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Return on sales is an important formula to understand business growth. Learn what it is, why you need to track it, and how to boost your return on sales
Return on sales is an essential sales metric to track to get a bird’s eye view of your company’s financial wellness. It’s easy to measure and helps you understand how to plan future sales strategies too.
Want to learn what it is, how it helps your business, and how you can grow it?
Return on sales is the profit you make on each dollar you invest in sales. “Technically, ROS is a measure of efficiency,” as Henning Schwinum, Co-Founder & Managing Partner of Vendux LLC puts it. “In a growing business, it also is a reflection of the investment in sales.”
Put simply, if you’re making more than what you invest, you’re naturally doing well. If it’s the other way around and your ROS equals or doesn’t equal the amount you spend on sales, you’re in loss. Whatever the case may be, we’ve got proven tips to increase your return on sales at the end of this post, so hang tight.
The ROS metric is a good indicator of how well your business is doing financially. But, there’s more to it too. Let’s walk you through other benefits of calculating return on sales:
A sales strategy that works for your business delivers a good return on the investment. For example, if you’re solely focused on cold outreach for sales, your ROS from it can tell how well the tactic is doing.
Additionally, “ROS is best used as a measurement of when to grow,” advises Josh Skinner, Director of Sales at TINYpulse. “It defines whether or not you are in a good position to spend some more. Knowing this KPI allows you to strategize, can you stretch a little more or should you cut back?”
When executives shell out money on software for sales, salaries for sales reps, and more, they need a clear idea of how well the return on that investment is. ROS can help give this snapshot.
For one, ROS gives you the profit you’re making so you can identify the return you want to reinvest into your company to grow it further.
Two, return on sales is a reliable metric to aim to increase as the higher the ratio, the more the profit.
Lastly, you can use the metric to get a picture of your company’s year over year performance as it takes into account both your expenses and revenue. In contrast, revenue isn’t a reliable metric to measure your businesses’ profitability as your expenses and revenue can vary over time.
This way, you can tell how well your business is doing in the industry and alongside its competitors.
Calculating return on sales is calculating the ratio between operating profit and net sales.
So, the formula to use is:
Here, operating profit is the profits your company generates without deducting earnings before interest and tax (EBIT).
On the flip side, net sales is the total revenue you make minus all the allowances, refunds/returns, and discounts.
Remember: the figure that you get at the end doesn’t amount interest or tax. This means the real profit tends to be lower after deducting these figures. However, tax and interest rates are never stable so they aren’t something an organization has any influence on, which makes ROS a reliable indicator of business performance.
For instance, let’s say, a business invested $500,000 in expenses in a given quarter. And, you made $700,000 in sales.
To calculate your return on sales, you’ll take the following steps:
1. Determine your profit by deducting sales expenses from your revenue.
For this example, it’s $700,000 - $500,000 = $200,000 in profit
2. Next, divide this operating profit by the total revenue.
So you’ve $200,000/$700,000.
This gives you a figure of .28 in return on sales or 28 cents per dollar you invested.
3. Drive a percentage of this value by multiplying by 100.
This gives 28% ROS.
Although both return on sales and operating margin are used interchangeably, there’s a difference in the numerator used to calculate them.
Where you use operating profit for ROS, you use the operative income to measure operating margin.
Here’s the complete formula to calculate operating margin:
Remember: operating income is the profit that your company makes from the revenue you drive home.
However, operating profit is the profit you make before deducting interest and taxes (EBIT).
Return on Sales
Calculated using Operating Profit
Calculated using Operating Income
Operating Profit: Earnings before deducting earnings before interest and tax.
Operating Income: Earnings after deducting earnings before interest and tax.
Since return on sales is a reliable metric to aim to increase for better profits, here are five effective ways you can grow your ROS:
Automate processes to scale your sales-related activities. For instance, automate tasks by creating workflows.
Say a lead shares their email address in your contact form. An automated workflow can then send an intro email to them with an action step such as booking a demo. If the prospect doesn’t respond, the CRM can automatically follow-up with the prospect a week later. This way, you can move prospects through your sales funnel efficiently – taking quick steps to closing deals.
Similarly, a CRM can help grow your sales revenue by ensuring you’re targeting the right leads, which can speed up new sales. How? By giving you a lead score, a numerical value telling which lead is worth pursuing based on a lead’s demographic, firmographic information, historical data, and behavior on email, in-app, and your site.
If you’re continuously satisfying your customers, consider upselling or cross-selling new features. In fact, you’re 60-70% more likely to succeed at selling to your customers than acquiring new ones (the odds of success of which are 5-20%).
A CRM that gives you a history of all interactions you’ve had with a customer and their behavioral data such as what they’re searching for on your site can facilitate cross-selling and upselling efficiently.
All the valuable data that it gives you help you build strong relationships with your customers and understand what they’re searching for.
On top of that, the data provides the much-needed context for upselling and cross-selling instead of taking a widespread approach.
Say, your customer uses your to-do list app, but is now searching for a collaborative feature on your site. Having this behavioral data of how a customer is engaging with your site, in-app, and on other channels takes the guesswork off your plate and you can go on to upsell them relevant features. In this example, it’d be a feature that lets them add team members to their to-do list.
But, be warned, “the products to up-sell and cross-sell have to be a fit with the original product sold, e.g. complementary products,” Schwinum points out.
“Ideally the decision-maker, the sales process, the type of sale, and the sales skillset required are the same, otherwise it ends up being just like a new sale, merely starting with a warm introduction.”
Increasing prices can also help you increase your return on sales subject to the fact that it’s done right. For instance, a sales manager needs to consider the following factors that Schwinum notes:
“Are the efforts necessary to implement the increase (e.g., is it worth doing it for just 3%, when reduced new revenue due to the temporary loss of focus on new clients may just exceed the gain). Go for a meaningful increase like 10%.
Look for the effect on both, revenue and expense. Fewer clients and a higher price point require fewer sales/CS resources.”
Skinner adds to this: “Increasing your price is a great way to increase ROS as long as you do not see a significant reduction in deals won.”
This is why, it’s essential, “to really monitor your ‘average days to close’ to make sure this is not dramatically slowing down the process as well as your team’s win rate. Otherwise, a price increase might not be suitable at that time,” Skinner explains.
This one can be challenging if you are only just creating your first sales commission plan. Why? Because if a sales commission plan isn’t fully thought-out, it can backfire and leave a negative impact on your revenue.
So keep in mind that a ROS-boosting sales commission plan is one that’s win-win for your business and sales reps. In that, it should be able to motivate sales teams to close more deals while staying with your company’s financial boundaries.
You miss a ton of opportunities when your sales and marketing teams aren’t aligned. However, sales and marketing teams working hand-in-hand on well-thought-out, adopted, and implemented campaigns can positively impact sales.
The first step for doing so is by leveraging a powerful CRM that gives both the teams a unified view of all interactions with a prospect. This way, you can have meaningful sales conversations with them.
For example, your CRM records past interactions such as which webinar a prospect signed up for. The sales team can then use this marketing data and reference it in their sales conversations to have contextual conversations with the prospect. This is but a small example of how you can use marketing data to quickly move prospects along lead stages.
Return on sales is a valuable metric to pursue as it tells you exactly how much your sales investment is reaping in profit. There’s also a lot that you can do to increase your ROS. However, most of increasing your sales return boils down to using a CRM software that offers features to identify the right leads, provides a unified account of marketing and sales data, offers user behavioral data, and much more.
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