The True Cost of a Sale, Part II
The True Cost of that Sale Might Not Have Been as Good as You Thought…
“We just closed a big deal – had to cut the price, but it was worth it!”
How many times have you heard this phrase around any given sales bullpen, bar, coach class flight back to the office, or just the hallway at headquarters? Someone finally bagged an elephant that they have been hunting for months, ultimately bringing in the paperwork thanks to a last-minute drop in price. The mood is positive, the attitude celebratory, and the team moves on to the next deal.
Then it is time for the senior exec meeting and two questions pop-up:
- First – “Have we hit our revenue numbers for the quarter?”
- Answer is, “Of course! We brought in that Big Deal! It pushed us over the edge!” A round of high-fives occurs.
Then the conversation shifts over to the CFO: “The Board is pushing for us to control costs and do a better job of maximizing profits.” So how much did you drop the price on that last deal? What was the actual profit margin we had on that? Maybe your price list has a floor, and the company supposedly maintains a certain margin even at the “floor” price.
But do they? That gross margin just covers revenue minus COGS after all, and misses out on the other costs of doing a deal. I first looked into this subject a few years ago, focused on the issue of over-payment on deals. In recent analysis by the Xactly Insights team, we found that 25% of the time more than 20 or more people are paid on a single deal by the time overlays, team bonuses, and shared credits are all added together.
Technology Can Help You Discover the True Cost of That Sale
Since I wrote that post, marketing automation technology started providing better attribution technology and reporting, which helps companies now begin to estimate the CAC (Customer Acquisition Cost = marketing programs + salaries + incentives) down to the individual deal level. Allocating those marketing costs at the deal level helps you get closer to analyzing the value of a particular deal. Your marketing team should be able to help with the allocated marketing costs on a deal by deal level (or at least an average).
Your commission administration team can run the next level of analysis to let you know what the total incentive cost of a deal was. In our dataset, we find that 7.12% of revenue is spent on incentives (with wide variation by industry). Find out what your number is, so that when you are celebrating a deal – make sure all of the gross margin hasn’t already left the building in marketing spend and incentive pay.
CFO Guide to Compensation Risk & Reward
The days of manually creating and implementing sales compensation plans are quickly coming to an end. If you’re a finance leader involved in managing compensation, you’re probably used to using spreadsheets to track and manage your sales compensation data.