COSTS … When sales managers, entrepreneurs, business owners, and CFOs think about turnover costs, they think about hard costs first. So, I’m going to start this discussion going against the grain. I’m going to first address emotional costs (which lead to hard costs) then direct and other indirect costs.
New salespeople joining a company affect the existing daily banter and human connections already in place. This relational ripple extends from new reps to management, support staff, and customers. Friendships and working relationships form. People begin to change how they engage one another based on each new rep’s social demeanor and style. Prospects and customers learn to depend upon and trust the company through these new salespeople. The support staff learns to interact and communicate with them over service issues and customer requirements. Even the after-hours social network of a company may stretch to include the new salesperson and perhaps their family as well.
Upon employee termination, even poor reps leave an emotional vacuum behind them – both negative and positive. And, productive reps leave an emotional hole which tends to undermine efficiencies and effectiveness within a company’s working community. The disappearing and respected sales reps leave and tend to draw others with them into a black hole of unresolved questions, concerns, hurt feelings, anger, lost working relationships, and a tarnished brand. Customers ask, “Where are they? What kind of a company loses valuable employees?” Other reps tend to ask, “Is there a better place for me as well?” This emotional vacuum from turnover creates uncertainty, water fountain discourse about management, and other time-sapping motions. The worst black hole of turnover siphons away prospects ready to purchase, customers, and other sales reps. Even support staff can be lost into this abyss.
The 4 (four) year retention rate in the insurance industry is as low as 13%. The failure rate then is 87%. Sales rep turnover costs run into billions in that industry and trillions nationwide.
The best companies in the world see turnover rates of 10% a year or better while the worst lose more reps than their entire sales force (from Gallup Organization’s data). What are the costs of turning one salesperson over?
I’ve heard estimates of as much as $100,000 to $500,000 per rep, or 150-200% of annual compensation. At those rates, the costs kill small businesses and can run into the multi-millions for large corporations. Turnover then represents the largest area of financial loss for many companies.
A Conservative Example …
– Average salary of 36000
– Turnover cost at 150% = $54000
– 100 salespeople turned over in a year = $5,400,000
– 1000 salespeople turned over in a year = $54,000,000
What are the direct and indirect cost areas that contribute to these estimates. How do companies lose as much as $200,000 per rep turned over?
- Recruiting Costs (pro rata cost of recruiter or manager time (hours) to recruit, ad placement, headhunters, job fairs, etc.)
- New Hire Orientation Costs (pro rata cost of trainer, overhead for training room, rep travel to training, etc.)
- Training Costs (management time to train)
- Lost Sales (Productivity) Costs (lost revenue during new rep recruitment and rampup)
- Customer loss/loyalty costs (in some cases hard to measure: for some companies, big and small sales are lost that were in the pipeline; some customers follow the rep or simply change suppliers)
Indirect Costs (hard to estimate these, but in some cases very large numbers)
- Lost of management focus and time spent on core business requirements and existing sales rep coaching or sales strategies – leading to lower team performance and lower sales.
- Low morale and internal negativity and associated loss of efficiencies, effectiveness, and productivity
- Brand reputation decreased in the eyes of employees and customers leading to brand killing employee behaviors including rudeness, theft, discrimination, etc.
- Emotional drain due to loss of friendship in the company, elevated uncertainties, teamwork, etc.
- Additional rep turnover as a result of previous rep turnover
- Team sales costs (peer effect) – loss of sales due to a loss of positive peer support and help from the departed sales reps
Final Thoughts About Turnover Costs
Some researchers believe that in very healthy sales cultures, turnover should be 10% or less. Sales teams produce within a bell-shaped curve of production and even the best managers or recruiters do not hire with 100% effectiveness, and some reps do change their attitudes or motivations after the hire due to unforseen circumstances. Therefore, the bottom 10% will either need to be replaced or they will self-clean themselves away from the companies in which they do not fit well.
However, as turnover increases to 20, 30, 50 or even 100 percent, the resource costs to an organization create an unhealthy environment – one that reduces profits, tarnishes brands, loses more good employees, and eliminates the ability to compete in the marketplace. Lance.