This ad will close in
Question added to topic Grow Your BusinessJune 16, 2008

Need help on determining what the proper cost of sales percentage should be for my firm.

My cost of sales and marketing is running about 29 percent annually. I believe this is very high. We are an IT services firm and our sales consultants earn a big salary and a healthy commission. Someone selling $1.8 million would see $220,000 at plan. What should these percentages be and how can I lower the percentage of COS?
I don't blame you. Everybody wants and needs some sort of standards and guidelines for his or her industry. For packaged software, my industry, I can buy some ratios from a newsletter provider that does an annual survey. I've bought them off and on for years, and some parts of that are useful.

I assume there are similar information providers for IT services. You'd be more likely to know them than I would. Maybe searching for newsletters and industry associations might lead you to where you want to go.  I believe Forrester Research has an IT industry section; it might have your number.

You can get some standard industry ratios in several places. We bundle them with Business Plan Pro. We also get them from Oxxford Info. We used to get them from Integra Information Systems. The Risk Management Association has some of this information, too.

Our legal situation doesn't encourage talking to competitors, but if you can find some similar businesses that don't compete directly, that might help.

By the way, you have your terminology wrong, which will complicate your research. Sales and marketing expenses are different from cost of sales, and referring to them that way, particularly with the COS acronym, will send people off in the wrong direction.

It's not your fault: The usage by accountants and financial analysts is confusing. But cost of sales is direct cost, and sales and marketing expenses are part of running expenses.

Tim
Tim Berry is the president of Palo Alto Software Inc., based in Eugene, Ore., which produces business planning software. He is also the author of 3 Weeks to Startup and The Plan-As-You-Go Business Plan, published by Entrepreneur Press.

0 Comments. Post Yours.

About ASK ENTREPRENEUR

Ask Entrepreneur is a question-and-answer forum for and by the Entrepreneur.com community. Send in your burning business question, or comment on someone else's now. Have a Question? Ask Now

Topics (over 1000+ answers)

Don’t see a topic? Suggest One

Ask Entrepreneur Q&A Hangouts

Google + Hangout With Shark Tank
Google + Hangout With Jason Falls
Google + Hangout With Angela Jia Kim
Google + Hangout With Grant Cardone