How To Produce Bigger Profit Margins

By NICO SCHINAGL

Think the economy is hurting your profit margin? Think again.

Because your enemy could be among your own sales team, leaving everything on the negotiating table and giving away add-ons like candy on Halloween. How else can you explain that, faced with the same economic conditions and stiff competition, some of your salespeople rarely give away discounts while others make it the norm rather than the exception. How are some of your salespeople able to explain and defend your value proposition in front of every customer, while others explain to your management team that without drastic discounts, the business they secured would have been lost for sure.

Your objective is to ensure that your company sells more to more people more frequently and especially at higher margins. Stop talking to your CFO about finding new ways to reduce your costs. Instead, the next time you sit down with your sales team, dig a little deeper than how the quarterly numbers compare to last year. You will find that by analyzing one metric and following a set of simple strategies you will be able to identify who in your sales force is playing for your team and who should be playing for somebody else.

The reasons for this profit discrepancy among a sales team are not that important. It could be your bonus plan is compensating the wrong metric (sales versus profit) or simply aligned to measure quantity of sales instead of quality of sales. Or the majority of your sales staff simply does not understand the true impacts of your value proposition to the market and thus only pursues the easiest customers while offering the biggest discounts right off the bat. Better to leave the reasons behind and focus on the way to identify the problem and develop strategies to fix it.

Identifying the Problem

Have your business intelligence manager prepare the following quick analysis of the sales team for your inspection:

Ranking by average profit

Taken into account volume or deal size and also special key account negotiation terms, have them prepare a ranking of the average profit margin generated per salesperson during the last 12 months. Have them insert the average overall company profit margin as an indicator of who is above this percentage and who is below. It’s helpful to add another column identifying the salesperson with regard to their sales ranking in the total sales generated scenario. I know it sounds simple – the best strategies are – but when was the last time you did this. The results will bring some light unto your sales effort and maybe a tear to your eyes. You will be surprised that:

• Some salespeople greatly overperform on their profit contribution and the lower-ranked salespeople are, in fact, the cause for dragging your overall performance to a single digit.
•  Some small customers serviced by the lower-ranked salespeople are generating the same profit margins as some of your key accounts, while purchasing only a fraction of what the KAM´s do.
• Business is brought in that actually produces zero profit or even a loss, and it is not business from a new customer, that could be explained as the investment to open the door into a much larger potential account.

Fixing the Problem

The strategies are straightforward and can be implemented individually or in combination:

1.  Go ballistic and simply cut the bottom-ranked salespeople, assigning their customers to better performers, thus also reducing your overall costs, which makes your financial department happy.
2.  Go drastic by changing the commission structure and tying it to profits rather than sales. Also implement a policy of minimum profits per deal allowed. If a salesperson still decides to close a deal below this limit, he or she has to pay the difference.
3. Go soft and make your top profit generators become the mentors of the lower ranks, teaching, advising and coaching them to defend and negotiate the desires terms in every deal.

It’s simple: The economic conditions are already bad enough and your growth opportunities limited, so at least make sure the people in front of your customers are not only chasing their commission, but helping your company to construct your brand, reputation and an attractive double-digit profit margin.