects of customer service (number of times seen and length of visit), the number
of clients seen (both current clients and potential clients), the number of salespeople needed, and the
benefits of increasing selling time. It can also point out the costs of cutting selling time for other
activities such as increased training, sales meetings, and other things.
3. Incremental Strategy - When firms add salespeople within an existing trading areas, the increase in new
business is usually smaller with each new employee (assuming a constant economy, marketing strategy
and competitive situation). Sales can grow because customers get better service, but the number of
potential accounts does not change. Eventually, all profitable accounts are covered and sales don’t
increase while expenses grow.
This suggests that new salespeople should be added until the gross profit on new business is equal
to the cost of hiring another person. Thus, sales revenues, costs and profits have to be carefully
monitored. The problem is estimating the new sales that would be gained from a new salesperson.
People's performance and the firm's and competitors products vary. The text suggests that past
experience can be used as a guide, and it can to a point. However, change is constant and old rules of
thumb may not work.
C. Experienced Salespeople or Trainees? - Generally you can hire people with experience or
trainees. Good, experienced people will cost more but generally have a faster immediate sales impact.
The reverse is true for trainees. Inexperienced people are usually easier to train in following firm
procedures. However, training takes longer and costs more for inexperienced salespeople.
There is also a quality vs. quantity issue. Some firms decide to have minimal training, hire lots of
folks, and weed out most recruits. Others put considerable money into recruiting and training. Two key
factors are training expense and the expense of uncovered territories - something difficult to estimate
from accounting data (explain).
D. Salesforce Turnover - has several direct costs (recruitment and training) and a hidden cost
(not covering the territory). Both the direct and hidden costs are real, and often overlooked by firms. The
turnover rate is the rate at which salespeople leave the sales force (promotions, resignations, retirement
and dismissal).
Separations per year
Turnover rate = Avg. size of sales force
The turnover rate is a direct influence on territory sales and hiring practices. Increases in
turnover increase recruiting and training costs and decrease customer satisfaction and hurt sales.
Replacing people can also eat up a huge amount of time for a sales manager. In the extreme the
manager’s job can become almost 100% recruiting and initial training.
Turnover can be reduced by having an equitable job environment (balanced territories and fair
compensation programs), providing positive feedback and improving financial awards. Note only the last
is a direct costs. This is an important control variable and can be too low as well as too high (explain).
E. Downsizing
The sales force may larger than the company can afford to maintain. Automation or improved
effectiveness can mean that there are more salespeople than needed. Downsizing is reducing the number
of sales employees. Downsizing is disruptive. Territories must be reorganized and many customers see
different salespeople who are unfamiliar with their needs. The remaining sales staff may become fearful
of losing their jobs causing the firm’s most productive salespeople to leave. Productive salespeople can
find a new job easily and often get unsolicited employment offers.
When sales force downsizing is needed, it is better to act all at once. Acting quickly is less
disruptive and loses fewer star salespeople than gradually letting a few people go over months or years.
Even when downsizing through attrition (retirements, deaths and people taking other jobs), gradually
shrinking the sales force causes a lot of territory reorganization and corresponding damage to customer
relationships.