Sales Cost and Profitability Overview  

Sales cost and profitability management

Sales cost to revenue ratio is one assumptions behind profitability projections. Minimizing the cost of sales while staying within assumptions boundaries is must.


Sales Cost and Profitability Overview


Sales cost and profitability is the 'bottom-line' part of sales function. A sale, which does not meet the expectation of returns for the share-holders is not termed as success.

Sales cost and profitability is the 'bottom-line' part of sales function. A sale, which does not meet the expectation of returns for the share-holders, is not termed as success.

Business Objective for sales cost and profitability

Achieve the sales cost and profitability as per the shareholder expectations.

Typical Business Questions

  • What is my cost of sales and its break-up?
  • What is the branch, channel and distribution profitability?
  • Which of my channel is more profitable?
  • Which of my channel is less capital intensive?
  • Which of my channel is having a longer break-even period?
  • Which of my products have higher sales effort and cost?

Scope of this chapter on profitability and cost of sales

Businesses mostly do not focus on maximizing sale profitability per unit of sales, but may do so on maximizing profits (which also sometimes may not be the case). This means that they peg a right balance between the price/profitability and the volume of sale. Beyond a certain point, per unit profitability leads to lesser number of units sold (Increase the price leads to fall in demand). This chapter will talk about how to maximize profitability per unit/dollar of sales, assuming a constant price-point of products.

It is understood that, when you are measuring the sales profitability, you will include the direct cost (cost of sales and sales expenses like sales compensation, sales offices). However, there is always a question on whether the field operations (like processing of sales orders) OR whether the indirect costs need to be allocated. You can measure sales profitability with different level of expense allocations (starting from direct costs to allocating all indirect expenses)

For the purpose of this chapter of 'sales cost and sales profitability', we will be limiting ourselves to the simplistic definition of direct sales related costs (sales expenses like sales compensation, sales offices, lead generation cost..) for 'sales cost' and allocating only the direct costs ('sales costs' and 'cost of goods sold') to define the 'sales profitability'.

One has to remember that a sales function can only control 'Sales Cost' and not the 'Cost of good sold'. Therefore the question is that why we should have sales function share the responsibility for 'sales profitability'. The reason is that 'Sales cost' is part of calculating 'sales profitability' and also sales function can alter the sales product mix to sell higher margin products.

Some part of sales cost and profitability will also be covered under the financial management section. This chapter is mainly focused on the factors, which a sales function can control OR can influence.

Success drivers for sales cost and profitability:

A clarity on setting-up the sales objective:

One has to define the measures for sales function, which layout the level of emphasis which needs to be placed on sales bottom line (sales profitability) vs. Sales Revenue. Sales people generally have a grouse that they get different messages from the management in terms on 'topline vs. bottomline vs. both'. They also say that it is not possible to focus both on bottom-line and top-line at the same time.

Sales product mix

A right kind of product mix, so that sales are more focused on sales of more profitable products. This however, has to be looked at carefully, because product mix decisions are not driven purely by the sales profitability. There are many other factors like Product risk, sustainability of product etc.

Sales Channel Mix

Selecting the right channel and therefore appropriate cost structure can be an optimum approach. For example- you can:

- Sell low-price/low profitability OR commodity products through non-tradition channels (web..) OR 3rd party channels (expected to be cheaper to sell).
- Sell high price/high margin OR specialist products through your own direct sales force

Sales Ticket Size mix

Higher sales ticket size leads to higher sales profits per dollar of sale done.

Media and Promotion mix

For certain industries (typically consumer OR retail products), media and promotion costs form significant part of the sales cost. Selecting a right mix can help you to get the best returns for each dollar spent.

Sales Facilities and Sales infrastructure for sales staff

Companies are finding creative ways to reduce the facilities and infrastructure cost for salespersons on the road.

Variability of sales cost

Depending upon the level of sales and its predictability, one can alter the balance between the fixed vs. variable cost to work towards lowest sales cost per unit/dollar of sales.