MODULE 7 : SALES TERRITORIES

The Need for Sales Territories

A sales territory is a group of present and potential customers assigned to a salesperson, branch,
dealer or distributor for a given period. Good sales territories are made up of customers who have
the money to spend and the willingness to spend it.

While the key to sales territory design in customers, geographical boundaries determine territories
in many firms.

When the firm is small or getting started, management can plan and control the sales operation
without using territories. As a firm grows and its market expands geographically, the advantages of
a geographically defined sales territories become clearer.

Sometimes firms forego geographic territories when their products are highly technical and
sophisticated, choosing instead to rely on product specialists who have the necessary expertise to
answer the customer’s questions. The disadvantage is the resulting duplication of effort as many
salespersons call on the same account. An alternative is to have a single salesperson reponsible for
the account, and the salesperson can call in home-office technical specialists when needed.

Sales territories also are not geographically specified when personal relationships and friendships
have a bearing on the sale.

Other than these exceptions, geographically defined sales territories are the norm in most
companies. The design of sales territories can affect sales force morale, the firm’s ability to serve
the market, and the firm’s ability to evaluate and control the selling effort.

Sales Force Morale

Unequal sales territories are a prime cause of poor morale. Good territory design improves morale.
Clearly defined territories lead to clarified responsibilities. Delineating responsibilities by territories
can reduce conflicts among salespeople over who is responsible for a given account and who is
entitled to the commission from sales to a particular customer.

Market Coverage
Soundly designed sales territories can improve hot the market is served. It is much easier to
pinpoint customers and prospects and to determine who should call on them and how often when
the market is considered a large aggregate of potential accounts. Salespersons who are restricted to
a geographic area are more likely to get more out of that territory than when they can roam at will.
When sales territories are designed to force such effort, salespeople cannot meet their performance
goals calling on only “easy accounts”.

As sales reps in a geographic design call on their accounts in their territory on a regular basis, they
can develop in-depth understanding of their customers’ problems and needs and can anticipate
products that will help the customer.

They also understand the account better and learn who is involved in the purchase decision. This
helps in more effective selling and better servicing of the account, thereby producing long-term
customer satisfaction.
Good territory design allows better integration of the personal selling effort with other elements in
the marketing programme, particularly the communications programme. In territories with little
potential, the manager may emphasise advertising and supplement that with a telephone sales
programme; he or she may place only minimal emphasis on personal visits by field representatives.

In a territory that has good potential and concentration of customers, the manager may forego the
telephone sales programme relying instead on personal sales calls while committing fewer dollars to
advertising.

Evaluation and Control

Geographically defined sales territories allow sales and cost data to be collected and analysed by
geographic area. This facilitates comparisons of market share across areas in total and by product.
Salespeople can be compared with respect to their sales versus potential and those who may need
training can be spotted.

Level of Involvement of the Sales Manager

- too much involvement from a sales manager may crimp the creativity needed to be a top
sales performer. Too little involvement may lead to major problems that could have been
corrected when they were small. Most sales managers try to be flexible and regulate their
involvement according to the territory.

- Cost-control advantages accrue to the firm with well-defined sales territories. Again,
comparing sales representatives in terms of the number of calls they make, their travel and
other expenses and proportion of time spent in face-to-face contact with the customer versus
other relatd activities can provide important insights into doing the job more efficiently.
Slight incremental differences can have profit implications for the firm.

SALES FORCE SIZE

- salesforce size or the number of territories
- design of individual territories
- allocation of total selling effort to accounts

Severat techniques for determining the size of the field sales force include :
- Breakdown
- Workload
- Incremental methods

(i) BREAKDOWN METHOD

In this method, the average person is treated as a salesperson unit, and each salesperson unit is
assumed to possess the same productivity potential. To determine the size of the sales force needed,
divide total forecasted sales for the company by the sales likely to be produced by each individual.
Mathematically,

N = S/P

Where N = number of salesperson’s needed

S = forecasted sales volume
P = estimated productivity of one salesperson unit
Disadvantages
- The method uses reverse logic : it treats salesforce size as a consequence of sales while the
logical causation is in the opposite direction.
- Depends on the estimated productivity per salesperson. Average productivity levels fail to
account for the ability levels of the salespeople, differing potentials in the markets they
service, and different levels of competition in sales territories.
- Does not allow for the turnover in the sales force. New salespeople are usually not as
productive as those who have been on the job for several years. The formula can be
modified to allow for sales force turnover, but it loses some of its simplicity and conceptual
appeal.

One alternative for smoothing out person-to-person differences in productivity due to ability,
market potential, and experience differences is to use industry-average productivity estimates in the
formula. However, an industry-average productivity estimates tends to ignore the market position of
the firm trying to determine the best size of its sales force.

- This method does not allow for profitability. It treats sales as the end in itself rather than as
the means to an end. The number of salespeople is determined as a function of the level of
forecast sales, not as a determinant of target profit.

(ii) WORKLOAD METHOD OR THE BUILD UP METHOD

This method is based on the fact that all sales personnel should shoulder an equal amount of work.
Management estimates the work required to serve the entire market. The total work calculation is
treated as a function of the number of accounts, how often each should be called on, and for how
long. The estimate is then divided by the amount of work an individual salesperson should be able
to handle, and the result is the total number of salespeople required.

The steps involved in the workload method are :

(a) Classify all the firm’s customers into categories
Often the classification is based on the level of sales to each customer. However, firms could also
rate customers on the basis of the prospect’s type of business, credit rating, and product line. Any
classification system should reflect the different classes of accounts and consequently the
attractiveness of each class of accounts to the firm. Thus, accounts could be classified into :
- Type A : large or very attractive
- Type B : Medium or moderately attractive
- Type C : Small, but attractive

(b) Determine the frequency with which each type of account should be called upon and
the desired length of each call
These inputs can be generated in several ways – they can be based directly on the judgements of
management, on the judgements of experienced salespeople or alternatively, the firm may conduct
controlled experiments in which the frequency of contact and the length of contact each are
syetematically varied to determine which is optimal. Also, historical data could be analysed using
appropriate statistical methods such as regression analysis.

(c) Calculate the workload involved in covering the entire market

The total work in covering each class of account is given by multiplying the number of such
accounts by the number of contact hours per year. These products are summed to estimate the work
entailed in covering all the various types of accounts.
(d) Determine the time available per salesperson
For this calculation, estimate the number of hours the typical salesperson works per week and then
multiply that by the number of weeks the representative will work during the year.

(e) Apportion the salesperson’s time by task performed

Unfortunately, not all the salesperson’s time is consumed in face-to-face consumer contact. Much
of it is devoted to non-selling activities such as making reports, attending meetings, making service
calls and travelling.

(f) Calculate the number of salesperson’s needed

The number of salespeople needed by the firm can be determined by dividing the total number of
hours needed to serve the entire market by the number of hours available per person for selling.

Advantages
- easy to understand
- explicitly recognises that different types of accounts should be called on with different
frequencies.

Disadvantages
- does not allow for differences in sales response among accounts that receive the same effort.
- Does not explicitly consider the profitability of the call frequencies
- Does not take into account such factors as the cost of servicing and the gross margins on the
product mix purchased by the account.
- Assumes that all salespersons use their time with equal efficiency

(iii) INCREMENTAL METHOD

This method is based on the fact that sales representatives should be added as long as the
incremental profit produced by their addition exceeds the incremental costs. The method recognises
that there will be decreasing returns associated with the addition of salespeople.

This approach is conceptually correct and is consistent with the empirical evidence that decreasing
returns can be expected with additional salespeople. Decreasing returns can also be expected with
other territory design features such as the number of buyers per salesperson makes an account, and
the actual time the representative spends in face-to-face contact.

Disadvantages
- difficult to implement
- while the cost of an additional salesperson can be estimated with reasonaable accuracy,
estimating the net profit is difficult. It depends on the additional revenue the salesperson is
expected to produce, and that depends on how the territories are restructured, who is
assigned to each territory, and how effective they might be.
- The profitability of the new arrangement also depends upon the mix of products generating
the sales increase and how profitable each is to the company.
SALES TERRITORY DESIGN
This process has the following steps :

(a) Select basic Control Unit

The basic control unit is the most elemental geographic area used to form sales territories. As a
general rule, small geographic control units are preferable to large ones. With large units, areas with
low potential may be hidden by their inclusion in areas with high potential, and vice versa. This
makes it difficult to pinpoint geographic potential, which is a primary reason for forming
geographically defined sales territories in the first place. Also, small control units make it easier to
adjust sales territories when conditions warrant. Some commonly used basic control units are states,
trading areas, cities or metropolitan statistical areas and zip code areas.

States
Advantages :
- State boundaries are clearly defined and thus are simple and inexpensive to use.
- A good deal of statistical data can be accumulated by state which makes it easy to analyse
territory potential.

Disadvantages :
- Buying habits do not reflect state boundaries as the state represents a political rather than an
economic division of the national market.
- The size of the states make it difficult to pinpoint problem areas.

State units are sometimes used by firms that do not have the sophistication or staff to use counties
or smaller geographic units. Styates are also used by firms that cover a national market with only a
few sales representatives, particularly when they can specify a national account by name.

Trading Areas
Trading areas are made up of a principal city and the surrounding dependant area. A trading area is
an economic unit that ignores political and other noneconomic boundaries.

Trading areas reflect economic factors and are based on consumer buying habits and normal trading
patterns. Thus they facilitate sales planning and control and diminish the likelihood of disputes
among sales representatives.

Disadvantages :
- trading areas vary from product to product and must be referred to in terms of specific
products.
- It is often hard to obtain detailed statistics for trading areas. This makes them expensive to
use a sgeographical control units, although some firms adjust the boundaries of the trading
areas so they coincide with county lines.

Whether or not a firm formally uses trading areas as basic control units, it should consider the
logical trading areas for the products it produces when specifying the boundaries for each territory.
Counties
Counties permit a more fine-tuned analysis of the market than do states or trading areas. One
dramatic advantage of using counties as control units is the wealth of statistical data available by
any county.

Another advantage is that their size permits easy reassignment from one sales territory to another.
Thus, sales territories can be altered to reflect changing economic conditions without major
upheaval in basic service. Furthermore, potentials do not have to be recalculated in doing so.

Disadvantage
- for some purposes, they maybe too large.

Cities and MSAs

For many products the area surrounding the city contains as much or more potential than the central
city. Consequently, many firms that formerly used cities now employ metropolitan statistical areas
(MSAs) as basic control units.

MSAs are integrated economic and social units with a large population nucleus. An area can qualify
as an MSA if :
- It contains a city of at least 50,000 people
- If it includes a census-defined urbanised area of 50,000 with a total metropolitan population
of at least 100,000 people.

An MSA includes the county containing the central city and any counties having close social and
economic ties to the central county.

The heavy concentration of population, income, and retail sales in the MSAs explains why many
firms are content to concentrate their field selling efforts on MSAs. Some assign all their field
representatives to such large areas. Such a strategy minimises travel time and expense because of
the geographic concentration of Msas.

ZIP Code areas

Some firms, for which the city or MSA boundaries are too large, use ZIP code areas as basic control
units. An advantage of the ZIP code areas is that they are relatively homogenous wrt basic
socioeconomic data. Whereas residents within an MSA might display great heterogeneity, those
within a ZIP code area are likely to be similar in age, income, education and so forth and to even
display similar consumption patterns.

Disadvantage
One disadvantage of using ZIP code areas as basic control units is that the boundaries change over
time. However, with the new computerised geographic information systems (GIS), that is less of a
problem than it used to be in that the boundaries can easily be reconfigured.

(b) Estimate Market Potential

- If there is a relationship between sales of a product and some other variables, this
relationship can be applied to each basic control unit. Data must be available for each of the
variables for the small geographic area though.
- Sometimes, the potential within each basic control unit is estimated by considering the likely
demand from each customer and prospect in the control unit.
(c) Form Tentative Territories
This involves combining contiguous basic control units into larger geographic aggregates.
Adjoining units are combined to prevent salespeople from having to crisscross paths while skipping
over geographic areas covered by another representative. The basic emphasis at this stage is to
make the tentative territories as equal as possible in market potential. Difference in work load or
sales potential (the share of the total market potential a company expects to achieve) because of
different levels of competitive activity are not taken into account at this stage. It is also presumed
that all sales executives have equal abilities. All these assumptions are relaxed at subsequent stages
of the territory planning process. The attempt at this stage is to simply develop an approximation of
the final territory alignment. The total number of territories defined equals the number of territories
the firm has perviously determined it needs. If the firm has not made such a calculation, it needs to
do so now.

(d) Perform work load Analysis

Although step © should produce territories roughly equal in potential, the territories will probably
be decidedly unequal with respect to the amount of work necessary to cover them adequately. In
this step, the analysts try to estimate the amount of work involved in covering each.

Typically, the workload analysis considers each customer (most assuredly, the larger ones) in the
territory. The analysis is conducted in two stages :
- First, the sales potential for each customer and prospect in the territory is estimated. This is
called Account analysis. The sales potential estimate derived from the account analysis is
then used to decide how often each account should be called on and for how long.
The total effort required to cover the territory can be determined by considering the number
of accounts, the number of calls to be made on each, the duration of each call, and the
estimated amount of non-selling and travel time.

Criteria for Classifying Accounts

- Total sales potential
- Competitive pressures for the account
- The prestige of the account
- How many products the firm produces that the account buys
- The number and the level of buying influences within the account

Determining Call Account Rates

- Call account rates can be determined on the basis of the ABC concept where the number of
calls per year for an account are determined and so is the average time spent on each call.
- The matrix concept of strategic planning can also be employed – this concept suggests that
accounts like strategic business units or markets, can be divided along two dimensions
reflecting the overall opportuntity they represent and the firm’s abilities to capitalise on
those opportunities.

In the case of the accounts, the division should reflect :

- the attractiveness of the account to the firm
- the likely difficulties to be encountered in managing the account

The accounts are then sorted into either a four cell or a nine cell strategic planning matrix.
Account Planning Matrix
(1) High account Potential, Strong Competitive Strength
Opportunity : Account offers good opportunity. It has high potential and sales organisation has
a differential advantage in serving it.

Strategy : Commit high levels of sales resources to take advantage of the opportunity.

(2) Low account potential, Strong Competitive Strength

Opportunity : Account offers stable opportunity since sales organisation has differential
advantage in serving it.

Strategy : Allocate moderate level of sales resources to maintain current advantage.

(3) High account potential, Weak Competitive Strength

Opportunity : Account may represent a good opportunity. Sales organisation needs to
overcome its competitive disadvantage and strengthen its position to capitalise on its
opportunity.

(4) Low opportunity, weak competitive strength

Opportunity : Account offers little opportunity. Its potential is small and the sales organisation
is at a competitive disadvantage serving it.

Strategy : Devote minimal level of resources to the account or consider abandoning the account
together.

The heaviest call rates in the above case would be on accounts in cells 1, 2, and possibly 3,
depending on the firm’s abilities to overcome its competitive disadvantages. The lowest planned
call rates would be on accounts in cell 4.

Determining Call Frequencies Account by Account

There are several ways of determining the workload in each territory on an account-by-account
basis :
- The firm can rate each account on each factor deemed critical to the success of the sales call
effort and can then develop a sales effort allocation index for each account. The sales effort
allocation index is formed by multiplying each rating score by its factor importance weight,
summing all the factors, and then dividing by the sum of the importance weights. The
resulting sales effort allocation index reflects the relative amount of sales effort that should
be allocated to the account in comparison to other accounts – the larger the index, the
greater the number of planned calls on the account.

- Another way is to estimate the likely sales to be realised from each account as a function of
the number of calls on the account. The actual sales response function is the key in
determining the optimal number of sales calls to be made on any account and the workload
in each tentative territory.
Returns to the number of sales calls first increase, then diminish and finally diminish. The
increasing returns are realised at low levels of salesforce effort. At first the rise in sales from
a new account is swift but then begins to flatten out as the number of salescalls is increased.
Decreasing returns set in when the number of calls become excessive, and the salesperson
becomes a nuisance to the account. The costs associated with calling on the account are
directly proportional to the number of calls. The firm must balance sales/cost considerations
 to determine the optimal call level on each account taking into consideration the sales
response functions of all the accounts in the territory.

Two methods of estimating the function relating sales to the number of calls on an account :
- Empirical-based methods, which use regression analysis to estimate the function relating
historical sales in each territory to an a priori set of predictors likely to affect sales,
including the number of sales calls.
- Judgement-based methods which require that someone in the sales organisation, typically
the salesperson serving the account but sometimes the sales manager, estimate the sales-
sales call function so that the optimal number of calls to be made on each account can be
determined.
One of the original, but still popular, judgement-based approaches relies on the interactive
computer programme CALLPLAN, in which the response function for each account is
generated from the salesperson’s own inputs. Callplan operates in the following way:
- No calls are made
- One-half the present calls are made
- The present level of calls is continued
- 50% more calls are scheduled
- A saturation level of calls is made

The salesperson is also asked the probabilities that prospects will be converted into customers with
different call frequencies. Callplan then fits the curves to these data points aand prints out the
expected sales for all feasible call frequencies and the optimal number of calls and the length of
each call to be made on each client and prospect during an average effort period.

Callplan seems best suited to repetitive selling situations where the amount of time spent with an
account is an important factor in the amount of sales generated.

Determine Total Workload

When the account analysis is complete a workload analysis can be performed for each territory as
already discussed. A similar set of calculations is made for each tentative territory.

(e) Adjust Tentative Territories

This step involves adjusting the boundaries of the tentative territories established in step c to
compensate for the work overload in step d. While attempting to balance the potentials and
workloads across territories, the analyst must keep in mind that the sale potential per account is not
fixed and is likely to vary with the number of calls made. While computer allocation models like
call plan take this into account, the ABC Rule of account Classification does not.

Account attractiveness affects how hard the account should be worked. Also, the number of calls
and length of calls affect the sales likely to be realised from the account. Yet, this reciprocal
causation is only implicitly recognised in some schemes used to determine workloads for territories.
The firm needs a mechanism for balancing potentials and workloads when adjusting the initial
territories if it is not using a computer model.

In order to accomplish this balance, the following ways could be adopted :

- One way is to formally estimate the function that relates sales in a territory to the potential
and workload in the territory, using regression based or judgement based analysis.
- Use the subjective judgement of executives to decide on all changes in call frequency to
achieve some specific objective.
- Restructure the tentative territories so that each territory involves relatively equal amounts
of potential, and to continue adjusting by trial and error until the proper balance is achieved.

(f) Assign Salespeople to Territories

At this stage in territory planning, analysts should consider the differences in the ability and
effectiveness of salespersons and attempt to assign each salesperson to the territory where his or her
relative contribution to profit is the highest.
One way of allowing for the differences in general ability among salespeople is by converting each
representative’s ability to index form.
The actual assignment of salespeople to sales territories also incorporates personal considerations.
The firm may not wish to change salesperson call assignments for particular accounts because of
the potential for lost business. It may not want to reduce sales force size even if the analysts suggest
it should because of morale problems associated with downsizing. Increasing salesforce size may
also be disruptive as more salespersons mean more sales territories, which means redrawing
existing boundaries.