Defining Sales Territories

A sales manager typically tries to develop sales territories that are equal in sales potential and in workload so that each salesman has an equal opportunity to make sales. A study of the literature in the field found territorial characteristics were typically used in defining territories. Market potential was used in every case, while concentration, dispersion, and workload were used to lesser degrees. Potential was found to have a positive effect on sales in almost all instances and concentration the extent to which potential was concentrated in a few accounts, also tended to have a positive relationship to sales. Geographical dispersion and workload (defined as number of accounts) were not found to be strongly related to sales, but this may be partially the result of the fact that only proxy measures were available to measure them.

This study concluded that workload is difficult to define operationally and has an uncertain relationship with sales so that it should not be used in defining sales territories. Furthermore, the study found the relationship between potential and sales has been so clearly determined that it recommended potential be the primary factor used to establish territories.

When workload was defined as number of accounts in the study cited above, not much correlation was found with sales. Nevertheless, most companies take some concept of the workload into account along with sales potential in establishing sales territories.

The sales representative’s workload is a function of a number of variables, including the number and size of accounts, average order size, account location, travel time between accounts, and non-selling activities required of the sales force. Through experience a company can usually develop workload measures that, when coupled with sales potential, can serves as the basis for designing sales territories. At the minimum, the firm should be able to eliminate extreme cases, such as where sales representatives have more potential (e.g. many large accounts) than they can exploit properly or have insufficient potential to occupy their time fully. Also such data are useful in helping the company decide whether to concentrate on high potential markets in an effort to increase sales while simultaneously reducing expenses.

In the Lotus super car example territories could be established on the basis of the residence of each of the small number of potential customer. Undoubtedly, the main cities would account for the bulk of the potential, and the relative amount of potential in each would be the relative number of potential buyers in each metropolitan area.

Setting sales Quotas: Sales quotas should be set after market potentials have been derived and sales territories established. The potential for each territory is then known; but sales quotas must also consider past sales performance, changes to be made in the amount of supporting sales effort during the coming year, and anticipated activities of competitors. Quotas are usually set for each sales territory and for each sales representative. They are ordinarily not the same as potentials or even of the same relative size. One market may have twice the potential of another, but may have local competitors that take so large a share that a given firm’s quota may be smaller there than in an area with less potential.

Sales quotas set in light of sales potentials furnish a much better basis for measuring the efficiency of sales representatives than do quotas set by the old rule of thumb – that year’s sales plus 5 percent. If two sales representatives turn in the same annual sales volume, they are usually paid about the same and are held in equal esteem by the sales manager. If market analysis shows that sales representative A has a territory with far less potential than sales representatives B, the sales manager may wonder if representative A may not actually be superior. A shift of the two might lead to an improvement into talk sales.

Sales Sales
Representative A Representative B

Sales last year 500,000 635,000
Territory potential 2,000,000 4,000,000
Percent of potential 25.0% 15.9%