The profit multiplier: sales productivity

In her work teaching her buying facilitation method, Sharon Drew Morgen (author of “Dirty Little Secrets”, reviewed here) states that she has worked with groups who have doubled their sales close rate. This doubling is possible because sales people are facilitating the change management that must occur in the buyer’s organization. And because the average close rate for companies with a direct sales force is low, around 7%.

What would it mean if a company doubled it’s close rate simply by increasing the productivity of its Sales people?

Let’s first look at a fictitious company with Revenues of $20M and an Operating Profit of $2M.

Here is the simplified income statement before the increase in productivity:

What happens when Sales productivity doubles? At first you might think, well, if the company has an operating profit of $2M and a margin of 10%, then if the revenue doubled, the operating margin would double to $4M. Typically this is true. A company grows, but it’s financial model and productivity stay the same. A doubling in revenue requires twice as many sales people and most operating expenses (except R&D) would also double.

This is not what Morgen is talking about. She’s describing a situation where the same marketing group delivers the same number of leads. The only thing that changes is that Sales people are twice as productive. This increase produces twice the sales and twice the revenue.

What would the impact be on the Operating Profits? Let’s take a look at the new income statement for our fictitious company. Revenue doubles and so does the corresponding Cost of Revenue and Gross Profit.

But the overhead cost has not changed, it is still $8M. Overhead is now only 20% of revenue. This increase in Sales productivity causes the Operating Profit to jump from $2M to $12M, an astonishing 600% increase in operating profits!

Here is the simplified income statement after the increase in productivity:

This exercise shows the power of increasing Sales productivity. You get a multiplier effect because you are increasing revenue but keeping operating costs stable.

Some other related posts you might find useful:

1. What is productivity in sales and marketing?
2. Dramatically improve sales productivity
3. How many sales leads do I need?
4. Sales qualification: Ask the right questions
5. Marketing metrics that matter – to a sales person