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David Geller

David Geller: Seeing Green

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The right pay structure makes your sales manager a partner in your business without signing over your shares, says David Geller.

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[h3]Seeing Green[/h3]

[dropcap cap=T]here are two very important job descriptions in a jewelry store:
Sales Associate: “To turn shoppers into buyers.”
Sales Manager: “To boost sales associates’ closing ratio and average sale.”[/dropcap]

Think about it. If your sales staff went from closing three out of 10 customers to four, that would be an increase in sales of 33 percent. If they increased the average sale from $300 to $400, that would translate to a 33 percent rise in revenues.  

Add those two factors together (increasing closing ratio by 1 more person per ten, and increasing the average total of each sale by 33 percent) and you get a whopping dollar increase. If your average sale is $300, and you sell three out of 10 people your sales would be $900.

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But if you sold four out of 10 people a $400 item your sales go up to $1,600 — a 78 percent spike that would have you laughing all the way to the bank. (And remember, that’s all while seeing the same number of potential customers.) Does this help you see the difference an effective sales manger can make?

[inset side=right]A sales manager should be paid upon the performance of the selling team. And by performance, we mean profits, not just increased sales.[/inset]

A sales manager should be paid upon the performance of the selling team. And by performance, we mean profits, not just increased sales. After all, anybody can offer huge discounts to sell to everyone … and send you on the road to bankruptcy.

So pay your store manager based on the gross profits of the store. The higher the gross profit margin, the more of the gross profit dollars the sale manager will receive. You could easily add in a formula that provides a larger bonus if sales increased in addition to profits. (One key thing to remember: we pay off of gross profits, which is sales minus cost of goods. We don’t pay off of the net profit; as sales managers don’t generally have control over all of a store’s expenses.)

The first step is to decide what percentage of sales you will pay your store manager. A typical store manager might be paid three percent of total store sales. As many of you do when paying sales staff, you break this up into a salary plus a commission. And again, that commission should be based on gross profits. After all, those gross profits are what you use to pay your bills.

To build your commission-pay package, set a target. For instance, a $2,500,000 store giving 3 percent of sales to the sales manger would pay $75,000 per year. This is the target income of your plan. Now, build a structure that assumes the gross profit margin you desire is met. I am using 44 percent. So we’d pay a base pay or salary of $45,000. The other $30,000 would have to come from a commission or incentive plan. The manager could make more than the $75,000 … and yes, they could make less.

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On the next page is a chart calculating potential scenarios, assuming $2,500,000 in sales.

So you’re done, right? After all, what else is there but making money? There’s lots more. I’ve seen plenty stores who make a 50 percent gross profit margin and still can’t pay their bills in January. Why? Because they have too much inventory and not enough “turn”. Turn is a subject I’ve written about before and we won’t get into it here. Simply, turn is found by taking the cost of goods for items sold from the showcase and dividing it by your inventory level. This will give you a number like “1.0” or “0.62”.  

You want a number greater than “1.0”, which means you sell your entire inventory at least once a year. If you have a number like “0.62”, that means it take you on the average 19 months to sell your entire inventory from the case. (The vendor gives you six months dating, and your customer buys it in 19 months. Makes it hard to make money, wouldn’t you say?) So increasing your turn will not directly make you more gross profits. That comes from sales. But it will improve your cash balance … since the stuff is not selling anyway. Increasing turn brings more dollars to your gross profit bucket and can reduce the amount of bills you’ll have to pay later. Just think what having another $100,000 grand in the checking account after paying your bills next year would mean.

[inset side=left]You could go further with this, adding in a compensation plan to give bonus for sales increases.[/inset]

So, encourage your store manager to increase turn by adding points to the “bonus percentage paid” if they achieve the goals you set. Here’s an example: for every .10 increase in turn (e.g. going from .70 to .80 turn), you add half of a point to the bonus percentage paid. Thus, in the case of a gross profit margin of 50 percent, the original bonus would have been 5 percent gross profit and, if the sales manager achieves their “turn goal”, should be bumped up to 5.5 percent. The final bonus would then be $68,750 — $6,250 more than the original $62,500.

You could go further with this, adding in a compensation plan to give bonus for sales increases. After all, we all do want sales increases — as long as they’re sales increases that result in increases in our gross profit. So, if you set a sales goal of $200,000 per month, you could offer a .5 percent increase in the bonus percentage paid for each 10 percent by which you exceed your sales goal. (And if you want to penalize the sales manager for failure to reach sales goals, you could similarly subtract .5 percent from the bonus total for every 10 percent that you fall below your sales goals.)  

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Run the numbers for your business and see what a compensation plan like this could do for you. Then, make your sales manager a partner … without signing over your shares.

David Geller is an author and consultant to jewelry-store owners on store management and profitability. E-mail him at [email protected].

[span class=note]This story is from the March 2004 edition of INSTORE[/span]

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