Sales Managers: Good Sales Territories Are Created by Design
I have known Bob for more than 10 years. I asked him to share with us what he does and how that affects sales and sales management. Bob – Thank you!
Robert Dunning is currently Director of Customer Operations, Latin America at Siemens Healthcare Diagnostics. He has approx. 15 years experience aligning field sales and service organizations for several Healthcare organizations. Robert holds a bachelor’s degree in Ceramic Engineering from Alfred University and is a former P.M.I. certified Project Manager.
Medical equipment companies, along with many other industries, continue to rely on and succeed through direct, face-to-face selling of products and services. Successful direct selling means putting (1) the right people (2) in the right place, and (3) focusing them on the right priorities. One key to success is having well-balanced sales territories, designed around new customers and markets. How to get there is a straightforward process, but it does not happen on its own.
Poorly designed and out-of balance territories develop over time and are created through significant events in the company’s evolution.
- Indicators of poorly designed territories are:
1. Two or more sales forces were folded together hurriedly without the benefit of alignment.
2. A change in strategic direction, or the introduction of new products, without a review of territories against the new direction.
3. Territories designed more than 3 years ago and not reviewed since.
4. Territory design based on sales history rather than focused on potential business and customers.
So what if territories are out of balance; if they are too large or too small? Territories that are too large leave customers under served. A Sales Rep will not, and cannot pursue all opportunities within the territory. The resulting sales are below the territory’s potential. In territories that are too small, a Sales Rep may be reaching a saturation point and is frustrated by the lack of opportunities. This frustration will lead to poor morale and higher turnover of personnel.
The solution is to balance the potential between sales territories so that all Sales Reps have an equitable chance to achieve success. The key to good design is to balance the territories on factors or objective data that are likely to influence sales growth, not on irrelevant historical information. Designing well-balanced territories is primarily a five-step process.
1. “Define the universe of opportunities” and “obtain relevant market data”.
Determine all the opportunities within your geographic boundaries and obtain market data to quantify those customers. The right information to use is dependent on your market, available budget for market data, and time available for gathering the data. In the case of hospital-based sales markets, government hospital data is readily available.
Examples of government and independent data available to healthcare companies are hospital admissions, licensed beds, prescription volumes, and number of procedures based on ICD-9 (International Classification of Diseases, 9th Edition) codes and CPT (Current Procedural Terminology) codes.
2. “Quantify” the potential at every opportunity and “stack-rank”.
With the universe of opportunities defined, every opportunity, including expanded business at current customers is assigned a relevant point value. Key to this process is to value potential or new business appropriately higher than maintaining existing business. You main objective, after all, is to grow your business through new sales by placing higher point values on potential business. Multiple valuation factors can be applied to each opportunity, such as using both ICD-9 and CPT codes. By using fractions or percent of the largest opportunity, information based on different scales can be combined into a composite value for each opportunity. Factors also may not equally apply in determining sales potential and should be weighted appropriately to arrive at a reasonable composite index.
So why is this step so critical? The best example comes from looking at hospitals. There are approximately 7,000 acute-care hospitals licensed within the US. That number includes everyone from mega-hospitals such as New York Presbyterian Hospital, with over 1,000 beds and over 80,000 annual admissions to small hospitals having less than 10 beds. The sales opportunities at these hospitals are not equal and should not be equally weighted when determining territory boundaries. Combining several appropriate factors will result in a more accurate weighting of a customers potential.
After each opportunity has been given a numeric value (index points), those with the largest value should be reviewed as a “sanity check” by people knowledgeable of your market.
3. “Analyze your current territory alignment”
With each potential sales opportunity given a numeric index point value, comparing the sales potential within your current territory alignment is achieved by combining all opportunities within the current boundary, and by comparing the sum of index points between territories. In order to make comparison easier between territories, index point values should be normalized to an ideal value, such as 1,000 points. Each territory can easily be reviewed as a percentage off the ideal value. (If you have normalized to 1,000 and are trying to achieve balance within 20%, then it is easy to see any territory that is less than 800 or more than 1200 points needs to be realigned to achieve balance.)
It is likely that some troubles with your current territory alignment will surface through this exercise. Territories that consistently exceed all sales targets may have significantly greater index points than adjoining sales territories that struggle to succeed. Territories that under-perform, but have sufficient current customers may be lacking larger potential customers or enough smaller potential customers to allow your sales professional to achieve their sales target. The key to an accurate assessment is to focus on potential sales, not on current installed equipment base or historical sales. You already have that business. You need to focus on business that you do not have.
4. “Realign Territories to balance the sales potential”
Having assigned a numeric value to every sales opportunity or potential customer, balancing territories is a matter of moving geography from one territory to another to shift enough index points to balance the potential. As previously mentioned, I recommend balancing within ±20%.
Balancing is also an exercise with many answers. With a smaller sales force of 50 or less Sales Reps, designing sales territories centered around major cities is pretty straight-forward. Larger sales forces of 200 or more Sales Reps can be a difficult challenge to balance as cities and areas must be divided. In all cases, it is recommended to use divisions that are easily recognizable to your organization. For smaller sales forces, state lines, county lines, and three digit zip code blocks may be logical boundaries for territories. As sales forces grow, five digit zip codes are often used to divide territories
Some markets require territory assignments to be made at the account level to balance the potential and to give all Sales Reps an opportunity to succeed. A common example of this is within New York City where a single zip code may contain too much potential for a single Rep to pursue.
Other factors to consider are (1) existing relationships, (2) buying groups and affiliations, and (3) travel time and other geographic or manmade considerations such as interstate highways. These factors can be difficult to manage collectively. There are sophisticated mapping software packages available to help this process, most with analytical tools to monitor the effects of moving geography from one territory to another on a real time basis.
5. “Establish a bonus plan that also focuses on new opportunities”
Having balanced territories is certainly important to success. However, having a Sale Rep bonus plan that rewards successful development of new opportunities is also key. Sales Reps will concentrate their efforts on sales opportunities that most affect their bonus plans. It is important to have a plan that is understandable and measured easily so that both the Sales Rep and their management. Sales organizations expend significant resources and lost time in trying to determine the status of a Sales Rep against his/her bonus plan.
In addition, key to realizing maximum potential in Sales Reps is to structure a bonus plan that has no limit to how successful a Rep can be. Sales Reps are in it for the money (along with other things). Remember, we do not like to admit it but some Sales Reps will “hold orders” from one quarter to the next or from one year to another if it benefits their financial picture (their bonus plan). The best way to address this is to have no maximum to the financial rewards a Sales Rep can achieve.
Summary – Balancing sales territories is an important process to increase the effectiveness of a field sales organization. As markets, products, competition, and potential customers change, territories will not remain balanced by themselves and should be realigned periodically. Alignment is a process that should be data-driven and centered on potential new sales opportunities, not based historical information having little bearing on future success. The process can be unsettling to both Sales Reps and to customers. However, the results from a well-done alignment carry an overall benefit to the sales organization. The results are overall improved sales performance, higher morale, and lower Sales Rep turnover. Combining balanced territories with a compensation plan that rewards success (not just effort) is the winning combination every sales organization needs to achieve.
Written by Peggy McKee - the medical sales recruiter
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