Making Sales and Losing Money
On the surface, the title of this article doesn’t make sense. The problem is this phenomenon happens all too often, particularly when a company and/or its salespeople are focused on making sales.
I can hear the masses crying out now that it’s the salesperson’s job to make sales and how dare I say otherwise. If you think that the job of a salesperson is simply to make sales, you’ve got it all wrong.
As someone once observed, “Any fool can make a sale and lose money.” We may not be fools but many salespeople and, indeed, companies fall into the trap every day of making sales and losing money.
If Not Sales, Then What?
So, if salespeople aren’t supposed to be out there making sales, what are they supposed to be doing? They should be making “gross margin.” Notice that I used the words “gross margin” and not “profit.”
Simply put, gross margin is the difference between what you sell something for and what the direct costs were to produce it. Whereas profit is that portion of the gross margin that’s left over after you’ve paid all the bills.
Why the Confusion?
The apparent confusion between making a sale, making a good margin, and making a profit doesn’t only exist on the part of the salesperson. I’ve known several companies who don’t seem to grasp the concept either.
A number of years ago I was working with the owner of a high-tech SME firm who was struggling to get his product into the marketplace. One day, when I showed up for our weekly meeting, he was all excited about the fact that he had just made a $110,000 sale, his largest to date.
I knew this guy worked hard and I was pleased and delighted for him. After the general jubilation had subsided somewhat, I asked if I could review the opportunity and the numbers.
Well, the jubilation not only died down but completely evaporated and changed to despair when we discovered that it would cost him something in the order of $125,000 to deliver the $110,000 project.
The $15,000 Lesson
Once the pain subsided, I convinced him to analyze the situation and determine how this happened so he could avoid a devastating repeat in the future. Here’s what happened.
First, he had a vague idea as to what his costs were but because he hadn’t documented it properly, he underestimated them.
Second, he didn’t give much thought to how much gross margin he should charge.
Third, and most important, although he originally proposed a price of $130,000, which would have resulted in a small gross margin (but no profit), he caved in to the customer’s demand for a better price, hence the $110,000.
If he had fully understood his true costs ($125,000), he would have run, not walked, away from this non-opportunity.
In fact, even his original selling price of $130,000, which represents a gross margin of 3.8%, was far too low and his selling price should have been in the order of $150,000, a gross margin of 20%.
To this gentleman’s credit, he delivered the project for the agreed upon price, absorbed the loss, and learned his lesson, make gross margin, not sales.
Giving Away Your Money
Salespeople have a bad habit of giving away a company’s money. Some do it because, frankly, they’re bad salespeople and always must have the lowest price in order to make the sale. They are easily browbeaten by the prospect to lower their price and in the absence of firm guidelines, they would happily give your stuff away for free if given the choice.
Many salespeople, both good and bad, simply don’t understand the basic fact that whenever they give away a dollar, they’re giving away a dollar of gross margin, and not a dollar of cost. The cost of what they’re selling hasn’t changed, only the gross margin that’s needed to keep the lights on in your business.
Even good salespeople who don’t truly understand the difference between cost, gross margin, and profit can fall into this trap.
What to Do? What to Do?
Before you throw your arms up in despair, there are some things sales managers can do.
- Don’t hide your margins from your salespeople. Help them sell what is most profitable for you to sell.
- Educate your salespeople. Make sure they truly understand the difference between cost, gross margin, and profit.
- Stop paying for unprofitable sales. Adjust your compensation plan to either pay less, or pay nothing at all, for low-margin sales.
- Monitor your costs and revise your pricing. Things change, costs go up, expenses change, and competitive pressures vary.
Stay on top of these four elements and you may stay ahead of the pack.
The Bottom Line
Times are tough, margins are slim, and profits are elusive. We need to help our salespeople not only make more sales but make more money as well.
That money is called gross margin.