The story of Frankie and Jonnie. Why the salesperson you think is your best, may not be.
The previous installment in this series (August/September issue of FURNITURE WORLD posted to the Operations Management Index on www.furninfo.com) discussed using numbers to improve the overall profitability of retail furniture stores. It also presented the concept of using Performance Indicator Numbers (PIN) to improve store profitability.
In the June/July issue the advantages of knowing the cost of each UP were reviewed. This article will look at the reasons why it is important to expand on this knowledge by tracking:
•The distribution of UPs among salespeople.
•The spread in closing ratios between salespeople.
•The spread in average sale between salespeople.
These points are made in the following conversation between two store owners and are absolutely true. Only the names have been changed to protect the innocent!
A TALE OF TWO RETAILERS
John Dough looked a bit distressed as he reviewed his year-end numbers It was a dark and dreary January morning in Lake Salesbegone. His 24,000 square foot store on the edge of this picturesque town on Route 2 was quiet now except for the churning in John’s stomach. “It must have been Jane’s meatloaf,” he thought.
His sales volume for the past year was up, so he was surprised and dismayed by the fact that net profits were lower than he expected. Out of frustration, and seeking diversion, he called his friend Paul Prophet. Paul owned a furniture store in Boomtown.
Considering that their stores were similar and in slightly overlapping markets, John was surprised when his friend told him that Boomtown Furniture had experienced traffic that was about the same as his prior year, but that his profits were way up.
"How did that happen?" asked John
"I got a wake up call last year," said Paul, "and now I use numbers to manage my business instead of letting my business manage me." John reached for a glass of water and dropped in 2 antacids. He watched the bubbles rise. Paul explained that in 2001, he had seen an impressive increase in sales revenue, but that his profits were lower. He went on to tell John that he brought in an outside consultant named Guy Smarty to help him understand what was happening in the business.
"It seems that I needed to take a detailed look at what was happening on my sales floor,” he added. “So did this Guy Smarty have you watching your salespeople from behind the potted plants, or did you buy some video surveillance cameras off the internet?” John chided.
Paul continued. "If you know what to look for, the problems and their solutions are all there in the numbers. I just didn't see it at the time."
"See what?" asked John.
"Several things. I was so focused on increasing volume, that I was blind to what that effort was doing to my profitability. In looking at the numbers, I learned several important things that helped me turn things around.
“First I learned how to use a performance indicator number to measure the effectiveness of my sales people. Once I did that I began to understand what was happening on my sales floor.”
Luckily John, had read about performance indicator numbers in the June/July issue of FURNITURE WORLD. Right now though he couldn’t remember what they were or how to use them. He found himself thinking of the meatloaf again and that his foot had fallen asleep.
“The first thing that jumped out at me,” Paul continued, “was the fact that the salespeople I thought were my best, didn't necessarily stand up once I started looking at their performance instead of just volume.
“The next thing I learned was that the distribution of UPs to the salespeople at Boomtown Furniture was all wrong. My lowest performing salespeople are taking the most UPs. My top performing salespeople are taking the least number of UPs. For the first time I was looking at real performance data, instead of the volume numbers. Volume is more a result of marketing than a function of effective selling. When more people walk in, sales will go up and volume covers up a lot of inefficiencies in the selling process of a store. John… John are you still with me?”
"Another thing I was able to see by looking at numbers was that the closing ratios for my salespeople were all over the place. It seems that this was an indication that I needed to train my salespeople how to sell."
This statement surprised John, because last year when Paul and his wife Ellen were over for dinner, Paul told him “that training salespeople to sell was a waste of time.” Then with his mouth full of mashed potatoes he exclaimed, “If they can sell, they stay! If they can't sell they're gone! That’s my policy.” John kept his mouth shut and continued to try to wake up his foot by wiggling his toes.
"I can't believe I was such an idiot before," Paul said with a laugh in his voice. "I was just looking at the training cost in dollars and not at the end results. The turnover was killing me, and the feeling of impending doom on the floor was killing any chances of me getting and holding onto a superstar.
“This year I’ve started raising my own superstars through sales training and I am now able to justify hiring a sales manager." As he was sharing this insight with his friend, Paul reflected back to one afternoon a year ago and a conversation he had with Guy Smarty. Paul liked Guy, but hated the name Smarty. “Perhaps he changed it from something like Irv Finkelstein,” Paul mused.
"Look at this," said Smarty that day, pointing to the spreadsheet, "the spread of closing ratios for your salespeople is pretty wide for a store like this.
“Your top writer has a 38% closing ratio, and your bottom writer has a closing ratio of 22%. That is a spread from top to bottom of 42%.” Paul looked at the forms he had filled out, and there in front of him in his own hand were the revealing numbers. He had just never looked at them that way.
"Now look here at the spread in your average sale." Said Smarty holding up the spreadsheets again after making a few marks on them. "The top average sale is $1,655 and the bottom average sale is $811." Smarty pounded on the keys of a calculator in a most annoying way. "That is a spread of 51% from top to bottom. When I see a spread that wide, it tells me that there is a problem with the sales management procedures."
"The problem you have on your sales floor is there is no selling process. Each and every one of your salespeople have a different way of selling, and that makes it difficult to manage them.
“Compounding the problem is the fact you are so busy with other aspects of the business, you are not managing the salespeople. This is causing several things to happen that are cutting into profits.
"Look at how the distribution of UPs fall across the sales team," instructed Smarty as he lined up the two forms. "Frankie has the highest closing ratio at 38% and has the highest number of UPs"
"Frankie is also the top writer in the store." Added Paul.
"Frankie may be the top writer, but he has the lowest average sale contributing to having the lowest PIN number," Smarty said circling the numbers on the forms and pounding on the desk.
For a moment Paul remembered feeling a touch of remorse at having put Guy up at the Motel 6 instead of the Sheraton. He was being so helpful. Smarty then started jumping up and down. "Look at this. Jonnie has the next lowest closing ratio at 26% and the largest average sale and did it with less than half the number of UPs Frankie greeted, which gives Jonnie the highest PIN of anyone on the sales team."
"Which means what?" Paul asked. It seems that all the jumping had distracted him.
"A high closing rate and a low average sale means that Frankie is a very good order taker. Not someone who is taking the time or making the necessary effort to develop a sale to it's fullest potential. In profit terms, it means that every time Jonnie greets someone, the store earns $111.00 more than when Frankie greets someone."
While relating the basic details of this conversation, John continued to fiddle with his empty antacid glass and remembered why he hadn’t invited Paul over to dinner lately. “This guy just can’t stop talking about business,” he thought. Then he realized that the blood was flowing back to his toes.
“At that time, I looked at the numbers and realized that Guy Smarty was right,” Paul admitted. “Reflecting back on times I observed Frankie in action, I realized that Frankie spent very little time with customers and that’s why Frankie had an average sale of about half of Jonnie's average sale. I had ignored this fact because I was blinded by Frankie's sales volume. Now the numbers were forcing me to rethink what was really happening. Until that afternoon, I viewed Frankie as my top salesperson.
“As you know, my marketing has always been excellent,” Paul boasted. “I even pull some customers all the way from Salesbegone.” John felt a twinge of annoyance but didn’t say anything. “My high traffic numbers, easily justified adding several more salespeople to the floor. By adding a couple of salespeople, I slowed down the rotation, and forced all the salespeople to spend more time with the UPs they do get. This helps me increase the average sale for the store."
Now John was in danger of missing “The Drew Carey Show”, his favorite, so he thought he would force Paul to cut to the chase. "How did things turn out?" he inquired.
"After one year the spread on the close ratios has narrowed from 42% to 27%. The closing ratio for my top writer dropped 2 points, but Frankie's average ticket increased by $180. The spread on the average sale has narrowed from 51% to 47% and on about the same level of traffic, my sales are up 23%."
“You must be rolling in Dough,” John offered with admiration. Why don’t you take Jane and me out to dinner at your club next Saturday. We can catch up on what the kids are doing. And do me a favor. Could you jot down a few things that I can do to improve my operation now and e-mail them to me? That Smarty guy sounds good, but I don’t think I could take all that jumping around.
John Egger, CEO of Profitability, Inc., helps retailers refocus their marketing strategies from the current M.A.D. (Mutually Assured profit Destruction) policy trend, to compete against other industries and stores based on value. Inquires can be sent to John care of FURNITURE WORLD Magazine at firstname.lastname@example.org.