Do Business Well

Do you plan to hire a sales force? Or use sales representatives? Or telemarketing? Or direct mail? Or retail outlets?

The answers may seem self-evident, based on your past experience or your knowledge of your industry. Celestial Seasonings sells its tea through supermarkets and other food retailers. Pizza Hut sells its pizza through freestanding fast-food restaurants. And People Express (now part of Continental Airlines) sells its tickets primarily via travel agencies, airport ticket counter locations, and over the phone.

Increasingly, though, creative entrepreneurs are looking for alternative sales approaches. Thus, a Boston-area maker of stereo products decided to avoid the traditional retail outlets and sell a new compact stereo system door to door with its own sales force. The firm avoided the crowded retail shelves and kept margins higher than discount-minded retailers will allow. A number of distributors of women’s clothing have been extremely successful selling via direct-mail catalogs rather than through traditional retail boutiques. And Home Shopping Network became very successful selling traditional department store goods through a nonstop television show.

Two forces are driving these efforts. First and foremost, sales costs have risen dramatically in recent years. Having your own salesperson making personal visits to potential customers can cost $200 or more each, based on travel, salary, and other expenses. Not even the best salesperson will succeed with every prospect, so the cost of each completed sale can easily be $600, $800, or $1,000, depending on the salesperson’s “hit rate.”

Direct-mail costs have risen dramatically as well. Bulk-mail postage rates alone have risen nearly 50% in recent years. That doesn’t take into account rising printing, stuffing, and other costs.

Second, competition within many sales outlets has become incredibly intense. Just getting a new food product onto supermarket shelves, even for a well-established company, can be nearly impossible. In some cases, supermarkets are charging expensive premiums—beyond the affordability of most smaller companies—simply to place particular products on their shelves. Direct-mail volume rises every year, making it difficult for mail-order companies to get their catalogs noticed.

Selling guidelines. Companies should expect to spend about 10% of their revenues on sales. Anything above that will likely become burdensome. Of course, there’s nothing wrong with keeping the costs below 10%.

With that as a goal, it quickly becomes apparent that certain products or services have limited sales approaches. High-ticket industrial products selling for $50,000 or $60,000 each can justify the involvement of high-level executives in the sales process. But $1,000 fax machines must be sold via retail or mail-order outlets.

Here are the primary sales approaches:

Executive selling. For high-ticket items—usually in excess of $50,000—the company’s president may go out on sales calls and spend half a day or more with particularly promising prospects. This happens in fields like corporate consulting, where contracts may well exceed $100,000. Sales of such services understandably aren’t made after one visit, but usually over a period of weeks or months. The executive involvement is necessary to win the potential customer’s trust.

In-house sales force.Supporting an in-house sales force can be quite expensive, with the cost of each sale running $1,000 or more. That makes it necessary to have a product/service selling price of $10,000 or sell in quantities totaling at least $10,000. For products that sell in large quantities to certain segments, an in-house sales force can be used only for those segments. For example, food products may sell in large quantities to institutional customers (hospitals, corporate cafeterias) and in small quantities to supermarkets and convenience stores. So an in-house sales force would be used for the institutional customers and another, less expensive sales approach would be used for the noninstitutional customers.

Sales representatives.These are usually either manufacturers’ representatives, brokers, wholesalers, distributors, or other commissioned part-time salespeople. They are part time because they represent several companies and divide their sales costs among a number of products. Thus, they are most appropriate for products that typically sell for between $1,000 and $10,000. The main difference between types of representatives is determined by whether they take possession of the products they sell. Wholesalers and distributors do take possession, while brokers and manufacturers’ representatives act only as intermediaries. The difference becomes important in determining inventory storage, shipping, and other costs.

Mass distribution. This includes primarily retailing, direct mail, and telemarketing. Products that sell for less than $1,000—clothing, consumer appliances, magazine subscriptions, sporting goods, and so on—are sold through mass-distribution outlets. This is probably the most crowded and intensely competitive of the sales approaches available and must be carefully planned. A clothing product that isn’t displayed prominently by retailers or a direct-mail catalog that isn’t handled properly by postal authorities because of incorrect sizing or metering can be terribly costly.

Of course, there is some overlap among these categories. For instance, personal computers, televisions, jewelry, and other items that sell for more than $1,000 are sold through mass-distribution channels, while home furnishings, cosmetics, and other items that often cost less than $1,000 may be sold direct to consumers by distributors. The following table summarizes the four main sales approaches:

Sales Approach	Price Range	Product/Service
Executive Selling	More than $50,000	Major medical equipment, electric power generators, consulting services
In-House Sales Force	$10,000—$50,000	Minicomputers, electronic instrumentation, industrial cleaning contracts
Sales Representatives	$1,000—$10,000	Packaged foods, industrial flooring, minicomputer software
Mass Distribution	Under $1,000	Consumer electronics, clothing, newsletter subscriptions

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