Optimal Decisions Using Marginal Analysis

As vice president of sales for a rapidly growing company, you are grappling with the question of expanding the size of your direct sales force (from its current level of 60 national salespeople). You are considering hiring from 5 to 10 additional personnel.

How would you estimate the additional dollar cost of each additional salesperson? Based on your company’s past sales experience, how would you estimate the expected net revenue generated by an additional salesperson? (Be specific about the information you might use to derive this estimate.) How would you use these cost and revenue estimates to determine whether a sales force increase (or possibly a decrease) is warranted?

Read also Marginal Analysis – Increasing Delivery Area To Increase Profitability

What is Marginal Analysis?

Marginal analysis is a decision-making tool used in microeconomics. It compares the additional benefits derived from an activity with the extra cost incurred by the same activity. Marginal analysis looks at the extra cost and benefit that come from making a little more or a little less of a product. When economists talk about “marginal,” they mean the difference that just one more or one less item made. This approach helps businesses decide by weighing the pros and cons.

What is Marginal Analysis is Used For?

  • Making the Most of Resources: Marginal analysis helps businesses use their resources wisely and make better choices.
  • Deciding to Grow: It’s important for businesses to look at the extra costs and the benefits they’ll get when they think about getting bigger.
  • Setting Prices and Adjusting Production: This method helps businesses understand what might happen if they change prices or how much they make of something.

Estimate the Additional Dollar Cost of Each Additional Salesperson

Step 1

First you do the calculation of the of the salesperson’s average sales hourly by subtracting any sales commissions due from the gross dollar amount of sales, then divide it with the number of hours worked. The hours that the salesperson was doing non-sales duties should not be included. This calculation yields a dollar amount of sales for every hour. The computation is not sufficiently reliable when the goods being sold are expensive goods sold on credit basis, due to the risk of buyer defaulting (Prokopenko& International Labour Office, 2007).

Step 2

This entails determining the salesperson’s average transaction by dividing the gross dollar amount of sales per week by the number of transactions completed by that salesperson on that week.

Step 3

You find out the salesperson’s average number of items per transaction by taking the total number of items that were sold during the week and dividing it by the total number of transactions.

Step 4

This step involves determination of the average profit of the salesperson per transaction, through the calculation of the company’s profit from each of the items sold by the salesperson in a particular week. Summation of these profits is done and then they are divided by the total number of transactions (Bragg, 2011). The deduction made if there is a low average profit per transaction is that the salesperson is facing difficulty in building the customer’s trust to a level that could convince him to purchase the expensive merchandise.

Step 5

The level involves examination of the four of the foregoing calculations in order to obtain a clear picture of the strengths and weaknesses of the salesperson. A high average hourly sales besides a low average transaction, would indicate that the salesperson is sufficiently aggressive but fail to be adequately resourceful (Baumol, 2012). A more comprehensive picture of the overall potential and performance of the salesperson can be obtained through the consideration of other factors, for example, the number of days of credit extended, long-term potential of his customers among other opportunities and risks associated with the sales.

Step 6

At this last stage, an evaluation of the conversion rate of the overall sales staff by taking the number of the transactions completed in a particular week and dividing by the number of the customers getting to buy from the company. A low number would mean that the company’s sales staff is insufficiently aggressive, although factors like the prices of products could also factor in.

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