Territorial Dominance – Perfect Balance

According to ZS Associates, a sales consulting firm in Evanston, IL, sales managers can boost total revenue by 2 to 7 percent with exactly the same sales force just by applying some simple territory alignment principles. Is this a trick? Hardly. Any good sales manager has the skills to pull this one off by creating properly balanced sales territories. The math is simple: If reps have too much territory, they’re missing some profitable accounts. With too few prospects they’re wasting time – and costing you money.

Selling Power talked with a territory alignment specialist to take the mystery out of balancing territories and show how your sales force can more productively improve the bottom line.

If your salespeople visit customers on-site, territory assignments become critical in the drive to hold down costs and increase territory revenues. How much difference can good territory definition make? Quite a lot, according to ZS Associates, a consulting firm that has done territory realignments for more than 200 companies.

ZS found that 56 percent of the territories it studied were significantly out of balance. That is, the workload imposed on more than half the reps was at least 15 percent higher or lower than the ideal workload to cover a territory.

Too much territory means the rep is missing some profitable accounts. Too few prospects means the rep is spinning wheels (and burning company gasoline) without adequate revenue rewards.

What to Balance

What exactly does a good territory design balance? There are several measures. These will differ in importance for each company.

The first is usually revenue opportunity – the sales potential for each rep. This is not the same as last year’s sales, which may reflect outdated territory assignments. Revenue opportunity is the amount you could be selling if you covered the market correctly.

A second balancing item is workload, or the amount of time it takes each rep to cover valuable prospects or accounts adequately.

A third measure is your reps’ earning potential. If everyone is paid the same flat commission rate on sales, revenue opportunity should be fairly well balanced. But if you have a more complicated compensation plan – for instance, differentiating between old and new products – you may have to balance this measure separately.

A good territory design will probably focus on one measure of balance first, then check how this affects the others. You may have to make adjustments, for example, to ensure that every rep has a reasonable shot at a minimum compensation level.

Balancing for Maximum Profits

There is another approach that tries to tie all the measures together. By looking at the selling costs and revenue potential of each account in a territory, you can aim at a profit-maximizing plan for covering the market.

Marshall Solem, a ZS principal who specializes in territory alignments, explains this new approach to right-sizing your territories. “The old rule was that balance is better than imbalance in territory alignment,” Solem says. “That is still fundamentally true, but companies are starting to combine geographical size with market balance.”

Solem gives an example. A company with 45 reps might distribute them over 45 geographical territories so that each rep has the same number of A and B accounts (the largest customers) to cover. Most reps would simply ignore or pay minimal attention to the less lucrative C and D prospects.

“But suppose those A and B accounts are spread across Montana or Texas?” Solem asks. “Would it be better to go to the farthest reaches of your territory to maybe pick up an A account? In the same amount of time, you might pick off three C accounts right at the end of your driveway.”

That is just common sense, right? Salespeople and sales managers usually recognize these kinds of tradeoffs in their adjustments of original territory designs. What is novel is that ZS’s mapping and optimization tools can take these tradeoffs into account explicitly, up-front, when territories are being defined.

ZS matches the profit potential of each account with the cost, including travel time, of visiting the account. A good territory alignment thus sets the original prospecting plan for maximum profit. In very large territories, the plan will include the smaller but close-by C accounts and leave out those rich-but-distant A’s.

“When you have fewer than 200 reps to cover the entire United States you have to make these geographical tradeoffs,” Solem says. “Recognizing distance is not a new idea. But we now have algorithms to help determine the profit-maximizing solution.”

Sizing the Sales Force

Another trend Solem sees in ZS’s practice is using territory analysis to size the sales force. “In the past, if a company said they needed 50 reps we would allocate them among 50 balanced territories. Now, by integrating the profit of individual accounts with the costs – including travel – of covering them, we may show mathematically that you don’t need 50. Theoretically, to cover A and B accounts for maximum profit, the right size may be only 46 reps.”

So ZS can help size the sales force before reps are assigned their territories. “Geographic practicality is a very big factor in sizing the sales force because travel time is such a big factor,” Solem points out. “You can be below or over the ideal number by a few people if you ignore distance in sizing your sales force. While that may not sound dramatic, imagine saving the cost of five sales territories that are not geographically cost-effective. The money can go to other marketing or sales programs – or drop right to the bottom line.”

This kind of sophistication is possible only because of 1) advances in market data bases, 2) sales costing functions and 3) ZS’s own optimization algorithms.

Size and market segment usually determine the potential profit of an account. “The size of customers is obviously a big driver of profit,” explains Solem. “But it also depends on their market segment. Some segments buy a different mix of your products, with different profit margins, than others do. So estimating the size of the account in each product market really matters.”

For many existing accounts, sales managers know the likelihood of a successful sales call. For new accounts, managers and ZS personnel estimate an expected return per sales call given the prospect’s size and market segment. That takes care of the revenue side of the equation.

On the cost side, the company estimates the full cost, including reps’ time, of visiting each account. ZS uses mapping software to estimate travel time for each sales call. ZS’s tools can use each client’s own historic cost data and travel policies to refine the cost estimates. For example, companies with leased-car fleets have a different cost structure than companies that reimburse reps on a per-mile basis.

With accurate revenue estimates and cost functions, it is a matter of crunching numbers to find the profit-maximizing sales force size and geographic distribution of territories. At least in theory.

Dealing with Disruption

The practice of territory alignment is tougher than that for several reasons. First, there is the possibility that a theoretically ideal territory plan will disrupt existing relationships between customers and reps.

“Most of our clients have a sales force in place and we are modifying that,” Solem says. “So there are disruption issues. Some companies think relationships are everything, and you can’t disrupt relationships to balance the sales force. They would rather keep it unbalanced. Other companies say that relationships are not sacred.”

The hot economy of recent years has intensified both views.

The expansion of the Internet as a selling tool has prompted many companies to focus on person-to-person contacts with their customers. Personal relationships appear to be one of the few things that e-commerce cannot replace.

On the other hand, tight labor markets mean turnover is inevitable even in the best sales force. Whenever a key rep leaves, at least one set of relationships is disrupted. Companies often reconfigure their territory design when a key rep leaves, so other relationships may also be affected. Like it or not, sales managers must get used to handling disruptions.

How bad is that? ZS’s own studies over many territory realignments suggest that, provided the selling firm has an effective transition program in place, the impact of disruptions can be minimal. “A disruption can even be positive if you stir up a stale customer relationship with new ideas,” Solem emphasizes.

Bridging the Disruptions

“You have to have a good transition program for your large-account relationships anyway,” Solem argues. “For small customers it may not make much difference. You don’t spend that much time with them, so they don’t notice much impact from a change in reps. But for large customers, if you don’t have a smooth transition you can lose heavily.”

Solem lists the elements of account transition: “First, of course, you must ensure the complete turnover of records, including account background.”

The second step involves joint sales calls and introductions of the new rep by the old rep. This step will vary by industry and the sales cycle. Solem recommends one or two joint calls to each account. “In pharmaceutical sales, you might cycle through all the accounts in one month, so the joint calls can happen for one or two months. In other industries, you might call only once per quarter, so it takes longer.”

Even small customers should get a letter from top managers announcing the change in representation and urging the customer to call managers directly if there are any questions or problems.

The third step focuses on paying extra attention to customer service and other sales support during transition. “You want to make sure customer service knows the new reps and is aware of the changes in their responsibilities,” Solem urges. “Make sure they are wired in – that service reps and sales reps have each other’s home phone numbers.”

A fourth step is more complicated – keeping the displaced reps interested in the performance of their old territory. “During the transition to a new territory system, some companies pay reps on the basis of sales in both their old and new territories,” Solem notes. Especially during the joint-call phase, reps will have double duties as they help their replacements while meeting their new customers. This mixed compensation program can last three to six months in some cases.

Another strategy is to keep a “bench” of reps ready to replace colleagues who leave territories due to promotion or turnover. This strategy ensures that customer coverage is not disrupted, even though personal relationships will be severed.

This strategy can be expensive. Your “bench” represents surplus sales capacity until reps are deployed to fill vacancies. This surplus cost must be weighed against the costs of vacant or badly covered territories when a key rep leaves by surprise. The time and cost of replacing reps in today’s labor market can be very significant.

Turf Tactics

Another challenge to territory alignment comes from the inside – the interest of commissioned reps in keeping rich turf. “Balancing territory assignments can be a real problem if the sales force is heavily commissioned,” Solem acknowledges. He figures that having incentive pay at 40 percent or more of total compensation creates hurdles for senior reps who are asked to give up major revenues they have developed and feel they own.

There are two ways handle the hurdles. “First, you can move to a goal-oriented compensation program.” Solem notes. “If the reps’ territories are changed, you adjust their sales goals.” Then, if the reps make 100 percent of their new goals, they get a top-performer compensation rate.

The other technique is similar. “Develop a buyout program for the people who had to give up a very rich territory,” Solem explains. “You promise them at least what they made for the last two or three years if they meet a couple of performance measures.” The last point is crucial. “The compensation commitment has to be connected to some performance measures or the reps may get complacent,” Solem notes.

Selling It to the Field

Of course, the best situation is to have territories in decent balance from the start. Designing a new sales force presents a golden opportunity to get it right at the outset. But most companies are trying to optimize the performance of an existing sales force. “Most of our clients evaluate their territories at least every two years as demographics change and new products are introduced,” Solem says. “And everybody makes little changes on a quarterly basis.”

Realignment of a major sales force takes 12 to 16 weeks to complete, depending on size, complexity and the availability of data. “First, we want to know what is an A or B account,” Solem says. “Then, what efforts are required to drive an A sale in each segment? Then we gather data about A and B accounts, build the analysis and review our recommendations with field sales managers.”

Working with first-line sales managers is essential to the success of territory design, Solem argues. “There are things you can’t capture mathematically from the data. We want it to be the managers’ alignment, assisted by ZS. These managers must explain and sell the plan to the field. If they can’t it may get sabotaged or become an excuse for everything that goes wrong.”

With the possibility of a 7 percent sales gain riding on getting it right, managers should work toward total buy-in across the company.