I recently had coffee with the owner of a distribution company that has enjoyed success in the past and has been trying to rekindle sales. We were talking about the key challenges he faced trying to increase revenues given the current state of the economy and afterwards he invited me to see his operations which were only a few blocks away. I agreed. When he opened the door to his loft style corporate office—which houses a little over 100 employees—I was struck by one thing: the silence. It was just too quiet. When I asked him what function these employees performed he told me all but 15 were in sales. Not good.
I immediately sensed something was wrong, and after further analysis, came to the conclusion that the size of his sales force didn’t make sense. It was too big. I have previously written about different methods for estimating the proper size of your sales force. In this case, neither method produced results that made sense given the dynamic of his industry. We instead implemented the “incremental method” for determining the size of the workforce.
The Incremental method of determining workforce size
Two key concepts studied in microeconomics are marginal cost and marginal revenue. Marginal cost refers to the cost of producing one more unit of a good. Think of it as the cost of producing the last unit. This can vary greatly from the average per unit production cost. In a typical company, the marginal cost per unit tends to go down. The more you produce of something, the cheaper it is to produce it.
Marginal revenue is the amount of money that is generated by the sale of the last unit. Marginal revenue also tends to go down as more units are produced.
In economic theory, a company should keep producing and selling goods until the marginal cost and the marginal revenue are equal. The reasoning for this is clear: As long as the marginal revenue is greater than the marginal cost, a profit is generated. Assuming you can keep making and selling more at a profit, you should do so. This trend continues until marginal revenue and marginal costs meet. After that point, you would lose money on every unit you sold since the marginal cost would exceed the marginal revenue.
Let’s apply this to the size of your sales force. When evaluating each sales person, you should determine if they are generating more in profitable sales than they cost your company. Sales people that don’t meet this criterion should be flagged for retraining and improvement. If there are no results, then they should no longer be a part of your organization. Beyond this, you should keep hiring sales people as long as the “last sales person hired” generates enough revenue to leave your company with a profit.
How are you currently setting your sales force’s size?