Evaluating Sales Performance: Measuring Sales by Margin or Revenue?

Sales performance is the overall efficacy of an organization’s sales team. It's a metric for individual sales representatives as well as the sales team as a whole. Individual and team sales efforts, as well as how effectively they meet their sales targets, are used in evaluating sales performance.

To hold salespeople accountable for delivering on their targets and supporting the attainment of corporate business goals, all sales incentive plans should include some type of financial metric.

The argument has always been: what is the correct financial measure for sales performance - margin or revenue? However, this has changed depending on the economic conditions (e.g. recession vs. rising markets) and who is in charge of the organization (e.g. sales vs. finance). 

Delivering revenue growth without a profit margin will not help the organization meet its profit targets. Margin without sales growth, on the other hand, can be a limiting factor. While it may generate some profit, it will not help the company meet its stakeholders' and field salespeople's growth expectations.

What Factors Should You Examine When Deciding Whether to Use Margin or Revenue?

While all sales forces must strive for revenue growth today, as competition grows and product differentiation becomes more challenging, the need to guarantee that margins are sufficient to fund expansion and run the business becomes crucial. Here are some key questions to consider when deciding whether to measure sales performance by margin or revenue.

How much do sales representatives influence margin?

The extent to which the sales representative can influence margin is one of the most important factors to consider when deciding which measure to use in evaluating sales performance.

The extent to which the sales representatives play a major role in the corporate pricing strategy and the right to discount and structure agreements is a defining factor in determining whether a sales job has the possibility for a margin compensation measure.

Furthermore, organizations will be able to proceed in this direction with the development and implementation of new tracking and monitoring systems since sales representatives will receive instant feedback on the impact higher margin has on their plan payout.

What is the Company's Life Stage?

The "life stage" of a company is typically a major determinant of performance measure selection. Driving incremental revenues and product traction, for example, is the lifeblood of smaller start-ups and periods of strong growth for businesses. Introducing customer product adoption performance metrics, such as revenue, into the sales compensation program is critical during these seasons.

However, this occurs in an environment lacking in infrastructure and margin management, and securing deals results in increased discounting and margin erosion. There will be a necessity to move to some aspect of margin in the incentive system to maintain growth and profitability.

What Kind of "Margin" is Measured?

Another factor to consider is the margin definition, which might be gross profit margin (total revenue minus the cost-of-goods-sold), operating profit margin (revenue minus the cost-of-goods-sold plus operating expenses), or net profit margin (revenue minus the cost-of-goods-sold and operating expenses) (revenue minus all expenses including interest and taxes).

You'll get different perspectives on the effectiveness of different margin indicators depending on the information source (e.g. sales, marketing, finance, operations, etc.). If you can't agree on whatever margin measure to use for sales crediting, you might have to use revenue as the common denominator.

What is the Current Economic Situation?

Companies that are more finance-driven focus on cutting costs and expenses in tougher economic times to correspond with changes in customer spending and variable revenues. Due to the importance of preserving cash, market share, and profitability during these periods, plans often include less room for discounting.

The strategies then either concentrate solely on margin or, if the salesperson is unable to impact margin, solely on revenue. Growth, on the other hand, is required to emerge from an economic downturn and achieve long-term financial success.

Sales at any cost, such as deep discounts, do not promote long-term growth; rather, they consume significant resources and set customer expectations that are difficult to reverse when conditions improve.

Organizations that focus on expansion while putting up the effort to reach and reward the needed level of profit measurement will be more successful in the future.

How do You Get Customers?

More recently, the emergence of the supply chain management profession and RFP (Request for Proposal) processes have colluded to extract as much profit as possible from the sales channel. Focusing solely on revenue or margin at the expense of everything else offers procurement a home-court advantage.

Margin is required to achieve the depth of the relationship between buyers and sellers that enables the flawless product or service delivery, and the value that a provider may bring to the customer with a best-in-class solution.  

Hence, the compensation plan should pay for transactions or target achievement that integrates both initiating and promoting behaviors and outcomes that combine both revenue growth and needed margin.

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How are Sales Quotas Established?

Quota achievement can be achieved by selling low-margin, easy-to-sell, "door-opening" products or services with a direct volume or revenue target. Volume and revenue must have the proper mix of products and services in overall sales, as well as a margin mix that achieves the required levels of both growth and profitability for the firm, to assure profitability.

Final Thoughts

Adopting measures to evaluate sales performance that encompasses both the required revenue growth to satisfy stakeholders, while making sure that margin is paid attention to on a transactional or target-driven basis is required to achieve sustained, profitable sales. Your sales team genuinely cares about the customer, the company, and themselves. Hence, the sales compensation plan must convey explain to salespeople what your company values and where they should focus their time and effort to support this credo. It's a formula for success to include performance indicators in the plan that are relevant to the sales function and focus on both revenue and margin.