The experts at Bluewolf recommend 6 great key performance indicators (KPIs) that measure sales effectiveness and promote sales team profitability:

1. Calculate the gross margin per individual sale.

Work with your corporate accountant to set up a reporting system that allows you to calculate how much actual gross profit was generated by any given sale. If your company sells products that decrease in value while inventoried, such as personal computers, be sure that the gross margin per sale is based on the depreciated cost rather than the actual cost; otherwise you could find yourself with a warehouse full of products that nobody is willing to sell.

2. Estimate the actual cost per individual sale.

Work with your accountant on the details of the yearly selling, general, and administrative expenses (SG&A) to remove for the purposes of your internal cost-of-sales accounting overhead that has nothing to do with sales. Once you’ve got that number, divide it by the number of sales reps, and then divide that number by 1,920, which is roughly the number of hours that a sales rep works each year. The result is your hourly selling cost. Then, using your CRM system, track the number of hours spent on each sale. For each sale, multiply that number times the hourly selling cost to get the estimated cost for each sale.

3. Base sales compensation on net profit.

Subtract the actual cost per individual sale from the gross margin per individual sale to get the net margin per individual sale. Base your commission structure on this number, rather than on the revenue. Make it possible for the sales rep to query within the CRM system the profitability (and by extension the commission) of the expected sale throughout the sales process. The sales rep will now be able to see the commission become smaller based upon the amount of time spent with the customer – or, if the rep manages to increase the size and scope of the deal’s profitability, the sales rep will see commissions go up.

4. Measure marketing on demand creation.

Marketing groups frequently waste money on activities that are marginal to the selling process. The solution to this problem is to measure and compensate marketing on the quantity and quality of leads they generate. For example, if marketing runs an advertisement, the impact in terms of generating prospects should be measured before and after the ad runs, and that measurement should continue through the sales process until the leads generated actually become customers.

5. Create a formal metric for R&D requests.

Using research and development (R&D) to help close business can fool sales reps into thinking that they’re reducing the cost of sales, when in fact they’re simply shuffling the cost from the SG&A line to the R&D line. More importantly, if the R&D group becomes mired in special requests for work that’s needed to close sales, future products can be delayed indefinitely. To prevent such problems, create a formal process that allows sales management and engineering management to decide collaboratively what deserves the attention of the R&D team.

6. Create a special metric for strategic accounts.

A strategic account is one in which the relationship is so important that it transcends the need to make money. For example, a small software firm might number IBM among its clients – and tout that relationship in all of its marketing materials. If your metrics focus purely on profit, it may become difficult for the team to focus on such strategic accounts, so you’ll need some other kind of metric to account for involvement in these relationships.

Sales effectiveness consulting is a hot area with Bluewolf, leading the drive towards increased profitability for Fortune 1000 sales organizations.

Join the discussion. What other metrics do you use to measure sales effectiveness and profitability in your organization?