Most companies use quantitative performance standards. The particular combination of standards chosen varies with the company and its marketing situation. Quantitative standards, in effect, define both the nature and desired levels of performance. Indeed, quantitative standards are used for stimulating good performance well as for measuring it.
Quantitative standards provide descriptions of what management expects. Each person on the sales force should have definitions of the performance aspects being measured and the measurement units. These definitions help sales personnel make their activities more purposeful.
A single quantitative standard, such as one for sales volume attainment, provides an inadequate basis for appraising an individual’s total performance. In the past the performances of individual sales personnel were measured solely in terms of sales volume. Today’s sales managers realize that it is possible to make unprofitable’ sales, and to make sales at the expense of future sales In some fields-for example, industrial goods of high unit price-sales result only after extended periods of preliminary work, and it is not only unfair but misleading to appraise performance over short intervals solely on the basis of sales volume.
Sales personnel have little control over many factors affecting sales volume. They should not be held accountable for “uncontrollable” such as differences in the strength of competition, the amount of promotional support given the sales force, the potential territorial sales volume, the relative importance of sales to national or “house” accounts, and the amount of “windfall” business secured. Ample reason exists for setting other quantitative performance standards besides that for sales volume.
Each company selects that combination of quantitative performance standards that fits its marketing situation and selling objectives. If necessary, it develops its own unique standards designed best to serve those objectives. The standards discussed here are representative of the many types in use. Let us now discuss the different quantitative standards that can be set:
- Quotas
- Selling expense ratio
- Territorial net profit or gross margin ratio
- Territorial market share
- Call-frequency ratio
- Calls per day.
- Order call ratio
- Average cost per call
- Average order size
- No selling activities
Quotas: A quota is a quantitative objective expressed in absolute terms and assigned to a specific marketing unit. The terms may be dollars, or units of product; the marketing unit may be a salesperson or a territory. As the most widely used quantitative standards, quotas specify desired levels of accomplishment for sales volume, gross margin, net profit, expenses, performance of no selling activities, or a combination of these and similar items.
When sales personnel are assigned quotas, management is answering the important question: How much for what period? The assumption is that management knows which objectives, both general and specific, are realistic and attainable. The validity of this assumption depends upon the market knowledge management has and utilizes in setting quotas. For instance, the first step in setting sales volume quotas is to estimate future demand for the company’s products in each sales territory- hence, sales volume quotas can be no better than the sales forecast underlying them. When sales volume quotas are based upon sound sales forecasts, in which the probable strength of demand has been fully considered, they are valuable performance standards
Selling Expense Ratio
Sales managers use this standard to control the relation of selling expenses to sales volume. Many factors, some controllable by sales personnel and some not, cause selling expenses to vary with the territory, so target selling expense ratios should be set individually for each person on the sales force. Selling expense ratios are determined after analysis of expense conditions and sales volume potentials in each territory. An attractive feature of the selling expense ratio is that the salesperson can affect it both by controlling expenses and by making sales.
The selling expense ratio has several shortcomings. It does not take into account variations in the profitability of different products-so a salesperson who has a favorable selling expense ratio may be responsible for disproportionately low profits. Then, too, this performance standard may cause the salesperson to over economize on selling expenses to the point where sales volume suffers. Finally, in times of declining general business, selling expense ratios inhibit sales personnel from exerting efforts to bolster sales volume.
Selling expense ratio standards are used more by industrial- product companies than by consumer-product companies. The explanation traces to differences in the selling job. Industrial- product firms place the greater emphasis on personal selling and entertainment of customers; consequently, their sales personnel incur higher costs for travel and subsistence.
Territorial Net Profit or Gross Margin Ratio
Target ratios of net profit or gross margin to sales for each territory focus sales personnel’s attention on the needs for selling a balanced line and for considering relative profitability (of different products, individual customers, and the like). Managements using either ratio as a quantitative performance standard, in effect, regard each sales territory as a separate organizational unit that should make a profit contribution. Sales personnel influence the net profit ratios by selling more volume and by reducing selling expenses. They may emphasize more profitable products and devote more time and effort to the accounts and prospects that are potentially the most profitable.
The gross margin ratio controls sales volume and the relative profitability of the sales mixture (that is, sales of different products and to different customers), but it does not control the expenses of obtaining and filling orders.
Net profit and gross margin ratios have shortcomings. When either is a performance standard, sales personnel may “high spot” their territories, neglect the solicitation of new accounts, and overemphasize sales of high-profit or high-margin products while underemphasizing new products that may be more profitable in the long run.
Both ratios are influenced by factors beyond the salesperson’s control. For instance, pricing policy affects both net profit and gross margin, and delivery costs, which also affect both net profit and gross margin, and delivery costs, which also affect both net profit and gross margin, not only vary in different territories but are beyond the salesperson’s control. Neither ratio should be used without recognition of its shortcomings.
Territorial Market Share
This standard controls market share on a territory-by-territory basis. Management sets target market share percentages for each territory. Management later compares company sales to industry sales in each territory and measures the effectiveness of sales personnel in obtaining market share. Closer control over the individual salesperson’s sales mixture is obtained by setting target market share percentages for each product and each class of customer or even for individual customers.
Call-frequency Ratio
A call-frequency ratio is calculated by dividing the number of sales calls on a particular class of customers by the number of customers in that class. By establishing” different call-frequency ratios for different classes of customers, management directs selling effort to those accounts most likely to produce profitable orders. Management should assure that the interval between calls is proper-neither so short those unprofitably small orders are secured nor so long that sales are lost to competitors. Sales personnel who plan their own route and call schedules find target call frequencies helpful, inasmuch as these standards provide information essential to this type of planning.
Calls Per Day
In consumer-product fields, where sales personnel contact large numbers of customers, it is desirable to set a standard for the number of calls per day. Otherwise, some sales personnel make too few calls per day and need help in planning their routes, in setting up appointments before making calls (in order to reduce waiting time or the number of cases where buyers are “unavailable”), or simply in starting their calls early enough in the morning and staying on the job late enough in the day. Other sales personnel make too many calls per day and need training in how to service accounts. Standards for calls per day are set individually for different territories, taking into account territorial differences as to customer density, road and traffic conditions, and competitors’ practices.
Order Call Ratio
This ratio measures the effectiveness of sales personnel in securing orders. Sometimes called a “batting average,” it is calculated by dividing the number of orders secured by the number of calls made. Order call ratio standards are set for each class of account. When a salesperson’s order call ratio for a particular class of account varies from the standard, the salesperson needs help in working with the class of account. It is common for sales personnel to vary in their effectiveness in selling to different kinds of accounts-one person may be effective in selling to small buyers and poor in selling to large buyers, another may have just the opposite performance pattern.
Average Cost Per Call
To emphasize the importance of making profitable calls, a target for average cost per call is set. When considerable variation exists in cost of calling on different sizes or classes of accounts, standards are set for each category of account. Target average cost per call standards also are used to reduce the call’ frequency on accounts responsible for small orders
Non selling Activities
Some companies establish quantitative performance standards for such no selling activities as obtaining dealer displays and cooperative advertising contracts, training distributors’ person- nel, and goodwill calls on distributors’ customers. Whenever no selling activities are critical features of the sales job, appropriate standards should be set. Since quantitative standards for no selling activities are expressed in absolute terms, they are, in reality, quotas.
Multiple quantitative performance standards
It is widespread practice to assign multiple quantitative performance standards. A company can assign different quantitative standards for a sales person.
