Compensate for profit, not revenue

From 5 Ways To Reduce Cost of Sales by Jeffrey James:

Many companies still use gross revenue to measure sales performance. Focusing solely on revenue, however, can easily put a company in a position where you’re losing money on each sale and trying to make up the difference by selling in volume.

In the past it was impossible to compensate on profit because most company’s back-office systems weren’t capable of reporting the profitability of each sale. Today, however, most companies have a fairly good idea of their cost-of-goods, which makes it possible to provide salespeople with solid estimates of how much profit their sales are generating.

Since profit, not revenue, is the point of selling in the first place, it only makes sense to measure sales accordingly. A big advantage of this approach is that it reduces the temptation to discount (a hidden cost-of-sale) in order to close a deal.

One thought on “Compensate for profit, not revenue

  1. Pingback: To raise profitability, control tech costs in sales | A Founder's Notebook

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