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This question has been closed, and points have been awarded.
Measuring Cost Of Sales In A Services Business
Posted By: jen_minogue* on 1/5/2005 8:43 PM (CST) 250 Points
we are a services business... roughly a $10 million business... our initial customer engagements are typically pretty small, but customers buy our services over periods of years.

our sales & marketing department is only about a year old... interested to learn about how others quantify cost of sales or e/r ratios to measure sales/marketing productivity. what costs are included? how would you quantify revenue given the recurring revenue stream scenario i described above?

Posted by: AndrewS Accepted Answer
1/6/2005 2:01 AM (CST)
The simple answer is all costs over the life of a particular customer interaction should be considered ... for me and my background this means:

o development costs - inc phyical development, manpower, testing, launch etc
o physical infrastructure
o deliver costs
o sales costs
o customer services
o business processes
o other supporting systems

The difficulty is assigning 'typical' costs for each individual sale! Not easy, but worth the effort to become or remain profitable.

Good Luck
 
Posted by: Papadoc (Steve)* Accepted Answer
1/9/2005 2:31 PM (CST)
For the most part, you are faced with two options:

1) Tracking expenses and revenue backwards for several years and constantly making adjustments.

2) Applying current sales expenses to current revenue, regardless of when the sale was initiated.

In either case, it is going to be several years before you can adequately express reliable ratios. If your revenue is relatively stable, the later would be your far better option. With number one above, you are in a constant state of making adjustments and you can really only EVER look backwards several years to determine what your effective cost per sale is. You would be hard pressed to identify what is going on now or recognize the trend.

With number two, you can begin almost immediately to recognize cost ratios and trends. It works pretty much this way. Apply sales costs from this year to revenue acquired this year. The only downside to this is that you will only be able to state the long term average profit ratio rather than the profit ratio on each sale. Assuming your sales are stable, it should come pretty darn close. If your sales fluctuate, you will simply have to build in and account for the increase in customer acquisition by appreciating it or depreciating by say for instance, the difference in the size of your sales force.
 
Posted by: Dare4More * Accepted Answer
1/13/2005 6:18 AM (CST)
Hi Jen,
Andrew made a good point when he described some of the costs involved in acquiring new customers. I deal with this cost on daily basis and what I can recommend at this point is to start by identifying all the costs involved within a month (advertising, telemarketing, operational etc) and calculate a montly average cost per new customer. In time you will be able to identify some trends and also to cut or allocate more money towards profitable areas.
Another thing that you need to consider would be the cost of lost customers; how many new customers do you need to put in in order to offset the loss of the old customers? (you will be able to assess this based on your revenue forecast).
And don't forget: it is 5 times cheaper to retain an existing customer than going out for a new one!
All the best,
Flori
 
Posted by: telemoxie Member Response
2/5/2005 9:59 AM (CST)
If I were in your shoes, I'd identify some competitors who are public companies and download their financials and annual reports. This will not only provide audited numbers and discussions about business conditions, but will give you info on business plans and their assessment of risksa and general business conditions as well.
 
Posted by: Sanjeev Kumar Vyas Member Response
2/6/2005 11:44 PM (CST)
To find the productivity of the Marketing group I think you can calculate the cost of various advertising options versus the number of customers gained over a period of time or just the number of leads generated.

Cost of a perticular sale would be basically all the cost that the company beared to get that deal.

Regards
Sanjeev
 
Posted by: Stokefire* Accepted Answer
2/10/2005 8:53 AM (CST)
Well - I'd suggest heading down to the library and grabbing a basic accounting book - they'll have numerous methods for calculating COGS (Cost of Goods Sold).

If you're looking specifically for how to calculate your marketing costs for each client I can recommend doing what most service firms do - begin tracking all expenses and hours by client. Once you can attribute all time and effort to a particular project you just need to figure out what your overhead costs are (e.g., rent, electricity, advertising, etc.) and divide those across all the projects you have ongoing.

MAKE SURE that you are adding in overhead. If you just track actual expenses your COGS will be far lower (and much less accurate.)

Best of luck!

Tate
 
Posted by: ASVP/ChrisB Member Response
2/13/2005 6:10 PM (CST)
In a services business, COGS is pretty much all the business expenses. Wages, rent, consumables, staff benefits, ravel and accommodation, etc.

Some costs my be directly recoupable from individual client projects, depending on the agreements you have with those customers.

I would look at every expense as a percentage of revenue. Try to maximise the profit as a percentage of revenues.

Watch how marketing expenses contribute to change in revenue over time (graph it and make notes of what campaigns happened when).

Does this help? If not, please come back and give more detail of what you are trying to determine or achieve...

ChrisB
 
Posted by: Val (Moderator)* Moderator Response
2/14/2005 12:25 AM (CST)
Hello all. I am closing this question, since its more than two weeks old. We do this to make sure members' contributions are rewarded in a timely manner and to improve the visibility of newer questions.

Thanks, so much, for participating!
Val (Moderator)
 


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