Performance Management Friday — CPOD

I’m shifting gears a little, today I’m focusing on a key sales management metric.  It’s important for sales people to understand this–it’s part of the way senior managers look at organizations and how they invest in the sales function, sales people should understand this.

The other shift, is this metric is more of a trailing measure, like sales and order performance.  In previous posts, I’ve spent more time looking at leading measures.

Cost Per Order Dollar (CPOD) is actually a number of measures, but they really look at the cost of selling.  Depending on your company, this may be based on orders–which is where the acronym comes from–or sales/revenue.  If there is a wide separation between orders and revenue, I track both, but find the order based measurement a little more meaningful from an operational point of view.

This measure is similar in concept to Cost Of Goods Sold (COGS), which is generally a representation of manufacturing expense as a percentage of sales (or orders).  CPOD is calculated by looking at Selling Expense/Total Orders(or Revenue).  Generally it’s expressed as a percent.  For example if the total cost of selling is $10M and the orders generated during that time were $100M, the CPOD would be 10%.

So now that you have the foundation for how this is measured, let’s dive into it a little more deeply.  I like to track Direct and Indirect CPOD.  Direct CPOD represents the cost of your sales people as a percent of the orders they generate.  This could be for your field sales force or your inside sales teams–if they deal directly with customers and generate orders.  The costs include all their salaries, commissions, benefits, travel, cars, computers, and related expenses.  It does not include the costs of the people and organizations that support the sales people–including their managers, sales operations teams, pre-sales support teams and other functions that may reside in the “sales organization” but are not directly involved in generating orders.  Indirect CPOD is the costs of all those functions divided by orders or revenue.

By tracking both, I understand the cost trend of the people directly accountable for orders and revenue, as well as the “overhead” costs.  Generally in looking at these measures, since they are trailing indicators, I track general trends–I want to make sure the sales function is affordable, plus it gives me a very rough indicator of productivity.

I tend to track the trailing quarter (what’s been the trend over the past 3 months) and the trailing 12 months.  I want to see it constant–or even better declining.  If I see Direct CPOD declining over time, it’s probably a good sign, it’s an indicator that sales productivity may be increasing. 

However, too often, we see it going the other direction–CPOD is increasing.  Now you’ll see why I track both Direct and Indirect.  If Indirect CPOD is increasing–it shows my overhead costs are rising–sometimes it justifiable–for example we may have invested in a major training program, which temporarily may increase Indirect CPOD.  But if it starts increasing on a consistent basis, I start to worry about why the overhead costs are increasing.  Generally, we want to run as lean as possible, so unexplained increases in Indirect CPOD may indicate some real problems.  If Direct CPOD is increasing, it means the productivity of the sales people is declining.  Expenses may not have increased–the line item on the budget may not have changed (or could have even decreased), but the amount of business being generated is declining.  This is really worrisome, it’s something we need to dive into and understand–we need to keep spending in sales at an affordable level.

Too often, managers just track the overall budget and spending.  They don’t separate the direct and indirect views to better isolate where the spending problem might be.  They don’t relate it to business volumes, so they may see expenses declining and think budget are OK–but orders may be declining at a faster rate.

These are trailing or historical figures.  If your pipelines are not looking good, you should expect Direct CPOD to be increasing–it should not be a surprise.  But a healthy pipeline may not mean your CPOD will be decreasing.

Sales managers always have to manage a budget are constantly looking at increases in sales productivity.  CPOD is probably one of the easiest measures for any manager to track.  It gives you a rough indicator on productivity trends and spending issues.

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Related posts:

1. Performance Management Friday — Activity Measures
2. Performance Management Friday — Wallet Share
3. Performance Management Friday — Average Transaction Value
4. Performance Management Friday — It’s Not About The Numbers
5. Performance Management Friday — Getting Personal