MODULE 7 : SALES TERRITORIES
The Need for Sales Territories
A sales territory is a group of present and potential customers assigned to a salesperson, branch, dealer or distributor for a given period. Good sales territories are made up of customers who have the money to spend and the willingness to spend it.
While the key to sales territory design in customers, geographical boundaries determine territories in many firms.
When the firm is small or getting started, management can plan and control the sales operation without using territories. As a firm grows and its market expands geographically, the advantages of a geographically defined sales territories become clearer.
Sometimes firms forego geographic territories when their products are highly technical and sophisticated, choosing instead to rely on product specialists who have the necessary expertise to answer the customer’s questions. The disadvantage is the resulting duplication of effort as many salespersons call on the same account. An alternative is to have a single salesperson reponsible for the account, and the salesperson can call in home-office technical specialists when needed.
Sales territories also are not geographically specified when personal relationships and friendships have a bearing on the sale.
Other than these exceptions, geographically defined sales territories are the norm in most companies. The design of sales territories can affect sales force morale, the firm’s ability to serve the market, and the firm’s ability to evaluate and control the selling effort.
Sales Force Morale
Unequal sales territories are a prime cause of poor morale. Good territory design improves morale. Clearly defined territories lead to clarified responsibilities. Delineating responsibilities by territories can reduce conflicts among salespeople over who is responsible for a given account and who is entitled to the commission from sales to a particular customer.
Market Coverage
Soundly designed sales territories can improve hot the market is served. It is much easier to pinpoint customers and prospects and to determine who should call on them and how often when the market is considered a large aggregate of potential accounts. Salespersons who are restricted to a geographic area are more likely to get more out of that territory than when they can roam at will. When sales territories are designed to force such effort, salespeople cannot meet their performance goals calling on only “easy accounts”.
As sales reps in a geographic design call on their accounts in their territory on a regular basis, they can develop in-depth understanding of their customers’ problems and needs and can anticipate products that will help the customer.
They also understand the account better and learn who is involved in the purchase decision. This helps in more effective selling and better servicing of the account, thereby producing long-term customer satisfaction.
Good territory design allows better integration of the personal selling effort with other elements in the marketing programme, particularly the communications programme. In territories with little potential, the manager may emphasise advertising and supplement that with a telephone sales programme; he or she may place only minimal emphasis on personal visits by field representatives.
In a territory that has good potential and concentration of customers, the manager may forego the telephone sales programme relying instead on personal sales calls while committing fewer dollars to advertising.
Evaluation and Control
Geographically defined sales territories allow sales and cost data to be collected and analysed by geographic area. This facilitates comparisons of market share across areas in total and by product. Salespeople can be compared with respect to their sales versus potential and those who may need training can be spotted.
Level of Involvement of the Sales Manager
-too much involvement from a sales manager may crimp the creativity needed to be a top sales performer. Too little involvement may lead to major problems that could have been corrected when they were small. Most sales managers try to be flexible and regulate their involvement according to the territory.
-Cost-control advantages accrue to the firm with well-defined sales territories. Again, comparing sales representatives in terms of the number of calls they make, their travel and other expenses and proportion of time spent in face-to-face contact with the customer versus other relatd activities can provide important insights into doing the job more efficiently. Slight incremental differences can have profit implications for the firm.
SALES FORCE SIZE
-salesforce size or the number of territories
-design of individual territories
-allocation of total selling effort to accounts
Severat techniques for determining the size of the field sales force include :
-Breakdown
-Workload
-Incremental methods
(i)BREAKDOWN METHOD
In this method, the average person is treated as a salesperson unit, and each salesperson unit is assumed to possess the same productivity potential. To determine the size of the sales force needed, divide total forecasted sales for the company by the sales likely to be produced by each individual. Mathematically,
N=S/P
Where N = number of salesperson’s needed
S = forecasted sales volume
P = estimated productivity of one salesperson unit
Disadvantages
-The method uses reverse logic : it treats salesforce size as a consequence of sales while the logical causation is in the opposite direction.
-Depends on the estimated productivity per salesperson. Average productivity levels fail to account for the ability levels of the salespeople, differing potentials in the markets they service, and different levels of competition in sales territories.
-Does not allow for the turnover in the sales force. New salespeople are usually not as productive as those who have been on the job for several years. The formula can be modified to allow for sales force turnover, but it loses some of its simplicity and conceptual appeal.
One alternative for smoothing out person-to-person differences in productivity due to ability, market potential, and experience differences is to use industry-average productivity estimates in the formula. However, an industry-average productivity estimates tends to ignore the market position of the firm trying to determine the best size of its sales force.
-This method does not allow for profitability. It treats sales as the end in itself rather than as the means to an end. The number of salespeople is determined as a function of the level of forecast sales, not as a determinant of target profit.
(ii)WORKLOAD METHOD OR THE BUILD UP METHOD
This method is based on the fact that all sales personnel should shoulder an equal amount of work. Management estimates the work required to serve the entire market. The total work calculation is treated as a function of the number of accounts, how often each should be called on, and for how long. The estimate is then divided by the amount of work an individual salesperson should be able to handle, and the result is the total number of salespeople required.
The steps involved in the workload method are :
(a)Classify all the firm’s customers into categories
Often the classification is based on the level of sales to each customer. However, firms could also rate customers on the basis of the prospect’s type of business, credit rating, and product line. Any classification system should reflect the different classes of accounts and consequently the attractiveness of each class of accounts to the firm. Thus, accounts could be classified into :
-Type A : large or very attractive
-Type B : Medium or moderately attractive
-Type C : Small, but attractive
(b)Determine the frequency with which each type of account should be called upon and the desired length of each call
These inputs can be generated in several ways – they can be based directly on the judgements of management, on the judgements of experienced salespeople or alternatively, the firm may conduct controlled experiments in which the frequency of contact and the length of contact each are syetematically varied to determine which is optimal. Also, historical data could be analysed using appropriate statistical methods such as regression analysis.
(c)Calculate the workload involved in covering the entire market
The total work in covering each class of account is given by multiplying the number of such accounts by the number of contact hours per year. These products are summed to estimate the work entailed in covering all the various types of accounts.
(d)Determine the time available per salesperson
For this calculation, estimate the number of hours the typical salesperson works per week and then multiply that by the number of weeks the representative will work during the year.
(e)Apportion the salesperson’s time by task performed
Unfortunately, not all the salesperson’s time is consumed in face-to-face consumer contact. Much of it is devoted to non-selling activities such as making reports, attending meetings, making service calls and travelling.
(f)Calculate the number of salesperson’s needed
The number of salespeople needed by the firm can be determined by dividing the total number of hours needed to serve the entire market by the number of hours available per person for selling.
Advantages
-easy to understand
-explicitly recognises that different types of accounts should be called on with different frequencies.
Disadvantages
-does not allow for differences in sales response among accounts that receive the same effort.
-Does not explicitly consider the profitability of the call frequencies
-Does not take into account such factors as the cost of servicing and the gross margins on the product mix purchased by the account.
-Assumes that all salespersons use their time with equal efficiency
(iii)INCREMENTAL METHOD
This method is based on the fact that sales representatives should be added as long as the incremental profit produced by their addition exceeds the incremental costs. The method recognises that there will be decreasing returns associated with the addition of salespeople.
This approach is conceptually correct and is consistent with the empirical evidence that decreasing returns can be expected with additional salespeople. Decreasing returns can also be expected with other territory design features such as the number of buyers per salesperson makes an account, and the actual time the representative spends in face-to-face contact.
Disadvantages
-difficult to implement
-while the cost of an additional salesperson can be estimated with reasonaable accuracy, estimating the net profit is difficult. It depends on the additional revenue the salesperson is expected to produce, and that depends on how the territories are restructured, who is assigned to each territory, and how effective they might be.
-The profitability of the new arrangement also depends upon the mix of products generating the sales increase and how profitable each is to the company.
SALES TERRITORY DESIGN
This process has the following steps :
(a)Select basic Control Unit
The basic control unit is the most elemental geographic area used to form sales territories. As a general rule, small geographic control units are preferable to large ones. With large units, areas with low potential may be hidden by their inclusion in areas with high potential, and vice versa. This makes it difficult to pinpoint geographic potential, which is a primary reason for forming geographically defined sales territories in the first place. Also, small control units make it easier to adjust sales territories when conditions warrant. Some commonly used basic control units are states, trading areas, cities or metropolitan statistical areas and zip code areas.
States
Advantages :
-State boundaries are clearly defined and thus are simple and inexpensive to use.
-A good deal of statistical data can be accumulated by state which makes it easy to analyse territory potential.
Disadvantages :
-Buying habits do not reflect state boundaries as the state represents a political rather than an economic division of the national market.
-The size of the states make it difficult to pinpoint problem areas.
State units are sometimes used by firms that do not have the sophistication or staff to use counties or smaller geographic units. Styates are also used by firms that cover a national market with only a few sales representatives, particularly when they can specify a national account by name.
Trading Areas
Trading areas are made up of a principal city and the surrounding dependant area. A trading area is an economic unit that ignores political and other noneconomic boundaries.
Trading areas reflect economic factors and are based on consumer buying habits and normal trading patterns. Thus they facilitate sales planning and control and diminish the likelihood of disputes among sales representatives.
Disadvantages :
-trading areas vary from product to product and must be referred to in terms of specific products.
-It is often hard to obtain detailed statistics for trading areas. This makes them expensive to use a sgeographical control units, although some firms adjust the boundaries of the trading areas so they coincide with county lines.
Whether or not a firm formally uses trading areas as basic control units, it should consider the logical trading areas for the products it produces when specifying the boundaries for each territory.
Counties
Counties permit a more fine-tuned analysis of the market than do states or trading areas. One dramatic advantage of using counties as control units is the wealth of statistical data available by any county.
Another advantage is that their size permits easy reassignment from one sales territory to another. Thus, sales territories can be altered to reflect changing economic conditions without major upheaval in basic service. Furthermore, potentials do not have to be recalculated in doing so.
Disadvantage
-for some purposes, they maybe too large.
Cities and MSAs
For many products the area surrounding the city contains as much or more potential than the central city. Consequently, many firms that formerly used cities now employ metropolitan statistical areas (MSAs) as basic control units.
MSAs are integrated economic and social units with a large population nucleus. An area can qualify as an MSA if :
-It contains a city of at least 50,000 people
-If it includes a census-defined urbanised area of 50,000 with a total metropolitan population of at least 100,000 people.
An MSA includes the county containing the central city and any counties having close social and economic ties to the central county.
The heavy concentration of population, income, and retail sales in the MSAs explains why many firms are content to concentrate their field selling efforts on MSAs. Some assign all their field representatives to such large areas. Such a strategy minimises travel time and expense because of the geographic concentration of Msas.
ZIP Code areas
Some firms, for which the city or MSA boundaries are too large, use ZIP code areas as basic control units. An advantage of the ZIP code areas is that they are relatively homogenous wrt basic socioeconomic data. Whereas residents within an MSA might display great heterogeneity, those within a ZIP code area are likely to be similar in age, income, education and so forth and to even display similar consumption patterns.
Disadvantage
One disadvantage of using ZIP code areas as basic control units is that the boundaries change over time. However, with the new computerised geographic information systems (GIS), that is less of a problem than it used to be in that the boundaries can easily be reconfigured.
(b)Estimate Market Potential
-If there is a relationship between sales of a product and some other variables, this relationship can be applied to each basic control unit. Data must be available for each of the variables for the small geographic area though.
-Sometimes, the potential within each basic control unit is estimated by considering the likely demand from each customer and prospect in the control unit.
(c)Form Tentative Territories
This involves combining contiguous basic control units into larger geographic aggregates. Adjoining units are combined to prevent salespeople from having to crisscross paths while skipping over geographic areas covered by another representative. The basic emphasis at this stage is to make the tentative territories as equal as possible in market potential. Difference in work load or sales potential (the share of the total market potential a company expects to achieve) because of different levels of competitive activity are not taken into account at this stage. It is also presumed that all sales executives have equal abilities. All these assumptions are relaxed at subsequent stages of the territory planning process. The attempt at this stage is to simply develop an approximation of the final territory alignment. The total number of territories defined equals the number of territories the firm has perviously determined it needs. If the firm has not made such a calculation, it needs to do so now.