How Much Does a Bad Salesperson Cost Your Organization?
Hello, people. Welcome to the BBC Youtube channel. After you hired Jeff, things started to go bad. Six months after hiring him, you decided to let Jeff go. This problem is familiar because people waste a lot of time interviewing potential employees, like salespeople do.
This has happened multiple times in the past, but most companies don’t understand the true cost of time lost due to employees leaving. Let me walk you through this. If you want more of this content, subscribe to the BBC Youtube channel and hit the notification bell.
The six months’ worth of salaries and benefits doesn’t tell the whole story, either. Organizations have also lost sales opportunities, management time and administrative costs as well as training costs over that period of time.
I am going to go over hard and soft costs, as well as some hidden costs which you may not be considering. This includes vacancy costs, replacement costs, customer costs and employee morale. If you have salespeople, please sit down before you finish watching this video.
For the past years, I have heard business owners, sales managers, vice presidents of sales, chief revenue officers and chief sales officers making their argument that they believe the only company’s loss of a bad hire is the money spent on an employee. But what most people know about hiring the wrong person is not true. Let’s look at the actual costs.
Let’s say a salesperson makes $50,000 up front. Next, they will earn $500,000 in cash over the course of the year. The total cost of their salary and benefits for the first six months is over $34,000. It may have also cost you an additional $5,000 to bring on an individual (e.g., advertising costs during recruitment, human resources costs of bringing one on). Sales training would cost an additional $4,000, and materials such as ads or flyers would cost another $5,300.
If Jeff had been successful, how much revenue would he have generated? Let’s say that his quota would have cost $250,000.
Would you have been more productive with more revenue if you had invested in going out and hiring a weekly writer? The cost of hiring someone to generate $1,700/week would have been just 15% of your annual salary—$17,000.
There are two real intangibles that impact this equation, employee morale and customer cost. If you have a bad resource, or they make customers go elsewhere, it not only creates disharmony in your team, it makes them work harder as well. What’s the lifetime value of a customer?
In the worst-case scenario, it’s estimated that a bad hire could cost you about six months of work for about $308,000. Add to this the loss in morale and customer count due to poorly done work.
With the help of assessments, you can find out if a potential hire has the skill set that will allow them to be successful in your sales department. These assessments are unbiased and give you an early gauge to their sales aptitude without hiring a costly training program like other companies would do.
Get sales behavioral agreements to better manage client performance.
Most of the people who complain a lot are usually the people who got themselves into the undesirable position in the first place.
Bad salespeople are a result of hiring recruitment problems.
Bad hires for sales staffers, like bad recruitment, can cost as much as 30 to 125 times the basic salary that your company has been paying that person. Bad management hires can also be very costly in the long run.
Recruitment is often considered a “chore,” which takes time away from your more urgent work. Instead of just hiring anything they can, consider paying one recruiter to make sure you are getting the attention you need and the quality of job candidate that you deserve.
If the company had taken more action to hire a better employee in place of the one who was ‘causing’ all these problems, then they probably would not be facing so many issues today.
So, how did you decide what you were looking for when it came to your job ad? Did you just look up an old one? Or did you design it specifically? Did you outline beforehand what the predictors of success would be for this role?
Identifying the best predictors of success in a sales role:
- Ambition and drive
- Accepts personal responsibility
- Sales prospecting
- Takes action
- Control and close
- Work ethic
- Repeated, consistent prior success
Displaying the ideal candidate is crucial, as recognizable professionals increase your likelihood of landing a job.
Create template job applications, interview questions to ensure you have the best candidates who can adapt to changing market conditions and be resilient to the challenges they will face.
Create a hiring scorecard so that you can compare characteristics and assess your personal feelings, stopping you from hiring someone who may be great at the interview but not able to do the job! Let’s be honest, sales people are brilliant at presenting themselves in an interview. This doesn’t mean they will succeed on their job regardless of what role they are interviewing for.
Hiring and paying a wrong sales hire will result in the single highest hidden cost in any business.
Set expectations from the outset, clarity throughout an offer and notice period, onboarding process, and throughout tenure in the business. Ambiguity is what can result in a mismatch of expectations.
Make sure to provide a clear onboarding process of 120 days from the start of the hire to the end of their probation period. Without this, even top A-players may not be up for.
Please be aware of the red flags that would lead to terminating your new hire early, in case they make a mistake. If they do, it is better to terminate them and recover quickly than wait until the moment damage is rendered.
Are you spending enough time training, coaching and mentoring your sales team members to perform at their best? This is your job as a manager. You want them to meet or exceed their potential. Are you observing, helping them develop call plans and debriefing from each experience?
What salary did they pay you? What are their commissions? What forms of benefits does the nonprofit offer employees? How much did you pay them? (basic salary, commissions, pension, health and life insurance)
The cost to run 1 salesperson can come anywhere from 3x salary to 300x salary. One rule of thumb is that it typically costs 3x what you would pay your salesperson per hour. What does that cost?
How much do you pay a salesperson? If they don’t generate leads, they’re not doing their job as they should. Therefore, when you hire a sales person who lacks results, what happens to your company’s budget-wise?
What could you have done with that time spent in line management? Consider the opportunity cost of spending 10-30 hours on line management in a recruitment cycle. With that amount of time, you could do something much more valuable with your career.
How much management time, HR meetings, and interviewing are tied up with each position? (For senior positions, this can take anywhere from 8-24 hours). How much management time is at risk due to internal discussion relative to the hourly rate? What could be lost if those hours were invested into other areas of the business instead?
What are you spending on monthly fees? Are they 20%, 25%, 30% of your basic salary, or do they charge a total package? What does that cost?
What is the interview-to-hire ratio at your company? Do you typically have to do screening with 3, 5, 10, or more candidates before you make a hire? How many interviews does that entail, and what are those cost implications?
The average salesperson starts off making about $250,000 in their first year.
How long do you need to ramp-up? 1 month, 3 months, 6 months, a year or longer than that? During this period of ramp-up, are your expectations of what percentage of the pro-rated first-year annual target they will fall short by? 20%, 40%? How much does this cost in cash terms and what does it mean for your bottom line?
What percentage of the target are the salespeople actually bringing home? If they aren’t at 100% percent of their target, how much does this cost per person in your company?
What is the average time you keep underperforming salespeople before firing them? What do those costs per salesperson mean for your company?
When you’ve hired someone who doesn‘t bring in customers, it actually costs more to fire them and search for a new employee.
Have you ever lost any customers because you hired the wrong person? Were they able to compete with your business while they were under your employments or is it worse if they left to work for a competitor? The number of years that they had you locked out of an account can be multiplied by the annual income you lost due to them leaving and then added up. This number can be used to determine the financial losses in your business.
How was the financial impact of these demands? How many accounts did they close that cost your company? What’s the potential impact to your business?
How much money did your account leave on the table? Will it create opportunities for your competition? What are the potential losses you’re now facing, despite being fired by them? How many of your accounts that have equal or lesser potential for growth, will they grow now that they’ve been updated to avoid people like that bad salesperson associated with them?
What is the estimated yearly cost savings if you deduct the money that these customers have left on the table? Equating to cash value, what is the approximate yearly cost of customer renewal, maintenance and cross-sells, upsells, and referrals that use this technology?
Is the number of clients your prospect is buying from, and (1) the number they should have bought as soon as they signed up, and (2) the average lifetime value for a client who has just signed up worth worrying about?
LCV = AOV x AOF x CL + R
LCV = Lifetime Customer Value
AOV = Average Order Value
AOF = Average Order Frequency
R = Annual Referrals’ Value
If our AOV is £5,000 and their AOF costs four times a year, they stay a client for four years and we bring them twelve referrals. If they have lost us ($1,200) with an average lifetime customer value of $800 would it be fair to say that they have so far cost us ($960,000)? Is that correct?
Understand this depressing fact. Your company’s new hire’s salary and running costs, the recruitment fees, training costs, and other expenses barely matter when you factor in the hidden costs of a bad hire!
What percentage of your sales team is currently hitting the target?
How much time have you allowed underperformance in your sales team before making the decision to fire them and hire new ones?
What is the potential loss due to the sales team members leaving so quickly?
Bad sales hires can be expensive. Even experienced sales leaders may be surprised to learn just how expensive they can be, even with a background in sales.
The company has wasted money on recruitment costs and potential lost business when the person they hired failed to work out.
There isn’t a shortage of definitions that define what constitutes a bad hire, but there are some common signs:
The salesperson is consistently in the bottom 20% of all salespeople, even after the ramp-up period.
Salesperson error rates are at an all-time high.
While they don’t perform well on their first attempt, they bring in new revenue that is easy to monetize. The customers are low-value, and there isn’t much room for growth.
The salesperson is unwilling to dedicate time and effort into ongoing, personalized training.
Team members say that the person in question does not collaborate, which creates a negative work environment. Being on their team doesn’t appear to offer many benefits either, as the individuals do not contribute significantly to the group initiatives.
Their lack of engagement may impact others.
In a call to a customer or prospect, the salesperson’s behavior is not professional and hurts their organization.
If your new hire is a bad fit, he or she may be displaying these traits. A bad hire means that you have put in the time and money for someone who will likely not perform.
So, how much is replacing this bad employee really costing? The answer to that is complicated. According to a number of estimates, a bad sales hire costs between 50-75% of the annual salary of the hire. That means an employee who makes $50,000 annually costs between $25,000 and $37,500 to replace.
Bad employees usually stay on for a year, which can be a significant amount of money. Since no commission is earned by bad hires, your company will have no commission to lose, though the base salary alone can be beyond amazing.
A business incur a reduced cost by not paying for benefits each year. Insuring a person doesn’t mean that you are going to continue to pay for their health insurance, accessibility or disability. You can calculate your average cost in 2018 if none has been provided. Some companies spend $5,655 on this annually, with sales professionals costing $228 yearly and a single full-time employee on average spending $228 per year.
Hiring costs: Hiring a new person isn’t cheap. You’ll need to pay fees to recruitment companies and job ads, travel expenses for interviews, background checks, and the work from employees who participate in the recruitment process. Depending on your process, you might spend $25,000 or more for a single hire.
The cost of getting new employees office equipment varies. The cost of your employee’s personal laptop, chair, etc. can range from $500 to $1,500.
Companies might incur costs including but not specific to pay trainers, technology, and possible outside expenses when training a new sales hire. $10,000 is the ballpark figure.
Employees are given severance pay and HR expenses when they are fired from their job. The total cost is around $10,000.
With certain hires, companies can expect to lose a large amount of money because they don’t bring in the sales they expected. With an average SDR at your company generating $500,000 in revenue annually, this means a loss of $300,000 for lost business. This can have rippling effects in future years. The customer you didn’t land in year 1 means lost revenue in years 2 and beyond, even if the bad hire is gone.
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