As a VP of sales for a rapidly growing company, you are grappling with the question of expanding the size of your direct sales force (from its current level of 60 national salespeople). You are considering hiring from 5 to 10 additional personnel. How would you estimate the additional dollar cost of each additional sales person? Based on your company's past sales experience, how would you estimate the expected net revenue generated by an additional sales person?
How would you use these cost an revenue estimates to determine whether a sales force increase (or possibly a decrease) is warranted?
I am thinking Sensitivity Analysis should be applied to this concept. Do you agree? But without any figures it would be hard to use the below equation, correct?
Break-Even Point in Sales = Total Fixed Costs / Contribution Margin Ratio
Thanks,
I don't understand why total fixed costs should ever be a major component to a calculation that should be made on the margin. The question is simple, does the expected additional revenues (MR) from the added sales force exceed the expected labor costs (MC) from the added force? If yes, then hire, if no then dont.
Now then, estimating expected net revenue is not nearly as simple.
If I had this problem.....
I would start by forming a formal economic model. I would start by listing all the variables that affect sales revenue. One obvious variable is the size of the sales force. Other variable include advertising expenses, product reviews, general economic activity, size of competing firms, some notion of size of the total market, etc.
Next, I would want to quantify each of these important variables as best I could. (e.g., GNP could be used as a measure of economic activity.)
Next, I would look for relationships amoung variables. I would plot sales against each of the variables to see if expected patterns emerge. I would especially look for non-linear relationships.
Next I will want to empirically measure the "model" using an econometric technique(s). Sales is the dependent variable, the empirical measures of your explanatory variables are your right-hand-side variables. The result, if successful, is an estimated model which relates each of the variables to sales. By changing one of the variables, I could estimate how much sales will change.
Once here, I am nearly done. Take it from here....
I hope this helps.
Thanks Economyst! Great start for me and I took it and ran with it.
To estimate the additional dollar cost of each additional salesperson, you would need to gather and analyze data related to the costs associated with hiring and maintaining sales personnel. Here are the steps you can follow:
1. Determine the direct costs: These include specific expenses related to hiring, onboarding, and training new salespeople. This might include recruitment fees, background checks, HR processing costs, and initial training expenses.
2. Analyze indirect costs: Consider other costs indirectly associated with each salesperson, such as office space, computers, software, and communication tools. These expenses might be shared among the existing sales force but would increase with additional hires.
3. Calculate ongoing expenses: Factor in commission or incentive structures that are typically part of a salesperson's compensation package. Also, consider ongoing professional development or sales training costs that are necessary to keep the sales team effective.
By summing these costs, you can estimate the overall additional dollar cost of each additional salesperson.
To estimate the expected net revenue generated by an additional salesperson, you would analyze past sales data to identify the average revenue generated by each salesperson. You can calculate this by dividing the total revenue generated by the number of salespeople, which will provide you with a rough estimate of the average revenue contribution per salesperson. This average can then be used as a benchmark to estimate the expected net revenue of each additional salesperson.
Once you have estimated the costs and expected net revenue, you can use this information to determine whether a sales force increase or decrease is warranted. Here's how you can approach it:
1. Compare costs and revenue: Calculate the net revenue generated by each additional salesperson and compare it to the estimated additional cost of hiring and maintaining them. If the net revenue is significantly higher than the cost, it may indicate that increasing the sales force is a viable option.
2. Sensitivity analysis: Perform a sensitivity analysis by considering different scenarios and factors that might impact the cost and revenue estimates. This analysis can help you understand the potential variations in outcomes and consider the best course of action.
3. Identify the break-even point: Using the break-even point formula you mentioned (Break-Even Point in Sales = Total Fixed Costs / Contribution Margin Ratio), you can determine the level of sales needed to cover the total fixed costs associated with the additional sales force. This can serve as another criterion to evaluate whether increasing or decreasing the sales force is warranted.
While sensitivity analysis can be valuable in exploring different scenarios, it does require specific figures and data to produce meaningful results. If you don't have access to relevant financial figures, it may be challenging to use the break-even point equation effectively.
In summary, estimating the additional dollar cost of each salesperson and the expected net revenue generated by them will help you make an informed decision about expanding or reducing your sales force. Sensitivity analysis can complement this process, but without sufficient data, its results may be limited.