Pricing

What’s the Sales Equivalent of “On-Base Percentage”

By James Marland
February 4, 2012

At this time of year in many sales-led corporations, the sales team is divided into winners and losers. The winners are off celebrating in Hawaii, and the losers are nervously looking at their pipelines and considering their futures. But who really are the stars in your company? Since we are all talking about MoneyBall at the moment, what is the pricing equivalent of “On-Base Percentage,” or the most important stat if you were to track just one?

Billy-Beane_Small Traditional red-blooded sales teams are bathed in the language such as “it’s all about closing the business,” “take it off the street,” and “bring home the bacon.” Wall Street often follows this lead by focusing on Revenue. A quick trawl through your Yahoo Finance RSS feed shows that many headlines are concerned with sales volumes.

Even popular culture follows the lead. In the TV show “The Apprentice” candidates are evaluated based on their ability to “sell” in one off situations, the “Pitch” is a key part of the evaluation.

The old saw “Revenue is Vanity – Profit is Sanity” speaks to the fact that this focus on sales revenue can often lead to a misaligned sales force. For this reason, progressive companies manage their sales teams on a “Balanced Scorecard” approach, many elements of which are not to be found in traditional sales reporting systems.

 

For example, the following measures of sales effectiveness are often not available in traditional Salesforce Automation (SFA) systems:

  • Pocket Margin (e.g. net of rebate)
  • Discounting habits / patterns
  • Off-invoice cost to serve (samples, shipping, payment terms, etc…)
  • Commitment compliance to volume agreements
  • Effect of Sales Approvals on price
  • Competitive Win / Loss vs. discounting
  • Revenue & Margin Causality (what has changed): Price, Volume, mix, New/Lost customers, currency, cost)

Consider three reps, let’s call them Peter, Paul and Mary. They all got an invoice price of $125 for a volume of 40,000. Who is better?

Peter’s customer is a Government department which historically under buys the volume. He gave 5,000 free samples to clinch the deal.

Paul has few competitors in his territory and he set up a rebate which can be earned with volume. His customer has a Returns clause.

Mary did not include Excise Tax, and has created Channel conflict at this price but she did negotiated a Surcharge for expedited delivery

There are two things you can do to evaluate your sales teams more fairly on their contributions to company profitability. The first is to develop a waterfall which isolates factors that are under the control of the negotiator (such as a surcharge, discount or rebate), and does not judge sales people on factors outside their control (HQ allocation, raw material price variation, tax).

For the second, the most important stat in the pricing world, if you had to pick just one, is Price Yield: The ratio of the Price Achieved over the Target Price. This helps you understand how effective your organization is at executing on your pricing guidance, across product families, sales people, regions, customers. Segmentation makes this “fair,” as there are no easy territories any more. Territories that were historically high priced now have an appropriate high target.

Armed with this single stat, you have a much better way of finding your Scott Hattebergs.

Don’t understand all these Moneyball quotes? See the real Billy Beane speak at Vendavo Profit Summit 2012 in Chicago, April 23-25.

  • Low Price Realization by Sales Rep , Vendavo Profit Advisor

    James Marland

    James Marland is the Director of Business Consulting at Vendavo based in London. In this role he helps diagnose Pricing Opportunities and develops business cases for pricing projects with ROI models. James has been in the pricing software space for many years, both on the customer and supply chain side: so he has a view from “each side of the table”. Prior to his pricing career he was VP of Solutions at Ariba and has also spent 5 years at SAP America. He has a Bachelor of Science degree in Mathematics from the University of Southampton.