Sales Analiza

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CommunicationsSOME LIMITATIONS OFRUSSELL'S SYSTEM OFSALES ANALYSIS

"A System of Sales Analysis UsingInternal Company Records" was pro-posed by Mr. Jack Russell, writing inthe April, 1950 issue of THE JOURNAL OFMARKETING. Certain types of accountingmeasurements were suggested by Mr.Russell. I want to criticize these meas-urements in the light of one guidingprinciple: What is the significance of aparticular measurement in the makingof a management decision?Ratio Analyses

The six ratios suggested by Mr. Rus-sell may be summarized as follows:(1) Sales returns divided by gross sales,(2) Gross profit divided by net sales,(3) Sales expense divided by net sales,(4) Advertising expense divided by netsales,(5) Accounts receivable divided by aver-age daily sales on account, and(6) Cost of goods sold divided by averageinventory.Ratio analysis as applied to themarketing functions suffers the same

theoretic limitations as ratio analysisdoes in its application to production orfinancial functions; it provides a meas-urement of relationships, but the basisof the measurement (the denominatorin the fraction which constitutes theratio) shifts. Furthermore, the ratioitself does not explore the logic under-lying the business function, but hasmeaning merely insofar as it denotes adegree of relationship or a direction inwhich the relationship is moving. Usingthe first ratio listed above to develop an

example, assume that gross sales in1950 are $100,000 and that sales returnsare $4,000; the ratio is then four percent. This means that for every dollar'sworth of merchandise purchased bycustomers, four cents worth were re-turned for some reason or other. Whatcan the sales manager do with the ratio?For one thing, he may compare it withthe corresponding ratio for the year1949, 1948, 1947 and as many yearsback as he cares to go. He may thenhave a time series made up of salesreturn ratios. What can he do with thistime series? He may look at it and seethat the ratio went up in some years andreceded in others, or he may discern atrend in these data. A second approachmight be to compare his four per centfigure for 1950 with the 1950 figures ofother companies, competitors or other-wise. A third approach might be tospeculate what the profit on the incomestatement would have been if the ratiohad been kept down to two per centinstead of four per cent; then the salesforce could be asked to "shoot at thetwo per cent figure and try to hit thebull's eye," all of which could be veryinspiring. However, the sales managerwould not yet have the answer to thefollowing questions which are crucial inhis decisions and in the decisions ofcertain of the other top managers : Whywere the articles of merchandise re-turned? Was the customer high-pres-sured into buying something he couldnot afford? Was there a defect in theproduct? Or conversely, is a high ratioof sales returns necessary to increasingthe volume of sales? Perhaps a woman'sready-to-wear shop should encourage


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THE JOURNAL OF MARKETING 481service. The rise or the decline of eco-nomic areas, changing tastes of con-sumers in particular regions, and tech-nological changes in the products soldmay complicate the problem of meas-uring how good a job Mr. C is doing inhis territory. A comparison of his ratiowith those of Messrs. A and B is of rela-tively small significance; in fact, thecomparison may have the negative effectof causing bitterness and dissensionamong thevarious salesmen.Secondly, what is the correct averagenum ber of calls per day? If M r. C has tomove on to the next town to find the

pendent meaning; therefore, the quotienthas no independent meaning.What Mr. Russell calls the "battingaverage" is the number of calls resultingin sales divided by the number of calls.In baseball, it is usually better to getone home run out of three times at batthan to get two singles out of fiveappearances in the batter's box. Thefirst case would yield a batting averageof .23y, the second, an average of .400.One home run counts more in the finalscore than two singles would ordinarily.In selling, the same principle holds butthere are more variables than there are

T A B L E B. SUMMARY OF SA LESFO RCBSalary & Exp.to Saks{per cent)

Av. Callsper Day Av. Costper CallNo. of SalesNo. of Calls(per cent)

Av. Sizeof SalesSalesman ASalesman BSalesman CC o m p a n y Av.

3- 54 -7 - 4

4 . 2

4.86.04.0

4 -9

4.252.88S.oo3-87

74541

51

187.50171.42225.00

189.47next customer to call upon, four callsmay be a very good day's work, whereasM r. B may be calling upon six citycustomers during the morning andplay-ing golf every clear afternoon. Somecustomers require more of a salesman'stime than others; some products orlines of products require more explana-tion than others; older customers mayrequire less of the salesman's time thanprospective customers, just as olderproducts may require less selling effortthan new ones. Therefore, when a salesmanager knows the average number ofcalls per day, he has not got a criterionbut merely a starting point for histhinking.The average cost per call is a figurewhich suffers all the limitations inherentin the figures representing the averagecalls per day and the salesman's salary

on a baseball diamond. The most profit-able course of action on the salesman'spart may be to call upon certain cus-tomers, present or potential, with thepurpose of ma intaining or creating good-will, knowing that there is no presentprobability of a sale resulting. A secondillustration: the salesman may be ac-tively demonstrating or explaining anew product without the probability ofimmediate sales. And these may be thevery things which will prove mostprofitable to his company in the longrun. However, if a sales manager adoptsthe ratio of the number of sales ordersresulting from a given number of callsas a measurement of the salesman'seficiency, that manager may be con-tributing to a reduction of future profits.The average size of the sales orderdoes not measure the profitability of th e


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482 THE JOURNAL OF MARKETINGsalesmen took the same number of salesorders which had dollar totals varyingwith the particular salesman. Mr. Csold orders which averaged $11^.00.Can it be assumed that the $225.00orders were more profitable than Mr.B's orders which averaged only J171.42?Before answering this question, we needto know the costs associated with thecustomers of B and C respectively. Dothey pay their bills regularly? Do theydemand extra services? What are theshipping charges which cannot be passedon to the customers? What are the in-cremental selling costs? the incrementalproduction costs of the products sold?the sales mixture of the items sold?Conclusion

Mr. Russell 's approaches to the analy-sis of orders and of customers suffersthe same theoretic limitations, men-tioned above, which may be summarizedas follows:(a) The measurements are all averages; abetter key to managerial decisions,however, are the marginals or incre-ments involved.! (It is not contendedthat the marginal or incremental ap-proaches are thefinalanswer. They arenot.)(b) There was a failure to consider themeanings of the measurements pro-posed; the profit maximization princi-ple was omitted.What the foregoing comments shouldsuggest is that the entire theory ofconventional cost accounting is inade-quate for the solution of the problemsof marketing management. Limitationsof conventional cost theory in the fieldof production have been suggested.^ Theprincipal limitation is that of the joint-ness of costs. There is more jointness of

' WiUiam J. Vatter , "Accounting Measurements ofIncremental Cost ," The Journal of Business of theUniversi ty of Chicago, Ju ly 1945, p. 145, et. seq.

costs in marketing than exists in vir-tually any production operation. Onemaxim is suggested:"Different managerial purposes andchanging environments impose differentclassifications and evaluations of data, mak-ing managerial accounting a multivaluedcalculus."'

R O B E R T H . W A T S O NArkansas State CollegeState CoUege, ArkansasA MEASURE OF RETAIL

EFFICIENCYThe attempt to compare the efficiencyof retail operations always faces thedifficulty of incomparable locations andthe effect of location on the nature ofpedestrian traffic and on sales volume.Two stores with theoretically equalmanagerial efficiency may be expectedto differ in sales volume and in profitbecause of the different effects of thetwo locations. A frequent measure ofefficiency in exploitation of retailingopportunities has been sales per squarefoot. This measure has sometimes in-cluded all space rented by a store, andsometimes included only selling space.Yet the obvious diference in value ofstore locations makes such a measuredubious in accuracy. In fact, all meas-uressuch as number of transactions,value of transactions, sales per squarefoot, and stock turnare joint functionsof managerial efiSciency and of the re-tailing possibilities of the specific loca-tion.A measure which promises a moreprecise focus would be one which in-cluded both the location factor (roughlymeasured by rent) and retailing results(measured by sales per square foot).T h u s , an index calculated by dividingsales per square foot by rent per square


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Sales Analiza