Pyramid Math
The pyramids used a lot of advanced math to build. The dimensions are a tribute to higher mathematics. So what does this have to do with sales?
We can determine the selling price by one of two methods–price markup or price margin. In working with many salespeople, I find they don’t understand the difference. Yet, the difference is important.
Math Examples
Price Markup = Cost * 1.x (x being the desired markup amount)
Cost is $9.95 * 1.40 [40% markup]) = $13.93
Sales Margin = Cost / (1-.x) (x being the desired margin amount)
Cost is $9.95 / ((1-.40)[40% margin] or $9.95 / .60 = $16.58 (Remember the decimal)
e= MC2 (just making sure you’re paying attention?)
As you can see, the difference is considerable if your pay plan comes from the profit of each sale. Multiply the above sale prices by a few thousand dollars and the difference is significant.
Looking at a monthly sales volume of $40,000 with both of the above factors we can use math and determine the cost of materials. Then assuming a sales commission of 15% for each month’s sales, you can see the difference.
If you sold $40,000 last month using a 40% markup, the starting cost is $28,571.43. This means the company made a profit of $11, 428.57.
$11,428.57 * 15% commission = $1714.29 paycheck before taxes.
If you sold $40,000 last month using a 40% margin, the cost of the items is $24,000. This means the company made a profit of $16,000.
$16,000 * 15% commission = $2400.00 paycheck before taxes.
That’s a difference of $685.71 in your paycheck.
Which do you prefer?
Pyramid Math
So what does all this have to do with the pyramids? Nothing really, except the pyramids are cool and the math is fun.
Look at the Other Side
Looking at the other side is more important.
The above sample shows the difference in your paycheck selling the same amount of goods or services. However, there is a better reason to look at discounting in a new light.
More Math Examples
If you are working for commission only or have your job tied to achieving a quota every month, this is for you.
If you calculate your selling price based on the cost of the items, it pays to understand the difference in markups and margins.
Many salespeople I’ve worked with used a standard markup when selling to their customers. Let’s use the same 40% number from above.
Let’s assume the items you sell in a month have a total cost of $50,000.
First, using a 40% markup we see the following:
Cost = $50,000 * 1.4 (40%) for total selling price of $70,000.
Now we’ll use a 40% margin to get our selling price.
Cost = $50,000 /(1-.40) or $50,000/.60 = $83,333.33
If your quota is $80,000/ month and you sell at a 40% markup, you come up short and get a write-up.
If you sell at a 40% margin, you exceeded quota and get an “atta boy” from the Sales Manager. Also, you get a much larger paycheck for the same amount of work.
I Hear Your Objections
You say, “But the market is tight and I have to sell cheaper to be competitive.”
Or, “I’m the highest priced seller in the market so I can’t sell at higher margins.”
I’ll address these (and more) excuses in a future article.
Learn this Secret to Hitting Quota
Learning Sales Math is a great way to increase your sales and income. The secret is sales training. The company’s sales training should include a session on Sales Math. It is important to understand the numbers for both the company’s sake and yours.
I wish I had known this when I started my sales career.