Sales Force Management 11th Edition Mark W. Johnston Greg W. Marshall Routledge 2013

Evaluation and Control of the Sales Program Part 3 Evaluation and Control of the Sales Program Routledge 2013

Chapter 12 Cost Analysis Routledge 2013

Real Costs Analysis Leads to Real Benefits 1 Operational excellence that brings together an attention to quality, and cost control (Chapter 12) 2 Talent acquisition and retention (Chapter 9) 3 Employee and customer focus (Chapter 2) Routledge 2013 Source: HR Chally Group (2012)

Real Costs Analysis Leads to Real Benefits Chally’s research found customers with a “dedicated” sales service support had higher satisfaction and were better customers than customers with “nondedicated” support: 18% higher customer service ratings 15% higher probability of repeat purchase 23% higher sales volume 30% higher purchase on “standard” products Routledge 2013

Learning Objectives Select appropriate cost allocation method for various sales management situations Describe how to implement methods Discuss importance of (ROAM) and calculate Apply financial cost analyses to sales management situations to make decisions Routledge 2013

Innovation: Learning about the Lifetime Value of the Customer Developing & maintaining a sales force is expensive Companies assess how to best use this resource One tool used is Lifetime Value of the Customer Measure each customer’s long-term value, or profitability Not all customers are equally profitable Must analyze cost of doing business with customers Get up-to-date information on real costs of business Determine real cost of maintaining customer relationship Consider short-term and long-term firm objectives Routledge 2013

Cost Analysis Development Sales managers need accurate knowledge of profitability of: Customers Geographic areas Products Markets Three approaches to cost analysis: Full costing Contribution analysis Activity-based costing (ABC) Routledge 2013

Full Cost versus Contribution Margin Full-cost (net profit) – many of the indirect costs can be assigned on the basis of a demonstrable cost relationship Contribution margin – direct product costs identified associated with revenue to yield a true Gross Profit Profit/loss statement (net income) – distinguishes between costs and expenses Costs – often restricted to materials, labor, power, rent and other miscellaneous items used in making the product Routledge 2013

Exhibit 12.1 Differences in Perspective Between Full-Cost and Contribution Margin Approaches to Marketing Cost Analysis Routledge 2013

Profit and Loss Statement By Department Using a Full-Cost Approach Exhibit 12.2 Profit and Loss Statement By Department Using a Full-Cost Approach Routledge 2013

Profit and Loss Statement if Department 1 Were Eliminated Exhibit 12.3 Profit and Loss Statement if Department 1 Were Eliminated Routledge 2013

Contribution Margin By Departments Exhibit 12.4 Contribution Margin By Departments Routledge 2013

ABC Accounting Activity-based costing (ABC) Allocates costs to activities Identifies fixed cost components for production and sales and associates them with the products sold Costs once assumed to be fixed in the short-run can be associated with operating units such as a sales office Routledge 2013

A Diagram of Activity-Based Costing Exhibit 12.5 A Diagram of Activity-Based Costing Routledge 2013 Source: Chea, Ashford, C., "Activity Based Costing in the Service Sector: A Strategic Approach for Enhancing Managerial Decision Making and Competitiveness," International Journal of Business and Management 6 No. 11 (November 2011, pp. 3–10.) 12-15

Comparison of Activity Base Costing and Contribution Methods Exhibit 12.6 Comparison of Activity Base Costing and Contribution Methods Routledge 2013

Steps in Conducting a Marketing Profitability Analysis Exhibit 12.7 Steps in Conducting a Marketing Profitability Analysis Routledge 2013

Technology: The Hidden Costs of Trade Promotion Great amount of variance in the promotional spending of consumer-packaged goods companies: Companies spend as little as 5% of revenue while others spend as much as 25% of revenue Research shows promotional spending is ineffective Closed-loop promotional process is the leading practice for managing trade show promotions Common inefficiencies include promotional demand planning, partner or vendor planning, event execution, production and distribution, and retailer compliance Routledge 2013

Major Functional Accounts that are Useful in Marketing Cost Analysis Exhibit 12.8 Major Functional Accounts that are Useful in Marketing Cost Analysis Routledge 2013

Functional Cost Groups and Bases of Allocations Exhibit 12.9a Functional Cost Groups and Bases of Allocations Routledge 2013

Functional Cost Groups and Bases of Allocations Exhibit 12.9b Functional Cost Groups and Bases of Allocations Routledge 2013

Functional Cost Groups and Bases of Allocations Exhibit 12.9c Functional Cost Groups and Bases of Allocations Routledge 2013

Functional Cost Groups and Bases of Allocations Exhibit 12.9d Functional Cost Groups and Bases of Allocations Routledge 2013

Leadership: Ripping Off the Company Using the T&E Expense Account Travel and entertainment account Fraud related to T&E has increased Two common frauds: Mischaracterized expenses – When salespeople have a personal dinner or buy a personal item and charge it as a business expense Overstated expenses – Making a $50 dinner a $100 expense on the T&E Report Sources: Ronald Jelinek and Michael Ahearne, “The ABC’s of ACB: Unveiling a Clear and Present Danger in the Sales Force,” Industrial Marketing Management 35, no. 4 (May 2006), p. 457, “The Enemy Within: Examining Salesperson Deviance and Its Determinants,” The Journal of Personal Selling & Sales Management 26, no. 4 (Fall 2006), p. 327. Routledge 2013

Example of Profit and Loss Statement Exhibit 12.10 Example of Profit and Loss Statement Routledge 2013

Allocation of Natural Accounts to Functional Accounts Exhibit 12.11 Allocation of Natural Accounts to Functional Accounts Routledge 2013

Basic Data Used for Allocations Exhibit 12.12 Basic Data Used for Allocations Routledge 2013

Profitability Analysis By Salesperson Exhibit 12.13 Profitability Analysis By Salesperson Routledge 2013

The Process Illustrated Direct Selling - Salary and commission items need little explanation. They reflect what each representative is paid and commission each earned on what was sold Contact management software such as GoldMine enables sales managers and salespeople to track sales calls by type Advertising – Amount spent on advertising for each product Three reasons to allocate per-unit-product – It is one of the most popular There is no clearly preferred alternative in the literature The example illustrates the cost analysis process Routledge 2013

The Process Illustrated Warehousing and shipping The profitability analysis by sales representative does not include an allocation for the warehouse person’s salary Order processing The costs allocated are the direct expenses for postage and supplies Transportation Charged against the individual sales representatives according to the number of bicycles each sold. Routledge 2013

Activities of Tucker Broken Down by Account Exhibit 12.14 Activities of Tucker Broken Down by Account Routledge 2013

Profitability Analysis for Tucker Broken Down by Customer Exhibit 12.15 Profitability Analysis for Tucker Broken Down by Customer Routledge 2013

Marketing Cost Analyses: Promises and Problems Benefit – isolates most/least profitable segments of business Combined with effective sales analysis, provides a formidable tool for managing personal selling Improves planning and control Required data may be costly to acquire, maintain Cost allocation decisions can be difficult Routledge 2013

Return on Assets Managed Sales analysis – measures the results achieved by the sales force Cost analysis – measures the cost of producing those results ROAM = Contribution as a percentage of sales × asset turnover rate Contribution as percentage of sales = ratio of net contribution divided by sales Asset turnover rate = sales divided by the assets needed to produce those sales Routledge 2013

Analysis of Return on Assets Managed Exhibit 12.16 Analysis of Return on Assets Managed Routledge 2013

Expanded Return on Assets Managed Model (ROAM) Exhibit 12.17 Expanded Return on Assets Managed Model (ROAM) Routledge 2013

Impact of a Reduction in Accounts Receivable to $250,000 in Branch A Exhibit 12.18 Impact of a Reduction in Accounts Receivable to $250,000 in Branch A Routledge 2013

Routledge 2013