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.


Variable Sales Cost


Sales functions are typically considered equivalent to P&L function where they are measured on the revenue generated by them minus the cost incurred. Variability of the sales cost is defined as the level to which the sales cost is function of the sales volume/value. Most closer is the linkage between the sales cost and sales volume, more is the variability

Sales functions are typically considered equivalent to P&L function where they are measured on the revenue generated by them minus the cost incurred. Variability of the sales cost is defined as the level to which the sales cost is function of the sales volume/value. More closer is the linkage between the sales cost and sales volume, more is the variability. Sales function prefers variable cost because:

  • It does not shoot up per unit of cost, if the sales volume is low.
  • Sales function can better handle the sales fluctuations.
  • Give a better product planning and pricing for the product development groups.

The underlying rule for maintaining sale variability is to make the sale compensation highly linked to sales revenue and other parameters (sales velocity, sales strike rate, sales quality). Also it means to lower the investment in sales infrastructure and keep it variable. For example, take the sales premises on rent instead of acquiring it.

The variability does not mean for keeping the per unit sales cost to be constant. One does need to go for economies of scale and over a period of time.

Following are the methods, which can be used to keep the sales cost variable:

  • Keeping sales compensation as variable, and more linked to the sales performance
  • Keeping sales processing cost as variable. For example, outsourcing the sales processing work (like application form entry, cheque-banking and cashiering), beyond a critical mass.