Ep 44: Training Sales on The True Cost of a Deal

BuzzSprout Audio

“There’s a lot of economics around just the real cost, the time to recoup, and cash flow management for this.” – Josh Sweeney



Josh Sweeney: Hello, this is Josh Sweeney. I’m joined by my co-host, Taylor Barnes. Taylor, how are you?

Taylor Barnes: I am doing great. I’m a little bit annoyed because I got this guy in my ear talking about comp all day long. “What can we do? What can we do? What can we do?” And I don’t think he really understands all the costs that go into a deal.

Josh Sweeney: Yeah. I’m gonna say stop talking to you and go make more calls, sales calls.

Taylor Barnes: I like that.

Josh Sweeney: We’ll go a different direction with this one.

Taylor Barnes: I’m going to use that one next time. Thank you.


Challenge Illustration

Josh Sweeney: So, for this one, the leadership challenge is you have reps that are unsatisfied about comp in some way. What do you do? What are the options?

Taylor Barnes: Yeah, and, number one, I think a lot of it comes down to the fact that a sales rep might look at a sale and might look at one of the costs associated with that sale, perhaps a tangible thing that you buy, whether it’s labor or product or whatever associated with that sale, and they say, “Wow, look at all this margin in this deal,” but they don’t understand the cost of goods sold isn’t holistic. So, we might refer to COGS, C-O-G-S, and, for many of you, I’m sure you know what it is, but if not, cost of goods sold. That is defined as a line item purchase that has a corresponding sale to it so cost and sale price, obviously, difference of those is the gross margin, not necessarily the net margin. So, that’s what I think a big piece of this is, is a little bit of education. They’re not happy about their comp because they don’t know the holistic real number behind what a true cost of a sale is.

Josh Sweeney: Yeah. We see that, I mean, that’s a common complaint, right? It looks like the number is bigger than it is, but, one, it doesn’t have the COGS for the deal so maybe they see it in the CRM or maybe they have access to more data, like an ERP system, but it’s really not the true cost, right? So they think there’s all this margin that really isn’t there. There’s lots of reasons, I mean. Another one is they perceive that the company makes all the money and the rep doesn’t make anything —

Taylor Barnes: Right.

Josh Sweeney: — you know, that can happen for a number of reasons too. It’s like they kind of don’t think about the fact that there’s all these other costs to run the organization so there’s education that has to happen there. What are some other reasons you run into that reps don’t really understand why the comp is what it is?


Challenge Follow up ( I too have been through this… )

Taylor Barnes: Yeah. I mean, there’s a lot of tentacles here. Let me give you an example of that last one because I think this is a good application for those out there. So, let’s say that we sell a project, okay? And that project is $100,000, and we know, as part of that project, we are going to need to contract out some labor for a piece of it so we’re going to handle most of it in-house but I need to go out and buy $20,000 worth of labor from a local organization out in California, what have you. So, in the transaction spreadsheet, you will see a $100,000 sale price and then you will see a $20,000 line item, because that is the only thing that I have technically really had to purchase outside. So, a sales rep might look at this and say, “There is $80,000 worth of margin here. Why am I only getting paid x?” And what he or she struggles to know sometimes is the amount of support that goes into delivering that project internally many times isn’t considered a cost of goods sold. Rather, it’s considered an overhead cost on like the P&L, for instance, and, as you know, as sales leaders, most salespeople don’t have access to the P&L and a lot of them should not have access to the P&L and I mean that respectfully, of course, but it’s obviously, you know, some stuff that managers need to manage too. So, one big reason here is you have to be able to create a comp plan, don’t get me wrong, you have to be able to back up that comp plan, you don’t want to just kind of throw it out there and tell the reps, “Don’t worry about it, take it or leave it, it is what it is.” I don’t think that’s necessarily a good solution either. But, unless you’re able to say, cost of goods sold plus x, y, z plus internal project management plus internal accounting plus internal executive oversight, whatever it is, you need to be able to explain the true cost of the deal and that visibility might not be right there when a rep is looking at the transaction sheet but he or she is going to have to get an education on that to make sure that they, again, know that the sale price minus the cost that you see doesn’t exactly equal the margin in that deal.

Josh Sweeney: Yeah, and I know not just for sales reps but with anybody individually, you know, that sees that you’re a business owner or a manager, whatever it is, I mean, a lot of these financial misunderstandings come from a person who really just doesn’t know the numbers, right? They’re not in it. They don’t, like you said, they don’t see the P&L, they don’t see that it costs $10,000 or $20,000 or $30,000 a year just to do your company taxes at the end of the year —

Taylor Barnes: Right.

Josh Sweeney: There’s all these things that people don’t know about. So, I mean, it seems to me like a rep, in some cases, right? Maybe they’re complaining about confidence legitimate, maybe that it’s just not good enough. But in many cases, it’s also the education around what it really takes to run that business, you know? I know, another example I see is nobody talks about the entire ramp-up time where the person is $60,000 a year base and you’re shelling that out for the first six months before they ever close their first deal because it’s a nine-month sales cycle, right? And then comp comes in, it’s like, “Hey, we haven’t even recoup the money that we spent on your salary,” you know? Let’s look at the numbers around that. So, a lot of it is about education. What else do you think causes a sales rep to complain about their comp?


The leaders challenge/purpose

Taylor Barnes: You know, let’s be just, again, practical here. There will always be the comparison game in a sales organization. Always. And so another reason I think is I think people get probably accidentally bitter about someone else’s success. I see this all the time especially in larger organizations where you’ve got kind of the majors, the minors, and the farm leagues, right? The majors are the ones that have loads of business, that have an enormous amount of pipeline. They’ve got two or three incredible clients that keep feeding them and keep feeding them and they might look at that type of a deal and they might say, well, that comp plan makes a lot of sense for him or her but in my line of business, because of my whatever industry, product versus revenue, product versus service, what have you, that comp plan does not make sense for me. And they might be on to something. You might want to look at different comp plans for different products and services. I actually would recommend it. But you can’t make a decision like that. You have to be able to explain and kind of manage to someone being bitter about someone else’s success and having them come all the way back to relate that to the comp plan. It’s kind of ridiculous when you say it, but I see that one a lot, Josh.

Josh Sweeney: Yeah, so, really, in some way, they’re not succeeding or getting what they need so it’s going to come out in other areas, right? It’s comp, it’s tools, they’re not getting the qualified leads, like they start to blame it on anything, you know, when they’re not meeting or exceeding those goals which I’m assuming is generally, from what I see at least, 60 plus percent of people. Like you said, you got your A and B and kind of your farm league, and the people on the bottom are going to have the biggest issues.

Taylor Barnes: Yeah, and you brought up something earlier that I want to touch on real quick, just not to breeze over it, you will hear this and Mr. or Mrs. Sales Manager, you will hear this a lot, the company makes all the money and the rep doesn’t make anything, okay? So, let’s talk about this for a split second. This is something, this is a challenge that you’re going to hear a lot. It’s going to be amongst the gossip in the organization. People are going to leave other organizations, come to yours, leave yours to another organization because of this simple message so I want to make sure that you’re aware of it. It’s being talked, whether you know it or not. So, I think it’s really important in that regard to make sure that the education is there. I will tell you that not many people, not many sales reps understand what gross profit after personnel looks like. Gross profit after expenses, overhead, building, software, whatever it is. Now, I don’t think you need to give them a full view into the P&L necessarily because they’re salespeople, it’s going to bore them right off the bat, but I will say that you need to make sure that they understand that the organization obviously has to make money, the sales rep has to make money, and the mix of it is whatever it is, but help make sure that you’re able to back up your comp plan by explaining that the company doesn’t make all the money and the rep doesn’t make, you know, nothing. You have to be able to manage that response a little bit because you’re gonna hear about it no matter what. But I think that’s just on the surface level. Josh, that is a reason people, you know, complain about comp because they think the brand’s making all the coin and the rep’s making not much.



Josh Sweeney: Yeah, most definitely. Well, I mean, that leads us into some of the solutions, right? So, reps are going to complain about comp, what do you do? We talked about some of the reasons that happens, but there’s a lot of solutions to this. So, one of the first solutions I think we’ve really highlighted is the educational aspect for the salesperson. There’s the technology, the salaries, how costs are being covered when they aren’t closing, the time to ramp up, again, time they’re not closing when they came on board. I’ve seen a lot of those ramp-up times where the company actually doesn’t even break even until a year in on a rep but the rep doesn’t really understand that, so, sitting down with the numbers. I know I’ve worked with some other organizations and know other founders and business leaders that have gone heavy into sharing more of the financials than most traditional companies would and they share it in a way, they actually brought in consultants that share it in a way that is educational that not only builds up the business financial awareness so they know what’s really happening and the why behind decisions, but also that helps them from a home perspective and everywhere else. So, there’s a lot of financial education that can happen to solve some of these problems. What other solutions do you see?

Taylor Barnes: Yeah, I like that one that you just said. Having a consultant come in and explain it, the value in that is pretty evident to me. It’s that it’s not the fox watching the henhouse. I’m not sitting here saying, “Look, just trust me, okay? Trust me.” Here’s — ’cause I’m the boss, right? “Just trust me, it’s fine.” Now, you’ve got a third party coming in and explaining it at a holistic level, which I think will just resonate a little bit more with the sales rep so I like what you said. One idea that we have always mulled over is really just kind of removing them from the transaction spreadsheet view. So, let me explain, what I mean by that is if we have a person sales team or whatever and, obviously, the main purpose of a salesperson and sales team is generating opportunity and ultimately getting that opportunity to close. Now, if you think about it, if that’s their job, what real responsibility do we need if they’re living within the ERP system, the transaction system, the Salesforce system, what have you, and the short answer is you might require it, you might not. So, do you have a situation where you could possibly remove them completely, create a comp plan that just says, “Hey, you’re gonna make a percentage of your revenue, so why do you even need to look at the numbers? If you’re going to sell something for 100 grand and you know you’re making 25 grand margin, then why would you even need to look at it?” So, coming up with a comp plan is a great idea and if you happen to be one of those organizations that has a comp plan based off percentage of revenue, then I would consider removing them completely from that kind of a view.

Josh Sweeney: Yeah, definitely. I mean, in many cases, the question is, is the problem caused or exacerbated by the amount of data that the rep has access to?

Taylor Barnes: Yeah, well said.

Josh Sweeney: And I think we see that a lot where it’s like, like you said, maybe they should just live in the CRM and work their deals, they shouldn’t have ERP access or I’ve seen reps that are part of the collection process where it’s like, “Well, you don’t get paid until we get paid so you have to follow up and make sure we get paid,” and I’m like, “Really? Do you want the sales rep’s job to be spending time trying to track down money or do you want them closing deals?” And so I see a lot of that where on the backend, giving sales reps a lot of information or a lot of other ancillary items that don’t have to do with sales instead of holding the operations and service and delivery team accountable for those actions and, look, in some businesses, this is required, you know? I know somebody that sells telecom equipment and they have to know the cost of it so that they don’t mark down prices below the cost of goods or the equipment. So, there are instances in certain roles where they have to know that. In more of a pure services role, though, you can say, “Hey, you’re allowed to discount up to this much and if you want to discount any more than that, then you have to go get approval,” or for any discount you have approval, or, you know, “Hey, it’s productized, the price is the price, go sell the value, we’re not discounting anything,” you know? And at that point, you don’t need access to cost of goods sold or ERP or cost of materials or people or —

Taylor Barnes: Right.

Josh Sweeney: — anything.

Taylor Barnes: Yeah.

Josh Sweeney: You know? So just remove that from the equation for that salesperson.

Taylor Barnes: Right. And I like what you said earlier about a sales rep being involved indirectly, I guess, is the right word in the collections process. Look, I get it, there are going to be times where accounting folks cannot get through to the customer so they need to lean on the individual that has the relationship in order to perhaps, you know, gain some feedback on what’s happening with the invoice. Very, very reasonable. But make sure that the sales rep’s getting involved at the appropriate time, not right off the bat. Don’t want to get off to a tangent here but that’s really — that’s an important one because, as we just said, their main job, generate opportunities, close opportunities. Last thing you want them to do is playing the AR game with you when you’ve got plenty of resources that can. So, lastly, Josh, you know, one of the things that I think is just kind of a pragmatic approach to this is education on the cost of a salesperson. We’ve talked about this in the past. Sure, the individual gets a salary, but understanding the amount of time that you’re not closing, AKA the ramp-up time, idle time, whatever it is, that’s cost to the brand. That’s cost to the organization. That’s it. It’s not like we go back in there and put that cost in your deals. It’s not that at all. We make the investment, we, as in the sales leaders of the world, make the investment. So educating them on what salary costs, what their technology costs. Josh, your deal kit, when you hire somebody, your $2,000 deal kit, when it comes — explaining what that is throughout the process. It’s not just good information for us as sales managers and leaders to have during the hiring process but when it comes down to that, again, the challenge of making sure that the reps who are complaining or are just not satisfied with — you have to be able to explain what the real cost of a salesperson is. Tech salary, all of it. You know what I mean?

Josh Sweeney: Yeah, and I think I’m always surprised too. You would think that somebody who’s been doing this 10 or 15 years probably would know this information but I generally find that they don’t. If you take and map out the monthly cost of a sales rep plus some additional stuff of just having them in there and, no, I’m not talking about the business cost, just salary, 401(k) matching, your standard stuff for having them as an employee, and then you show where their first deal gets closed, how much of that is cost of goods, how much of that is available to pay their salary, you ramp that out or walk that out over a year or two in Excel and you walk through that with them? Most people I find are actually surprised at how long it takes for the company just to get out of the negative. You know, get into the black, get out of the red ink —

Taylor Barnes: Yeah.

Josh Sweeney: — and then after that, the company starts making money and they’re like, “Okay, well, I’ve been here three years, the company’s making money,” it’s like, okay, yeah, but you had a month where you didn’t close a deal —

Taylor Barnes: Yeah.

Josh Sweeney: — you know? Or you had two months where you didn’t close a deal. Yeah, you closed a whopper four months in but the money still had to be in the account from all the other deals to pay for those few months, right? So, there’s a lot of economics around just the real cost, the time to recoup, and cash flow, right? Cash flow management for this.

Taylor Barnes: Yeah. And before we get to the final question, Josh, I want to leave our leaders out there with a little bit of a hack. This one has worked very well for us. In the example that we just talked about, all the internal resources and the costs that go into supporting that sale, spin it on the salesman and say, “Okay, would you like to do this yourself? Would you like to prospect, close, create, handle supply chain, handle accounting, handle billing software, handle the audits, handle sales support?” Just list them out. List them out, men and women, because I’ve done that and it’s very fun to watch the formerly bitter salesperson, their face soften a little bit and then have that aha moment. That’s a really good one. I’d recommend taking that with you throughout the process, if you want to really just break it all down. They don’t necessarily remember off the top of their head all the things that go into supporting that salesperson.

Josh Sweeney: Yeah, definitely. I mean, I think that’s good training for maybe the onboarding is, you know, here’s how we support you and how we ensure that you’re effective, right? Here’s what we provide. Here’s the things that we keep off your plate. You know, here’s all of the things that we’re doing to ensure your success at our company and we’re happy to do it but we want you to be aware of what they are.


Final Question

Josh Sweeney: So, the final question: What are you doing to ensure that your sales reps are seeing the appropriate amount of financials?

Taylor Barnes: And this has been Purpose-Driven Sales with Barnes and Sweeney. Now, go lead on purpose.

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