Bruce Merrifield, President — Merrifield Consulting
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Wednesday, October 18, 2017—In this video interview, Bruce Merrifield and Randy MacLean discuss how sales has changed over the years, delving into Randy's career history of designing sales compensation programs.
"Randy has had a varied and interesting career," Bruce said. "He's had a lot of jobs – including ones in programming, sales, and sales management – and owned quite a few companies. This included getting involved with sales compensation programs pretty early on which meant that he's had a bird's eye view to how sales and sales compensation practices evolved over time."
Randy discusses how he took a break from software for about a decade and spent most of that working on sales compensation programs for some Fortune 100 companies, including some major wholesale distributors. It was devilishly tricky work trying to find a good balance between incentives and how to translate the money being paid out for the profit that came in.
"How many of those plans were based on easily accessible financial numbers, including margin dollar and margin percent, as opposed to line item profit analytics where we actually know the net profit or loss of every customer?" Bruce asked.
These plans were based entirely on financially accessible numbers because the technology wasn't available to compare it against actual profits. There was no way to run those calculations, so instead we had to create some very complex programs to simulate what those profits might look like.
That's all changed now thanks to line item profit analytics (LIPA) where we can calculate the actual profitability on every sale, territory, product, and customer. This is what the best companies have long considered to be the Holy Grail. It's something that people would have paid a fortune for, and yet now it's available to even some of the smallest companies!
"When a typical WayPoint Analytics client starts to use the service, how many of their territories are profitable?" Bruce asked.
Usually less than half of their territories are profitable. While the number sounds shocking, remember that they've been using a model that was developed before we had the technology to know what was really going on, which forced people to make educated guesses. However, because everybody was suffering from that same problem, it was less of a competitive disadvantage at the time.
For instance, the distributor may have reached the conclusion that any sale with a 22% margin will be profitable. This number may have been based on what seemed like reasonably good information and valid on certain transactions at one point, but odds are that it's been carried forward and misapplied all these years.
More importantly, LIPA has proven that you can't rely on just a gross margin number since cost-to-serve (CTS) can vary widely. A 22% gross margin is great when your CTS is lower than that, but a sale with a 22% gross margin and a 35% CTS means that you're losing money. If you've been relying solely on gross margin for all of these years, you're going to discover that you have a lot of unprofitable sales. Even worse, you're going to discover that you've been paying a commission on many of these unprofitable sales.
Recognizing the significance of CTS is the first step in reforming that business so it will be more profitable. And it's important to recognize that the way your company handles sales and its sales force will need to change to compete in today's market.
The sales model from 40 years ago involved a guy in a car, driving and knocking on doors and bringing back orders, and you apply that to all of your customers. In the days when the margins were a lot higher than they are now and the cost structures were a lot lower, that was a viable strategy.
Back then, everybody was also operating under the same handicaps as far as sales practices and information went. Now that better tools are available, distributors who choose not to use them are putting themselves at a severe disadvantage.
For more information about Bruce Merrifield, visit: www.merrifieldact2.com
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