Selling Cost and Why It Matters
A direct path to improve productivity in your retail business starts with understanding the selling costs of your salespeople.
A direct path to improve productivity in your retail business starts with understanding the selling costs of your salespeople. Selling cost reflects the relationship of the cost of selling your product. The selling cost for a brick-and-mortar Indie retailer is calculated as: selling payroll/net revenue. Here is an example; net revenue for the week is $15,000 and selling payroll is $2,000. The selling cost is 2,000/15,000 = 13.3%. This should then be broken down by each salesperson.
Typically selling costs range from 6 to 12%. The higher range is sustainable if elevated Initial Markups and net margins are achievable.
In this example, the person selling the highest amount was also the highest sales cost. The most productive person for the week is salesperson 1. This would be a high selling cost for a typical Indie retailer with a 55 to 58% initial markup and an MMU of 47 to 49%, so taking action could make a big difference.
The beauty of selling cost is that selling is managed as a variable expense and not as a fixed cost. For the Indie retailer that means they can sustain higher wages as long as they are measured as a percentage. For the salesperson, they are rewarded for performance and not penalized for creating sales and not being adequately compensated.
Back in 2005, M1 retail expert Alan Roseman created this manual worksheet to help retailers track selling costs by employee. It is still one of my favorite spreadsheets. Access your free copy here
In this example, the hourly rate for the salesperson is $20. On a 40-hour work week, their breakeven at a selling cost of 8% is $250 per hour creating $10,000 in revenue during that period. The base pay is $800 and the incentive pay is $160. For the salesperson, they received a 20% bonus and their pay rate is actually $24 per hour. For the retailer, although they are paying more, the % of expense stays the same. It is a win win.
An effective way to implement this compensation is to pay weekly. If a salesperson makes an incentive they are more likely to be motivated to repeat it, and if they do not make it they can quickly recover.
Success requires constant coaching and training. It also requires the right salespeople. I encourage Indie retailers to invest time each week going out into the marketplace and meeting sales providers and other service providers.
There are components to creating and sustaining a high-achieving sales team:
Measuring
Coaching and learning
Recruitment
Measuring actual sales cost by total and per person provides a baseline from your history. If the data is available, look over the last 12 months by month. Once that is established, you can set out your future goals. Those goals are achieved by measuring conversion, items per transaction, and average sales per transaction. Share the results with your staff and coach one-on-one and as a group. Selling is a skill that can be taught and improved over time.
Recruitment is an activity that few businesses commit the time and resources to pursue. If 5 hours a week were spent on recruitment, then over 50 weeks that equates to 250 hours. That is time well spent to find the right people who are the right fit for a critical piece of your growth. Retail is about people and products. Indie retailers invest time and money going to a variety of markets to find great products. Investing in finding great people to sell that product productively is of equal importance. It is a key piece of building the productivity and profit potential of your business.
Wishing you all a very happy and profitable holiday season.
Onwards and Upwards,
Marc Weiss
Co-Founder - Management One
You can also contact Management One directly for more information. We are always happy to discuss your results and share solutions for you and your indie retail business.