Author: Andris A. Zoltners, PK Sinha, and Sally E. Lorimer

There’s a question all top managers should ask: How can I make my sales force, which is one of the biggest and most important investments my company makes, perform more effectively?”

There are several reasons that question is so important.

Sales forces are expensive. Despite predictions by some pundits that many sales jobs would disappear due to the Internet and “big data”, companies continue to invest in sales forces in a big way. According to Selling Power magazine, the largest companies in America selling products such as computer and office equipment, consumable goods, insurance, telecommunications, and financial services, each employ tens of thousands of salespeople. By our estimates, the amount invested in U.S. sales forces exceeds $800 billion a year. This is 4.7 times the estimated $169.5 billion spent on all media advertising in 2012 and more than 20 times the estimated $39.5 billion spent on Internet advertising in 2012.

Sales forces are empowered. The significance of a sales force goes beyond its cost. The sales force is perhaps the most highly empowered organization within most companies. Usually working alone and unsupervised, salespeople are entrusted with a company’s most important asset — its relationship with its customers. To many customers, the salesperson is the company. As customers face a proliferation of buying choices, the way a company sells becomes a key point of competitive differentiation and a source of customer value. This makes an effective sales force essential for driving top-line performance.

Sales force dynamics are complex and poorly understood. Managing a sales force requires many difficult decisions. For example, you need a sales strategy defining which customers to target, what value proposition to offer, and what sales process to use to engage customers and create mutual value. You need to decide what sales force size and structure best allows you to meet customer needs and achieve company goals. You need to choose who to hire for the sales team, and how to continually develop sales team skills and knowledge. And you need to determine the goals, incentives, and sales culture that will motivate peak sales force effort levels and performance.

Many companies today are taking a more strategic and data-driven approach to making all of these and other sales force decisions. But regrettably, our understanding of what drives sales force success still falls short when compared to the cost of a sales force and the huge impact that salespeople have on customers and company performance. Sales continues to be one of the most poorly understood and under-optimized areas of business. Compared to marketing, the number of good books and academic articles in the sales force space is woefully inadequate. In the last ten years, only 3% of the articles in four leading academic journals (Marketing Science, Harvard Business Review, Journal of Marketing, Journal of Marketing Research) have focused on sales force topics. In 2009 (the last year that one of this blog’s authors taught MBA students at the Kellogg School of Management at Northwestern), the graduating class left the university having taken over 4,000 course equivalents on marketing topics — but only 100 course equivalents on sales. Less than 1% of undergraduate institutions in the U.S. offer a major or minor in sales and none of the top 20 graduate business schools offer a concentration in sales for their MBA students. (HBR ran an article on the dearth of academic programs in sales in its July/August 2012 issue.

Improving sales force management is a huge opportunity. We believe that sales force improvement initiatives typically produce incremental short-term revenue gains of at least 10%, and long-term increases of 50% or more. Consider the following examples of companies that have implemented sales force improvement initiatives that had big positive bottom-line impact.

• A business within GE that leases over-the-road trailers sought to refocus sales efforts to improve productivity. Leaders invested to develop better measures of customer potential. In just one year, qualified leads increased by 33%. The customer potential data also helped GE redeploy several sales territories into more lucrative markets, allowing the business to grow sales productivity by 7 percent without adding people.
• Global healthcare company Novartis identified a group of outstanding performers in its U.S. sales force, and isolated a set of “success principles” and behaviors that differentiated their performance. Leaders developed a new sales process based on these success principles and behaviors, and aligned sales hiring, development, and other programs to support the new process. The initiative contributed to six consecutive years of double-digit top line growth, well above the industry average.
• Temporary housing provider Oakwood Worldwide transformed its sales force to align better with customers’ need for a more consultative sales approach. This involved a new sales force hiring profile, training program, coaching process, and sales enablement tools and metrics. A large percentage of the sales force did not survive the transformation, but most top performers did. A year after implementation, deal win rates had tripled, sales cycle time had dropped by 50%, and salesperson turnover had declined to under 5%.

More research and education on sales, and continued work to develop and refine frameworks for understanding the drivers of sales force effectiveness can make a significant business impact in the years to come.

For sales managers, this is not an easy question to answer. The number of salespeople affects profitably by impacting both revenues and costs. It’s easy to estimate costs by looking at historical compensation, benefits, field support, and travel costs per salesperson. But it’s much more difficult to predict revenues, as it requires understanding how complexities such as customer needs, the economy, and the effectiveness of your and your competitor’s salespeople, influence a sales force’s ability to generate sales.

Most companies use financial decision rules to determine how large their sales forces should be, but regrettably, these rules often lead to poor decisions. Consider three commonly-used rules.

Add a Salesperson when there are Enough Sales to Pay for that Person

This “wait and see” approach to adding salespeople views the sales force as a cost item justified by sales, rather than as an investment that drives sales. An “earn-your-way” strategy is sometimes necessary in markets with high uncertainty or when a company is cash-strapped. But when leaders take this conservative growth approach even when there is reasonable certainty of success and available financing, they undersize their sales forces and forfeit opportunity. One pharmaceutical company’s overly-cautious sales force expansion strategy resulted in too little support for a new product launch and cost the company 17% of profits over three years.

Split a Territory as Soon as Its Sales Hit a Threshold Level

At one company, when a territory hits $3 million in sales, sales leaders split the territory and give a portion of it to a new salesperson. The current salesperson’s “reward” for working hard to build business is to have his territory reduced. Over time too many salespeople are placed in geographies where salespeople were successful initially and too few are placed in other geographies where considerable market potential remains untapped. Another downside is that salespeople in territories with sales approaching $3 million have incentive to stop selling in order to keep their territories intact.

Keep Sales Force Costs at a Constant Percentage of Sales

A sales force stays affordable by keeping costs in line with industry or company benchmarks for a sales force cost-to-sales ratio. But this is not the same as maximizing profits. Although it’s counterintuitive, when a sales force is undersized, adding salespeople increases the cost-to-sales ratio and also increases profitability. You can always reduce the cost-to-sales ratio by cutting headcount, but the impact on profitability is positive only if the sales force is already too large. Maintaining an industry average cost-to-sales ratio is especially harmful to small-share companies that want a competitive share-of-voice. Sustaining a historical ratio is also dangerous during a business downturn; it may result in excessive downsizing that amplifies the impact of the downturn and leaves the company poorly positioned for a turnaround.

A Better Approach

Financial decision rules alone are not enough for figuring out the right size number of salespeople. A better approach requires three steps.

Step 1. Look at four sources for signs that the sales force is under- or over-sized. If customers complain about inadequate service, if salespeople protest about too much work and travel, if sales activity focuses mostly on order taking instead of prospecting, and if competitors are expanding their sales forces, it’s likely that your sales force is smaller than it should be. On the other hand, if customers avoid returning your salespeople’s calls, if salespeople feel they don’t have enough opportunities, if sales activity emphasizes too many non-critical tasks and low-value customers, and if competitors are downsizing their sales forces, it’s likely your own sales force is too large.

Step 2. Do analysis that focuses on customers, not financial constraints. This requires understanding and segmenting customers according to their needs and potential, and determining what sales process and how much sales force time is required to meet those needs and realize the potential. By aggregating time required across customer segments, you can estimate the number of salespeople required to effectively cover your customer base.

Step 3. Look at financial ratios (such as sales force cost-to-sales) as a final check. Adjust as needed to ensure affordability. Often, by shifting coverage of lower-value customer segments to more efficient channels such as telesales, it’s possible to improve financial ratios while giving up minimal coverage of market potential.

Finally, keep in mind that changes in sales force size have both short-term and long-term impact. The cost impact is immediate, but the revenue impact accrues slowly and accelerates with time. When expanding the sales force, it takes new salespeople time to get acclimated and make sales, and for the new customers they acquire to make repeat purchases. Alternatively, when downsizing a sales force, loyal customers may continue to buy for a while despite reduced sales force coverage. But eventually, repeat business dwindles away. The best sales force sizing decisions look at profitability over at least a three-year time horizon. If leaders under pressure to deliver short-term results focus only on the first-year impact, they will under-size the sales force – our research indicates by 18% on average. As a result, they sacrifice long-term profitability.