We have all heard the saying, “they are so good at sales they could sell ice to an Eskimo.” Making a sale is first and foremost a relationship event. After the relationship has been consummated, what is the actual result of the transaction? There are many things to think about when trying to answer this question. The answer to the question will come by analyzing the data associated with the analytical questions posed throughout this chapter.
Sales commonly represent the amount that a company bills or invoices its customers for goods and/or services. It is known by a number of business labels, including revenue, billings, sales, and so on.
Many people believe that “sales” analysis is the most understood and straightforward business metric out there. To most, there are only two components to understanding sales – the unit price and how many units shipped. Because of these simplifying assumptions, sales data is too often analyzed only at the aggregate level. This approach can leave many organizations in the dark with respect to significant drivers of their business.
What Is the Real Value of the Sale?
Consider going to a store to buy a retail item of almost any kind. First, you may have received a coupon. With the coupon in hand, you are feeling good about this form of incentive, which has added to your rationalization to purchase! Then when you get to the store you are bombarded with all kinds of point-of-purchase information about further markdowns, customer loyalty programs, and even “point” systems that can be used against future purchases. The item you set out to purchase may normally have a price tag of $100, but with all the incentives, it costs you only $75. You are now convinced that you just received the deal of the century!
This example raises some basic questions, such as what is the real price of the item you bought and what should it be? A related question is what is the revenue, or sale, to the company that sold you the item?
Do you know the real price of your company’s products? Is it the “list” price or list price reduced by terms, discounts, and other programs that you don’t have much visibility into?
Another example involves a manufacturer of consumer products that sells to major retail chains in North America. In order to set the stage for this example, it is important to know that retail chains, like most businesses, are constantly challenged with achieving results in terms of sales and margin. To help meet this challenge, retailers have ways to “ask” suppliers for money to increase their margins. These many ways include co-op advertising paid for by the manufacturer, free goods, in some cases as a promotion, and slotting allowances. In addition to the demands placed on suppliers to pay for these programs, suppliers typically have to pay commissions to those who represent their products.
Slotting allowances, for those of you who are not painfully aware of them, are the costs of buying out the competitors’ merchandise to make room for your products on store shelves.
The company in question was attempting to understand their sales information and why their margins continued to erode. The company controller was attempting to help so he went to see the sales folks. After a number of well placed questions and intentionally vague answers, the controller believed he finally had an understanding of some of the issues. After verifying with the sales folks that he had heard the facts correctly, he said, “So, we paid sales commissions and we owe the customer advertising money for the privilege of shipping them free product? Is that right?” To which the stunned sales folks replied, “free goods that qualify for sales credit and co-op dollars…yep that’s it!” Each individual decision was made for a good cause and may have made sense by itself; however, the sales personnel didn’t recognize the cumulative impact of these decisions.
You can see from these examples a number of variables that affect the revenue you receive when you sell a product to someone. These are common sense variables such as:
● Customer allowances with the intent to grow sales over a period of time
● Product promotions to add velocity to new product introductions
● Advertising to grow sales and brand or product awareness
● The payments required by customers to gain shelf space in their outlets
● Payments to reduce price in an attempt to move slow-moving product
The variables in a business to business (B2B) sale may be called something different than the variables in a business to consumer (B2C) sale; however, those variables present the same challenges to understanding the real revenue of the product you are selling.
The revenue you receive should represent the “price” component of your sales. The other component is volume. Regardless of what channel you sell in, it is important to be able to identify the elements that answer the question, “What does the result of a sale tell you about the current state of your business and its future potential?” The analysis starts with some basic questions, which are discussed in the following sections.
What Happened?
Typical sales analysis includes reporting the outcomes of “what happened?” These outcomes are reported in a set of so-called lagging indicators, which are measures of results.
Although only part of the story, absolute sales amounts are important to know. You are probably familiar with looking at an absolute amount of sales and comparing it to a history or to some expectation. You might compare the absolute amount of sales to a budget or a sales quota (the two are usually not the same), to the latest estimate, or to the same period from a previous year. Some of the most common time comparisons include:
● Actual year-to-date sales compared to actual prior year-to-date sales
● Actual quarter-to-date sales compared to actual prior year quarter-to-date sales
● Actual month-to-date sales compared to prior year month-to-date sales
● Recent rolling 12-month sales to the previous rolling 12-month sales
Trend analysis is rather important in the effort to understand your business. Trend comparisons can be done at a variety of data levels. In addition to comparisons at an aggregate level, we recommend that an organization have the functionality in their systems to analyze the data at the following levels of detail for both units and dollars:
● Total for the organization
● Customer/channels/geographies
● Product/styles/sizes/color/brand
● New and existing customers
● New and promotional products
Again, this type of analysis is common. However, analyzing lagging indicators won’t always help you answers the questions of why it happened and what it means.
Why Did it Happen? What Does It Mean for My Business?
These questions are near and dear to every business leader wanting to know what is happening in the marketplace and what the opportunities are for the future. To answer these analytical questions, you need to go deeper than just looking at measures of results (lagging indicators). You need to understand the drivers (leading indicators) of your sales.
The Importance of Understanding the Real Drivers of Sales
One company found itself in a situation where raw material costs were skyrocketing (over 25 % in one year!). As a result they calculated that they needed to raise their prices by an average of 8 % to recover the raw material increases. They even built this expected result into their financial plan. Their customer base was made up primarily of mass retailers who did not want to accept price increases at all. Six months into the year, the company noticed that sales had increased in total by 6 %. They believed that price had increased by 8 % because they announced the increase at the beginning of the year. They then concluded