Lowering Your Breakeven Point

First, let's clarify what a breakeven point is. The simplest definition is that breakeven occurs when revenue equals expenses.

But since revenue and expenses are both moving targets, it helps to look at breakeven from a slightly different perspective.

There are two types of expenses: fixed and variable. Fixed costs are expenses that do not increase as business increases. Examples include office space, utilities and salaries.

Variable costs are expenses that vary with the amount of business you do. Commissions, telephone charges and manufacturing costs are variable expenses.

Variable costs are tied to revenue – if you don't have any sales, for the most part, you don't have those expenses. But whether or not you bring in any money, you still have to cover your fixed expenses. For the sake of argument, let's say that 80% of your revenue goes to variable expenses. That leaves 20% of the revenue to cover fixed expenses and profit.

At breakeven, that entire 20% goes for fixed expenses.

Once you pass breakeven – when you've got your fixed expenses paid for – the rest is profit. And lowering your breakeven point directly and immediately increases profit. Now, let's talk about why offering a choice of plans lowers breakeven (and increases profit).

1. Risk-sharing

Typically, at least one of the plans you offer will give sales representatives the option of taking on greater risk in exchange for a potentially greater reward.

A commission-only or 100% plan does this. So does a plan where the sales associate reaches a higher commission faster in exchange for paying for his own advertising.

The sales associate who has confidence in her own abilities chooses this plan because she believes she will make more money this way.

The company benefits because it is shifting an expense (like advertising or office expense) to the sales associate. Or the company is replacing a fixed expense (a salary) with a variable expense (a commission).

By reducing expenses like this, the company lowers its breakeven point and starts making a profit sooner.

2. Motivation

By offering a choice, you are allowing people to select the style of compensation that motivates them most effectively. This removes the disincentives to greater production that exist in so many commission plans. When sales representatives become more productive, profitability increases.

3. Turnover costs

Improving motivation reduces turnover. The expenses associated with turnover decrease; therefore, so does the breakeven point.

Offering a choice also helps retain those reps who want a different style of compensation. They no longer have to leave your company to obtain it.

4. Recruiting

Offering a choice expands the pool of potential recruits. If you offer only a straight commission, you are limiting the number of people who will be interested in working for you. When you offer more options, you can choose from a greater universe of talent. That lowers your recruiting costs and reduces breakeven.

Of these four factors, the first one is the most direct. Having sales associates pay some of the costs of running your business or having them take on additional risk has an immediate effect on your corporate profitability.

Increasing Share Value through Sales Compensation Design

[ read time: 4 minutes ]

By David J. Cocks, CEO

While there are a number of factors that impact the share price of a company, the two basic drivers remain earnings (or profit) and the multiple applied to earnings.

Two companies with the same profit, working in the same overall environment, frequently have different multiples; these multiples dramatically impact the value of the company and therefore the share price.

For example, a company with a $10,000,000 profit and a multiple of 5 times earnings receives a $50 million valuation, while another company with the same profit and a 7.5 times multiple has a value of $75 million.

While many companies focus on increasing profit, and therefore shareholder value, relatively few focus the same effort on improving their multiple. So, what drives this multiple?

The first driver is economic expectations. If the economy is deteriorating, even though profits have not yet fallen, share prices will drop and multiples retract on expectations of leaner times. Despite the fact that this is outside of management's direct control, it is important to note that some companies do not drop as significantly as their counterparts.

This is due to the influence of the second driver, corporate expectations. These expectations are a function of the company's ability to lead the industry. Proven leaders typically have higher multiples than others in the same industry, regardless of economic expectations. One of the key leadership criteria is whether or not a company has a sustainable competitive advantage.

So if a company's compensation plans strengthen the company financially, increasing profit immediately and protecting earnings in a downturn, it would provide such a sustainable advantage.

Such a solution does exist today and has stood the test of time. It is particularly effective when the primary distribution channel is through people whose skill is key in binding the consumer to the company. Examples range from industries that use a typical sales force, like real estate and manufacturing, to professional service organizations, such as law firms and dental offices.

The companies that have used this bold new approach have experienced increased productivity from their existing staff and improved ability to recruit key revenue providers from their competitors. They typically have seen an immediate increase in profit and have been able to retain their lead even after competitors copied their strategy.

The essence of the approach is:

1. Design compensation plans so that after the company has recovered its costs plus a profit from each revenue-producing individual, those individuals can then receive substantially more of the revenue they bring in.

This drives productivity and immediately increases profit. It also creates a naturally cost-efficient environment and improves recruiting.

2. Offer choices that empower the individual to find the right compensation fit; usually this involves selecting the risk-reward relationship that works best for each revenue-producer.

This maximizes recruiting and retention and lowers the breakeven point of the company, increasing its survivability and maintaining profitability, even in a downturn.

If you have any questions, please call us, email us on hello@cmglobalpartners.com or schedule a demo here.