What is Sales Risk?
Sales risk refers to the uncertainty relating to the price and quantity of goods that are available for sale to consumers. Usually, sales risk may result in sales failures, and it can significantly affect the reported financial performance.
Protecting the business against the sales risk can help build resilience in a way that the sales team is able to counter the contributing risk factors. The sales team should be properly trained on how to identify, monitor, and control the risk factors of sales risks.
- Sales risk is a form of risk that results in sales failure.
- The sales team should be well trained on how to capture, monitor, and control the sales risk factors.
- The main forms of sales risks include hubris risk, information risk, strategic risk, ethical risk, and reputation risk.
Types of Sales Risks
1. Hubris risk
Hubris risk is characterized by overconfidence and arrogance, and it causes the person (s) in charge to believe that they are doing nothing wrong. It can cause the person responsible for making sales decisions to make short-sighted and irrational decisions since they do not consider the opinion of other people or the effects of their decisions on other people.
Hubris risk is often associated with successful individuals, such as corporate executives. A sales manager may make decisions without fully thinking of the consequences or considering the opinions of other people in the sales team.
The inconsideration is due to the overconfidence on the part of the sales manager that they are making the right decision, and that the decision will not cause negative consequences. Sales managers should be self-aware and understand that past accomplishments do not mean future challenges cannot occur.
2. Information risk
Information risk is associated with the use, ownership, operation, and adoption of information technology within the organization. Such risks can damage the sales process, especially as a result of poor implementation of information technology and mismanagement of processes.
The failure of IT systems in businesses that rely on technology can cause a security breach, which may result in fraud, theft, damage to physical assets, and even damage to the brand name. Frequent outages or downtimes in the IT systems can result in adverse consequences, such as lost sales, reputation damage, breach of customer confidentiality, and reduced customer satisfaction.
Businesses may be required to pay penalties and fines when the failure of systems causes non-compliance with regulatory requirements.
3. Strategic risk
Strategic risk occurs when the business pursues an unsuccessful or wrong strategy. The risk may emerge when the management makes poor business decisions that fail to achieve the intended outcome. It may also arise when the company allocates inadequate resources to a new product line or fails to respond appropriately to changes in the business environment.
For example, the management of Kodak ignored the rapid growth of technology, and they failed to make strategic decisions that could’ve helped them survive the quick adoption of digital technology.
4. Tactical risk
Tactical risk arises due to changes in business conditions that occur in real-time, causing businesses to incur a loss. The term “tactical risk” is borrowed from the military, and it refers to the conditions on a battlefield. It differs from strategic risk in that a strategy is a plan for the future, whereas tactical risk occurs in real-time as the events unfold.
Tactical risk relates to the present threats that the company faces in the current business environment. For example, when there is a surge in demand for the company’s products, it should be able to improve its productivity immediately to meet the demand.
5. Ethical risk
In a revenue-focused organization, the sales team may engage in any activity that helps them attain the set revenue targets, even when the activities are unethical. The management may place undue pressure on the sales personnel that may force them to compromise the organizational standards.
Issues such as bribery, fraud, abusive behavior and lying to stakeholders are the most common ethical risks present in organizations. While such activities may help the organization achieve its revenue targets, it may corrode the shareholders’ trust on the executive team.
Employees should be trained on how to avoid unethical behavior. The company should also create confidential reporting mechanisms that allow employees, customers, and other stakeholders to report unethical behavior within the organization.
6. Reputation risk
Reputation risk refers to a threat to a company’s profitability due to an unfavorable public perception of the company or its products/services. Reputation risk may be direct or indirect. Directly, reputation risk may be caused by actions of the organization itself, while indirectly, reputation risk may be due to the actions of an employee of the organization.
Reputation risk poses a threat to the survival of an enterprise. If not managed early enough, it can result in the loss of millions or billions of dollars in revenues or market capitalization.
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful: