The question that's been crossing my desk and popping up in seminars recently is, “How much sales volume should I expect from a service salesperson?” Obviously, there are many variables, which depend upon the role of the salesperson and his or her direct cost to the contractor. First, we need to examine the basics of acceptable return on investment (AROI). When employing a service salesperson, management should view this expenditure as a commodity, just like any other investment.
When it comes to salespeople, there's a direct cost which should hit the overhead line of the profit and loss statement. At an absolute minimum, a 20% AROI should be expected and demanded in the first year of employment.
One contributing variable is the marketplace the salesperson covers. A point of discussion for many years has been whether it's better to have sales personnel dedicated to service agreements, with others focused on projects, retrofits, and change-outs.
One advantage to specialization is that salespeople then follow the same steps each day. In fact, you could assign vertical markets to them which helps hone their skills by enabling them to see similar situations and problems throughout the selling cycle. Additionally, specialization sends a signal that service agreements are your company's money machine.
People often believe that projects are easier to sell and have greater aggregate dollar amounts than service agreements. As a year end result, the salesperson achieves his or her numerical goals, but the service agreement base grows very little. Projects usually don't provide repeat business as do service agreements, and the margins are much smaller.
Another argument for having dedicated salespeople is the greater need for technical abilities in project sales as opposed to service agreements. This allows the management team to shop for a sales candidate who is stronger in sales aptitude rather than technical knowledge.
A downside is that salespeople focused on selling service agreements may pass up project and replacement opportunities. The solution: hinge service agreements together with projects, and take full advantage of the cost justification from both. This is a good argument for team selling.
The bottom line: project salespeople must generate considerably more revenue than service agreement sales personnel. When addressing the minimum of 20% AROI, management should look at the gross margin line, not the pre-tax-profit (PTP) line.
Contractors often tell me that a salesperson who creates a $60,000 cost would need to generate $600,000 in revenue to break even. That assumption is simply wrong. These contractors are applying the cost to the pre-tax-profit line rather than overhead.
If you have a service agreement salesperson with associated costs of $60,000 (don't get hung up on the numbers) who produces $72,000 in margin, he or she has reached the 20% AROI. Incrementally, you've covered your sales cost from the overhead with a reasonable return.
This isn't to say that $72,000 in new service agreement gross margin is a great performance, but consider that 90% of the $72,000 will repeat the following year, without the associated sales cost. As this number compounds, the numbers become even more attractive.
Another consideration is that 75% of that margin is statistically in service agreements, not project work. That $54,000 ($72,000 X .75) in margin should produce residual business of one to two times greater. Now the margin for this performance increased from $108,000 to $162,000.
A strong service company with a good sales team should execute service agreement margins at 45% to 50%. In this economy, project sales may be as low as 20% to 25%. Assuming the same cost of $60,000 and an AROI of $72,000, a project guy or gal will have to produce $288,000 to $360,000 in gross margin just to reach the minimum acceptable.
These examples establish that a first year goal for a dedicated service agreement salesperson would be $150,000 at 45% executed margin, while a first year project salesperson would require $360,000 at 20% gross margin. If the salesperson is selling both, it's simply applying the math. You will also need to make the corrective calculations according to the total annual cost of the employee. Each subsequent year, as their income and experience level increases, the annual goals should increase accordingly.
We often hear about million dollar producers, and there are many of them. However, it's not realistic to build your organization on superstar performances. Remember: if you have a superlative performer, every competitor is looking in their direction.
Earl King is the founder of King Productions International, a commercial HVAC contracting sales consulting firm based in Texas. He speaks to associations and trade groups, as well as writing this column for ContractingBusiness.com. His next workshop on Commercial Service Agreements will be held in Austin, TX on March 22-23. Email Earl for more information or with any questions or comments at: [email protected] or call him at 515/321-2426.