When is gross margin considered a good basis for evaluating sales performance?

Gross margin is considered a good basis for evaluating sales performance mainly when a company sells different products with varying gross margins. This is because gross margin provides insight into the profitability of each product sold, allowing sales managers to assess not just revenue generated but also the efficiency and effectiveness of the sales team in promoting higher-margin products.

When products have different gross margins, focusing on gross margin rather than just total sales enables the organization to prioritize selling items that contribute more significantly to the bottom line. If sales activities are evaluated based only on total sales volume, the sales team may inadvertently emphasize lower-margin products, which might not align with the company's profitability goals. Analyzing gross margin in this context helps to better align sales strategies with overall financial health.

In contrast, other scenarios might not benefit as significantly from using gross margin as a key performance indicator. For example, evaluating overall sales quotas without considering gross margin may overlook the importance of product profitability. Similarly, when assessing customer purchase behavior, other factors may be more relevant than gross margins, such as market trends or customer satisfaction, which do not directly tie into the efficiency of the sales processes in polishing profit margins.