Deloitte’s Richard Hayes and Christine Cutten tell how to drive performance improvement in sales and marketing.
In spite of recent economic turmoil, Wall Street still has high expectations today for the growth of public companies. Yet the investment community no longer looks at mergers and acquisitions as the only path companies can take to achieve significant growth. Instead, investors today want evidence that a company is growing organically by developing innovative new products and services, entering new markets, and capturing new kinds of customers.
To do this effectively, manufacturers need to fully understand the opportunities they have in specific market segments and the needs of the different customer segments they target in those markets. Crafting an appropriate value proposition and optimizing selling expenses to increase top line growth and profit margins is key.
This means shifting the focus from pushing existing products to any market into one that is geared toward recognizing and serving those markets that offer the better opportunity, while not over-serving less desirable markets and their less profitable customers. This typically means that manufacturers must be more proactive about their sales and marketing operations and determine how effective their spending is.
In the current business and economic climate, we believe one of the key metrics for determining the effectiveness of chief marketing officers (CMOs) or chief sales officers (CSOs) should be their ability to improve the ratio of selling expenses to revenue. Called the Sales Expense Productivity Ratio (SEPR), this metric is important to track both during periods of high business growth as well as during tougher economic times when containing costs without disrupting revenue streams is an imperative. It could also be used to help effectively manage the sales and marketing organizations.
By demanding continuous improvements in the SEPR, manufacturers can foster a corporate culture that is committed to getting the most out of their sales and marketing investments, regardless of the competitive climate.
THE SELLING EXPENSE PRODUCTIVITY RATIO
The SEPR is the amount of revenue a business brings in for every dollar it spends on sales and marketing activities. This ratio is important because it demonstrates unambiguously how well the sales and marketing functions are leveraging the funds being invested in them. Not incidentally, mindful tracking can point manufacturers toward tactical and strategic moves that better leverage their financial resources.
There are a wide range of expenses that can be classified as “selling expenses” under U.S. Generally Accepted Accounting Principles (GAAP). Because of this, the expenses used to calculate the SEPR can vary. Selling expenses we consider when calculating the SEPR include:
- Sales and marketing salaries
- Customer service salaries
- Travel and entertainment
- Advertising and promotion
- Packaging and distribution
- Commissions and fees to sales agent
- Post-sales support
WHY USE THE SEPR?
There are many arguments in favor of using the SEPR to evaluate the performance of CMOs and CSOs. First, there is a direct link between this ratio and shareholder value. All other things being equal, the higher the ratio the better the earnings per share.
Secondly, achieving the right product and customer mix is an evolutionary process that requires dynamic allocation of sales and marketing resources and careful measurement and tracking of the payback on those investments. SEPR is a model metric for doing this.
Finally, from the CEO’s perspective, the ratio promotes accountability from sales and marketing that mirrors how other operational areas are evaluated.
However, traditional ways of managing sales and marketing operations can get in the way of using the SEPR most effectively. These practices include:
A focus on existing products and customers rather than opportunities. Many companies that sell their products to other businesses focus their sales and marketing efforts on pushing as much product as possible out to the market – in whatever volumes the market will bear. While customer retention is a strategic goal for an organization, it must be managed by analyzing the more profitable customer relationships.
Career-track practices that place personnel without core selling and marketing skills into key positions. In manufacturing, it’s not uncommon to promote employees with engineering or product skills into sales and marketing roles. Lacking the sales and marketing experience, such individuals can approach the role from a product-centric point of view. While providing employees’ experience that helps them better understand the customer is a good thing, this practice can prevent companies from recruiting the marketing and selling expertise they really need to be competitive.
Sheer inertia of the organization and culture. Companies have generally evolved their profitable products and product strategies over long periods of time. When a new competitive threat emerges, they may be slow to react or unfamiliar with how to respond. Or, they may simply be unprepared since they have not been analyzing alternative means of squeezing revenues from smaller selling expense inputs.
Employee resistance to change. Many sales and marketing professionals grow comfortable in their roles. Increasing focus on SEPR productivity can help reinforce the need for the sales and marketing organization to think outside the box for growth.
Avoidance of accountability. The old adage that you cannot manage what you do not measure often holds true. Not having had accountability for selling expenses in the past, CSOs and CMOs may be reluctant to take it on now. Yet without the discipline that such measurement brings, sales and marketing productivity is unlikely to make strides forward.
RECONCILING SEPR WITH LARGER BUSINESS GOALS
Before manufacturers can decide the steps to take to improve the SEPR in the sales and marketing arena, they need to determine how sales and marketing must perform against overall business objectives and strategies.
Steps companies can take to assess direction and identify areas for improvement include:
- Controlling sales and marketing costs. Frequently, organizations have a mandate to reduce sales and marketing costs. The SEPR provides direct feedback on whether those aims are being achieved.
- Aligning marketing with competitive realities. The money and personnel resources invested in selling and marketing activities should mirror what the particular market and product niche demands – and no more.
- Optimizing customer service levels. Customer service levels must also be appropriate given the value proposition for each customer segment and the associated profit margins.
- Separating specialty from commodity products. Generating customer interest in specialty or highly customized products can require large investments in sales and marketing capabilities. Many manufacturers do not recognize the opportunity, consequently limiting sales potential and leaving money on the table.
- Following the value model. Understanding the precise value proposition for the customer and the value they represent to the business is key. Providing customers with what suits their needs to represent and enhance the value of their products is essential.
IMPROVING THE SEPR
Manufacturers can improve the SEPR ratio and work toward achieving the overall strategic goals of their business by pulling the appropriate “levers” for changing the sales and marketing mix. They should specifically reevaluate the following areas:
- Strategic Levers
o Targeting new markets
o Innovating the product portfolio
o Segmenting customer service offerings
o Exploring new channels
o Segmenting customers based on the value-proposition model
o Considering demand-generation alternatives by market and customer segment
o Allocating sales and marketing resources by customer segment
- Operational Levers
o Aligning sales and marketing roles with a go-to-market model
o Reconciling sales and marketing efforts with customer metrics
o Measuring marketing communication effectiveness by market and customer segment
o Designing effective sales processes
Remember that SEPR is Just One Piece of the Puzzle
The elements that a company includes in its SEPR analysis may not necessarily tell the whole story. In fact, companies should consider other levers that can be pulled to enhance productivity.
There is no one-size-fits-all solution for achieving the optimal sales and marketing mix for a company. As a result, manufacturers need to view the SEPR as a tool for helping them continuously improve how effectively they are spending their sales and marketing dollars. Once a baseline SEPR has been established, companies should ask the following questions, and then track improvements:
- What or where are my growth markets?
- Given my products and capabilities, which of these opportunities can I pursue?
- Which of these opportunities are the most profitable?
- What are my targeted customer segments?
- How am I aligning my sales strategy to those opportunities and segments?
- How am I prioritizing my portfolio of marketing dollars?
- What is my service model?
For more information, contact: Richard Hayes, Principal, Deloitte Consulting LLP
Christine Cutten, Senior Manager, Deloitte Consulting LLP
As used in this document, “Deloitte” means Deloitte Consulting LLP. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte & Touche USA LLP and its subsidiaries.