In multilevel marketing salespeople have an incentive to

Direct Channels
of Distribution:
Personal Selling and Direct
Marketing

Chapter Thirteen

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Key Learning Points

How the sales force fits into the marketing organization
The major duties of a salesperson
Managing the sales force
Setting sales quotas
Issues in sales force compensation
Technology’s impact on sales management
Importance of direct marketing
Major direct marketing media
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Key Learning Points

The purpose of this chapter is to introduce some of the issues in managing two major direct channels of distribution: personal selling and direct marketing. After reading this chapter, the student will have learned:

• How the sales force fits into the marketing organization

• The major duties of a salesperson

• Managing the sales force in terms of managing sales force performance, designing sales territories, determining sales force size, and assigning salespeople to territories

• Setting sales quotas

• Issues in sales force compensation

• The impact of technology on sales management

• The importance of direct marketing

• The major direct marketing media

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- Russell S. Winer

“The salesperson not only communicates information about the product or service and delivers the key value proposition to the customer, but also attempts to complete the transaction with the end customer (a key role of some channels).”

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The size of sales forces can be substantial. Pepsico has 36,000 salespeople and drug companies sales forces have been estimated to be about 90,000.
Many firms devote a lot of resources to their sales forces. The funds spent training, motivating and rewarding the sales force rivals that spent on other channels and types of communications. The cost per call ranges between $158 per call to $224, depending upon the size of the sales force.
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Figure 13.1
Sales Force Organization in a
Medium-Sized Firm

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Different titles are used in sales management, depending on the level of the organization.
Figure 13.1 shows the different titles typically used in a mid-sized sales organization.
The vice president of marketing or sales heads the sales organization.
Most of the other titles describe job responsibilities defined by the size of the geographic territory covered (national, regional, and district sales managers).
The largest part of the organization is made up of the field sales representatives, or reps.
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Figure 13.2
Adobe Systems Marketing Organization

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Sales organizations are often separate and powerful entities within companies. In such firms, marketing is viewed as providing a support function (advertising, selling materials, trade shows) to sales.
Figure 13.2 shows the organizational structure of Adobe Systems Inc., a computer software company.
The product marketing group includes product managers responsible for putting together marketing strategies and programs for products such as Acrobat, Photoshop, and Illustrator.
In this organization, product marketing is different from marketing. Marketing offers support to product managers by planning promotional events, designing trade show displays, and so on.
The sales organization is also separate from marketing and is responsible not only for calling on corporate customers but also for channel merchandising (handling relationships and other matters with distributors).
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Figure 13.3
Hewlett-Packard Medical Products Group Organizational Chart, 1992

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There are three kinds of sales organization structures.

The product/product sales organization sells a product or product line to all markets and often coexists with a product-focused organization. A disadvantage of this structure is that a customer may be called on by several salespeople from the same company.
An example of the product/product structure appears in Figure 13.3, which shows the organizational structure at one time for Hewlett-Packard’s Medical Products Group (MPG). MPG sells a variety of products. On the right side of the chart is the U.S. Field Operations, with different national sales managers (NSMs) for the different product groups within MPG. The Imaging Systems Division (ISY), which manufactures ultrasound devices for cardiologists and vascular surgeons, has its own sales force and national sales manager, as do the other three product groups. The ISY sales force only sells the products made by that division.
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Figure 13.4
MCI Communications Corporation Organizational Chart, 1986

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A second sales organization structure is aligned by market segment.

In this case, the sales force sells the entire product line to customers in the segment. An illustration of this kind of organization is shown in Figure 13.4. MCI’s U.S. marketing operations were organized by geographic market segments (the company is now part of Verizon). In each geographic territory, the sales force is responsible for selling all telecommunications services to the customers.
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Figure 1.4
Dessert Division Organizational Chart, General Foods Corporation

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A third organizational form is called product/market.
In this case, the company has a product management structure but the sales force sells all products marketed by a division to a single market.
An example of this kind of structure is the General Foods dessert division from Chapter one (Figure 1.4). In this example, there are individual product managers for Jell-O Gelatin, Jell-O Pudding Pops, and other products, but the sales force for the desserts division is responsible for selling all of the division’s products to the national supermarket chains.
Sales force reorganizations can be costly to the company. Xerox’s financial problems in the late 1990s were attributed to a reorganization of the sales force that failed.
On the other hand, the organization of the sales force may need to change as companies grow, when customers change, or when there is a significant change in industry structure.
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Figure 13.5, Part A
Ways to Organize National Account Sales Forces

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National/Key Accounts Organizations

Many companies have an additional layer of salespeople who deal with the largest accounts. In many firms a few large corporate accounts make up a large percentage of sales, so a higher level of attention to their business makes good sense.
National account personnel are charged with developing new accounts and maintaining existing ones; the latter is particularly important for long-term relationship building. Key account managers become very familiar with customers’ operations and problems and are in an excellent position to satisfy customers’ needs by helping them develop a strategy for the product in question. In addition, such positions are considered plums in the company and serve as a career goal for the sales force.
Figure 13.5 shows four common ways to organize the key account sales force. For ease of viewing, this figure is presented in two slides.
The most common form of organization is for the national key account sales force and the regular sales force to be on the same level organizationally and for both to report to the corporate vice president of sales.
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Figure 13.5, Part B
Ways to Organize National Account Sales Forces

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The ways in which the national account and regional sales teams interact can vary.
In some cases, the national account team calls on national or international headquarters, whereas the regional salespeople concentrate on the local offices.
In others, the national account manager acts as a coordinator for the regional team.
With either kind of arrangement, there are often difficulties dividing up the commissions earned from sales as it is often unclear who contributed the most to the sale.
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The Sales Force and the Marketing Organization

Multilevel (network) marketing
Successive levels of salespeople recruit additional sales representatives

Differs from illegal pyramid schemes

Suffers from image problems and high turnover

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Multilevel Marketing

Amway, Mary Kay, Tupperware, Avon, and many other product and service lines are sold using multilevel or network marketing distribution systems. The concept behind the system is simple: people recruit other people, who recruit others, and so on, to sell the products. Part of the commission on each sale is transmitted through the system so that the person at the top of the pyramid can receive substantial income by managing the network.
The use of the term pyramid is unfortunate because multilevel selling has been linked to illegal pyramid schemes that have bilked people out of their money.
Although legal and very successful, multilevel marketing systems still have image problems.
One problem is that some systems force salespeople or distributors to purchase a significant amount of inventory in advance. However, In 1992, the Direct Selling Association adopted a new ethics policy that requires members to buy inventory back from distributors for at least 90 percent of the purchase price.
Another is that the amount of sales that actually occur is far less than that promised (how many relatives do you have?).
The riches some people have made rarely accrue to the average distributor.
Thus many network marketing systems are plagued by high turnover and shattered dreams.
However, network marketing does offer individuals the opportunity to make extra money and manage their own businesses.
In the past several years, the industry has tried hard to reverse its negative image.
Many managers, displaced through corporate downsizing programs have brought an element of professionalism to multilevel marketing. A look at the Inc. 500 shows that many of the fastest-growing small companies in the United States use this kind of distribution system.
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Illustration

One of the key jobs of a salesperson is maintaining a good relationship with the customer.

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A salesperson is rewarded on her or his ability to sell. Less obviously, salespeople are also charged with maintaining and enhancing customer satisfaction with the selling firm and are often rewarded at least partially on that basis. Today, most sales people talk about selling “solutions” to customers or, in other words, solving a customer’s problem.

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Response selling
Trade selling
Technical selling
Missionary selling
Creative selling
Types of Selling Situations

What Does A Sales Force Do?

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Discussion Note: A common way of classifying various selling situations is shown on this slide and explained below. It might be beneficial to ask students to identify specific examples of sales positions that fit each selling situation.

Response selling. The salesperson is basically an order taker. The customer initiates the sale and gives the order to the salesperson. Inbound sales and retail sales clerk positions are good examples.
Trade selling. This kind of selling includes order taking, but also entails responsibilities such as making sure the stock is adequately displayed on shelves, setting up displays, providing demonstrations, and other activities sometimes called merchandising. Examples include many consumer goods sales reps who call on retail stores, and liquor reps who call on retail and bars.
Missionary selling. In this kind of selling, the salesperson attempts to influence the decision maker rather than the user or purchasing agent. The missionary salesperson helps the buyer promote the product to internal or external customers. The best example is found in pharmaceutical sales. Other examples include textbook salespeople (who influence the professor to adopt the text).
Technical selling. In many industries, the salesperson also acts as a technical consultant to the purchaser. For this to be successful, the salesperson must have strong technical training. For example, the Hewlett-Packard salespeople in the Imaging Systems Division must be knowledgeable about the latest developments in ultrasound and other medical imaging technologies. Complex machinery using in manufacturing equipment, especially if custom-designed, would be another example.
Creative selling. This method involves developing new customers and maintaining old ones by investing a considerable amount of time in understanding buyers’ needs and wants.
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Figure 13.7
Determinants of Sales Force Performance

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Sales Force Performance

A number of internal and external factors contribute to the success of the sales force, as shown here in Figure 13.7

Internal Factors

The salesperson’s motivation is a basic force behind how much effort he or she devotes to the job and how he or she responds to different kinds of incentives. The sales force is motivated by financial incentives such as commissions on sales, salary guarantees, and bonuses. However, salespeople can also be motivated by sales meetings and contests, education and training, and information about the company and its plans. Different salespeople are motivated by different factors. Some may be motivated by loyalty to the firm.
Salesperson performance is also affected by aptitude for selling, or natural ability to sell. It is generally thought that some people are born salespeople and others are not. However, this implies that selling skills cannot be taught, which is not true. At the same time, some aspects of aptitude, such as empathy and persuasiveness, cannot be taught easily and do give one person an edge over another.
Higher levels of job satisfaction are positively correlated with salesperson performance.
The salesperson also needs to understand both his or her superior’s expectations and the kind of selling that is necessary to be successful. This knowledge is called role perception. For example, if the sales manager expects the salesperson to spend half of his or her time taking care of the stock on the shelves and the salesperson thinks that is a minor part of the job, this mismatch in expectations will lead to lower performance.
Finally, personal attributes such as gender, attractiveness, education level, and other factors are often related to success in particular industries.
External Factors

Environmental factors have a major effect on performance. These are derived from the marketing plan described in Chapter 1. Included are:
Customers. Obviously, changes in customers’ tastes, buying behavior, and their own competitive conditions make the salesperson’s job more difficult.
Competitors. Tracking the competition is important for successful selling. This involves more than prices (the usual focus of salespeople). It also involves changes in their strategies, financial condition, product line, and other factors.
The industry environment. Changes in technology, social changes, economic shifts, regulation, and politics affect the job.
A second set of external characteristics relate to the organization. For example, it is easier to sell if the products are market leaders. Conversely, the market position is affected by the sales force’s efforts. An important factor is the amount of financial resources a company puts into sales efforts, as performance is likely to improve as more money is spent.
High-quality personnel and a culture that supports personal selling efforts also help. The quality of the sales management also directly affects the performance of the sales force which in turn is affected by the amount of resources the company spends on sales management and the kind of people who occupy key sales management posts.
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- Russell S. Winer

“A sales territory is a group of present or potential customers assigned to a salesperson. In most cases, as the term implies, sales territories are geographic areas selected to minimize travel time between accounts and delineate clearly which person is responsible for a particular account.”

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Designing sales territories is an important part of sales management.
Territories that are not balanced in terms of potential sales can be demoralizing to the salespeople assigned to them.
An insufficient number of territories means salespeople spend too much time traveling and not enough time selling.
Too many territories means lower income and salespeople fighting over the geographic boundaries.
If territories are shrunk, reps may wonder how they will meet their ever-increasing quotas with fewer potential customers.
There are three major, interrelated decisions concerning sales territories:
1. Deciding how many salespeople to have.

2. Designing the territories.

3. Allocating selling effort to the accounts.

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n = s / p

Determining the Size of the
Sales Force – Breakdown Method

Designing Sales Territories

n = the number of salespeople needed

s = forecast sales

p = average sales per person

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Breakdown Method

The breakdown method is a simple method that assumes an average productivity level for each salesperson. The number of salespeople needed can be computed from the following equation: n = s / p

where n equals the number of salespeople needed, s equals the forecasted sales, and p equals the average sales per salesperson.

Therefore, a company expecting to sell $100 million worth of goods in 2010 with a sales force currently averaging $5 million per salesperson needs 20 people.
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Determining the Size of the
Sales Force – Workload Method

Designing Sales Territories

1. Classify the firm’s customers into categories.

2. Determine sales call frequency and length.

3. Calculate the market workload.

4. Determine the time available for each rep.

5. Allocate the salesperson’s time by task.

6. Calculate the number of salespeople needed.

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Workload Method: Six steps are required to implement this method:

1. Classify all the firm’s customers into categories. Divide the set of customers into three categories, based on the amount of sales for which they account (other criteria could be used as well). Customers classified as A might be the top 25%, B the next 50%, and C the bottom 25%. The assignment could be based on sales potential rather than actual sales.

2. Determine the frequency with which each type of account should be called upon and the necessary length of each call. For example, based on experience and judgment, the following data might be used:

Class A: 12 times/year × 120 minutes/call = 1,440 minutes, or 24 hours

Class B: 6 times/year × 60 minutes/call = 360 minutes, or 6 hours

Class C: 2 times/year × 30 minutes/call = 60 minutes, or 1 hour

3. Calculate the workload necessary to cover the entire market. Assume that there are 200 A customers, 400 B customers, and 200 C customers. Then the total workload necessary would be:

Class A: 200 customers × 24 hours = 4,800 hours

Class B: 400 customers × 6 hours = 2,400 hours

Class C: 200 customers × 1 hour = 200 hours or a total of 7,400 hours.

4. Determine the time available for each salesperson. Assume for this illustration that the typical salesperson works 48 weeks each year (4 weeks of vacation) for 50 hours each week. This gives a total of 2,400 hours per year for selling.

5. Allocate the salesperson’s time by task. As we noted earlier in this chapter, the salesperson has activities other than selling (planning, writing up call reports) that take time. Supposing that selling is only 50 percent of the salesperson’s time, then this implies that 1,200 hours (50 percent × 2,400 hours) can be allocated to selling.

6. Calculate the number of salespeople needed. This is simply the workload of 7,400 hours divided by the 1,200 hours available or 6.17 (rounded to 7) salespeople.

This method is more logically appealing than the breakdown method but it makes several assumptions that may not hold. Different accounts within a class may require different amounts of effort. Also, different salespeople operate with varying amounts of efficiency and can allocate more or less time for traveling, planning, and other activities.

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Activity

A formerly regional business is expanding geographically. Sales for the upcoming year have been forecast at $40,000,000. Their current sales force of seven average approximately $ 2,500,000 per person in sales annually. Calculate how many additional sales representatives should be hired for the expansion.

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Based on the information provided, the breakdown method can be used to estimate the overall size of the sales force (n) needed to accomplish the forecast sales levels. Subtracting the current number of sales people from this number yields the number of new hires needed.
S = 40,000,000 and P = 2,500,000. S / P = 16. As the firm already employs seven people, they need to hire a minimum of 9 new salespeople to achieve the forecast sales level.
Discussion Note: After students have performed their basic calculations, it would be useful to ask them whether they think that an additional nine people are sufficient to achieve the $40,000,000 in sales. Given that the firm will be moving into new geographic markets never before serviced with inexperienced personnel (in terms of the company and product, and perhaps even inexperienced in selling), the expectation that they will average the same amount of sales as experienced reps do now is very unrealistic. If the firm is only willing to hire 9 people, quotas should be adjusted downward for those assigned to the new market. Furthermore, the firm may ultimately feel that it is more beneficial to place experienced reps in the new territory while letting the new reps work with established clients. While this suggestion may seem the best way to utilize limited resources on the part of the firm, the existing sales force would very likely rebel or quit. Why? Aside from the issue of having to uproot their families, breaking into a new territory is very difficult and can take time. Without an existing client base to service, their income will most likely to drastically effected, and existing reps would very likely resent the new hires taking over the customers (and commissions) in the territory to which they were previously assigned. The instructor might wish to ask what adjustments in the compensation plan would be recommended to mitigate these problems (larger salary, earn partial commissions over a period of time on all sales made to former clients, etc.).

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Designing Sales Territories

Marginal economic method
Resources should be allocated to the point were marginal revenue equals marginal costs.

Salespeople should be hired to the point where the generate $1 in additional contribution margin.

Technique is difficult to implement.

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Kate S. (KS) - This sentence is not clear. Please reword.

Marginal Economic Method

Basic microeconomics teaches us that we should allocate a resource up to the point where the marginal revenue obtained from an additional unit of the resource equals the marginal cost.
Suppose that it costs $60,000 to hire a salesperson. Based on this approach, salespeople should be hired as long as they can sell enough to generate $60,001 in contribution margin (much more in sales, depending on the variable margin rate). The $1 in contribution generated was previously unavailable and would go toward covering fixed costs.
Although this marginal economic method sounds theoretically appealing, it is more difficult to implement than the other two techniques discussed because it is difficult to know what the “marginal” salesperson can generate in sales.
In addition, the marginal sales volume will decrease as additional salespeople are added because the remaining customers are more difficult to attract or service than those who are already buying your product or service.
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Figure 13.8
Territory Design

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Designing Sales Territories

The steps involved in designing sales territories are shown in Figure 13.8.

Select the control unit or the basic geographic unit that will be used to form the territories. The most common units are (in decreasing size) countries, states, counties, cities/standard metropolitan statistical areas (SMSAs), ZIP codes, and blocks. Obviously, the control unit varies by the kind of product or service.
2. Estimate the market potential in each basic geographic unit. The methods described in Chapter 3 can be used.

3. Form tentative territories. Contiguous geographic units should be combined so as to make the territories equal in market potential. The number of territories should be based on calculations of the appropriate number of salespeople (note that this assumes the assignment of one salesperson per territory).

4. Calculate the workload for each of the tentative territories. The first part of the workload analysis is to determine the distribution of accounts by their size (based on actual revenues, potential, or some other measure). However, in this case the analysis must be done on an account by account basis. Subsequently, each account must be assessed for the amount of time necessary to serve it. A potential account would be allocated more time because more selling effort is needed to create a new account than to maintain an existing one.

5. Adjust the tentative territories. The workload analysis (and any other relevant information) is then used to adjust the initial solution to territory design. Again, adjustments should be contiguous so that salespeople do not waste time traveling through another salesperson’s territory.

6. Assign salespeople to territories. Salespeople have varying abilities and fit better with different kinds of accounts. Some are better at developing new accounts, some are better at maintaining relationships, etc. There are also personal aspects that must be considered. A salesperson who was born and raised on the West Coast may not be interested in moving to the Southeast.

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Figure 13.9
Account Planning Matrix

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In step four the territory design process, an account planning matrix similar to Figure 11.9 can be useful in prioritizing accounts and determining the effort needed to service each.

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Illustration

Computer analyses for territory design and salesperson assignment are common today.

Such programs combine geographic mapping with optimization algorithms.

Visit TerrAlign to learn more.

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Computer analyses for territory design and salesperson assignment are common today. These programs combine sophisticated geographic mapping capabilities with optimization algorithms. Such software is sold by TerrAlign (http://www.terralign.com). TerrAlign:

■ Automatically generates optimal calling plans for the field sales force.

■ Minimizes distance between calls.

■ Calculates call frequency requirements for customers.

■ Balances the weekly calls across customers.

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Setting Sales Quotas

Sales quotas
Quotas are specific goals that salespeople have to meet.

Different types of sales quotas exist:

Sales volume based quotas

Profit based quotas

Combination quotas