“We can ignore reality, but we cannot ignore the consequences of ignoring reality.” - Ayn Rand
B2B salespeople are a massive cost overhead. In today’s high-velocity, ultra-competitive global markets, natural market forces are shining a bright light on this increasingly unsustainable cost of doing business.
Let me explain: Throughout my 28-year B2B sales career, I have been taught to focus my energy on top-line revenue attainment. Rarely have I ever been encouraged to consider the other side of the P&L, or the cost burden that my employers have had to accept in the name of customer acquisition. Intuitively, most successful salespeople know they a massive cost, but for some strange reason, they have always been excluded from the detailed financial measurements that typically run each and every business.
This is an outdated form of thinking that assumes salespeople don’t need to know about the real workings of the business -- they should just focus on selling.
Sure, narrowing the focus and protecting certain employees from unnecessary noise is often wise, but it’s crucial salespeople understand exactly how they are being assessed and measured from a management accounting perspective, and not just from a revenue attainment perspective.
Any CFO will tell you that running a field sales force is often the most expensive fixed (and variable) cost element on practically every vendor balance sheet, yet in my entire sales career the total cost burden of my individual role has never been discussed or revealed to me. Why?
In Australia’s high-tech industry, the average outside salesperson has a base salary of approximately A$150,000 (or $117,300 USD). If they hit their numbers, they can often earn another A$150,000 in commission and bonus. At a total package of A$300,000, plus expenses like travel and client entertainment, it’s easy to see how sales people become the largest cost component of every sale. Forrester Research’s 2009 report Uncovering the Hidden Cost of Sales Support found that technology vendors are spending, on average, 19% of their selling, general, and administrative costs, or A$177,000 per quota-carrying sales person, on support-related activities. So, when you calculate the fully loaded cost (including superannuation, allowances, and a myriad of other benefits) to recruit, employ, support, train, and retain each salesperson it’s a massive number -- in some cases, well above A$500,000 per year.
The Value Chain
Now consider the extinct vendor-push business models. In these old models (see diagram below) the salesperson effectively acted as the “retailer” or “re-seller” in the value chain. Vendors have nearly always employed this old sales model where the sales person acts as an “autonomous agent” who owns a territory and collects a commission on every sale that they make. Because salespeople had so much more information than buyers, this model worked. But it was based on an incredibly high Cost of Customer Acquisition (CoCA).
Fast forward to 2017, and salespeople are facing a different reality. Information parity is the key difference: Buyers are now more educated and better able to solve their own problems. They can often -- and often do -- deal directly with the vendor. B2B salespeople are experiencing a “pincer” movement where buyers no longer depend on them, and their employers are forced to review their very costly role in the value chain.
Many tech vendors must lower their CoCA simply to remain competitive. In some cases, technology now allows buyers to get a better deal through self-service, and even in high value/high complexity sales models, where full self-service isn’t possible, those vendors are moving toward insides sales and self-serve platforms to reduce the CoCA.
Cost of Customer Acquisition (CoCA) vs. Lifetime Customer Value (LCV)
Take Atlassian, an Australian software company that does not employ salespeople. Atlassian has dramatically reduced its CoCA, meaning it has huge margins to reinvest in product development and customer success and customer advocacy initiatives.
Large incumbent vendors like HP, IBM, and Oracle, which employ thousands of commissioned salespeople, spend well over 50% of their revenue on sales and marketing alone. How can these incumbents compete with the likes of Atlassian when their CoCA is so much higher and their margins are so much lower? They can’t, so they must review their go-to-market approach. Salespeople are simply becoming too costly, particularly in transactional or packaged solution (commodity) selling models. Remember, every product is continuously being forced down the curve towards commodification.
If you are working in a sales role and you are not creating value over and above what you cost (at a reasonable margin) then your employer will soon become uncompetitive -- and incapable of paying your high salary and commissions. It’s only a matter of time.
My advice to sales people is simple: stop and think about how much you (and the entire support infrastructure around you) cost your employer per transaction. Please do not naively assume that just because you brought in more top-line revenue than your salary that you are creating value. Average margin per transaction is now a more important measure of your worth in the current climate than the extent to which you smashed your quota. As Derek Wyszynski wrote recently, “Being let go even when you are the top performer is a cruel reality of the new world that we all operate in.”
Specialize. It’s increasingly obvious that sales people must become specialists in their field to be truly valuable to both customers and employers. To find out how to specialize, you should read my new Amazon best-selling book, The Future of the Sales Profession. Register at SalesTribe as well -- there’s strength in numbers.
Cultivate a personal brand and become part of an open network that can protect your career.It’s simple to say, yet not simple to do. You must become digitally driven, socially connected, mobile, and specialized. As Lee Bartlett says, “Are you able to build a strong enough network and personal brand to future-proof yourself against decisions that are out of your control?”
Outside salespeople, and the high costs that go into supporting them, are increasingly under the microscope. Despite today’s relatively strong economic conditions in most markets, across most industries, these new self-serve business models are now driving vendors to find more cost-effective means by which to acquire customers and protect margins simply to remain competitive.
The increased focus on the ratio of CoCA versus LCV is becoming the determining factor for your sales career. Buyers no longer need you (the way they once did), and your employer (vendors) can no longer afford you -- unless you are highly effective.
If this post resonates with you, please share it. We sales folks must urgently spread this important message to the 15 million plus B2B salespeople around the world today. This is the new reality that we all face, and putting your head in the sand will not help you.
Originally published Jul 20, 2017 6:30:00 AM, updated July 19 2017