Cars and Sales: A Research Study on Cost of a Car As a Sales Tool

One of the most perplexing problems confront­ing the fleet operator with a large sales force is what type of fleet operation is best for his company.

Should he use company-owned or leased cars and absorb all of the costs? If so, how should he handle the use of the cars when the salesmen are not work­ing? Or should he let the salesmen operate their own cars and reimburse them? If so, how much? Or should he completely ignore the problem and make a car a condition of employment without any reimbursement?

Obviously, there is no clear-cut answer. What might be ideal for one fleet operator may not necessarily be right for another fleet operator. Even within the same company, circumstances may dictate different modes of operation.

There have been hundreds of surveys on sales­men operated cars and the only conclusion that can­not be denied is that wheels make the sales go around. A car is a vital-almost necessary-sales tool and if used properly can greatly increase earnings. If used improperly, a car can be a great drag on a company's resources.

One of the most recent surveys on the use of cars in business was conducted by the Research In­stitute of America Inc., a New York-based research firm. A poll of the institute's sales members revealed that 99 per cent of the respondents used a car in their work.

While a survey of this type cannot possibly tell a fleet operator what is best for him, it does provide a yardstick which can be used to measure his policies against those employed by other companies. The diverse methods of payment and the number of miles piled up each year indicate the immensity of the problem.

Fifty five per cent of the salesmen responding said they were driving a 1962 or 1961 car. Twenty-eight per cent were using a 1960 model; 12 per cent were in a 1959 model. The remaining five per cent drive older cars.

On the subject of ownership, 42 per cent of the salesmen said they use their own car in their work while 27 per cent said they used a company-owned car. Leased or rented cars were used by 31 per cent of the responding salesmen.

Reflecting the growing trend away from unreim­bursed expenses for auto use, only eight per cent of the salesmen said they were not compensated for their driving expenses. Fifty-three per cent had their actual expenses paid and 39 per cent were paid by mileage. Mileage payments ranged from a low of 2 cents per mile to a high of 11 cents per mile with the average amounting to 7 cents per mile. In place of mileage, some salesmen said they received lump sums each month ranging from $100 of $160, or a combination of mileage and the monthly payment.

Further indication that surveys, while useful as a yardstick are not conclusive, is evidenced by the number of miles driven annually by the salesmen responding to the Research Institute of America sur­vey.

Two per cent said they drive less than 10,000 miles per year; 9 per cent drive 11,000 to 15,000 miles per year; 16 per cent drive 16,000 to 20,000 miles per year; 19 per cent drive 21,000 to 25,000 miles per year; 21 per cent drive 26,000 to 30,000 miles per year; 13 per cent drive 31,000 to 35,000 miles per year, another 13 per cent drive 36,000 to 40,000 miles per year; and 7 per cent put on more than 40,000 miles per year.

This tends to support findings by AUTOMOTIVE FLEET that the average fleet car travels more than 28,000 miles a year.

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Chevrolet was the most popular car in the RIA survey. Thirty-two per cent of the salesmen said they drove a Chevrolet. Ford was next in line with 20 per cent, followed by Plymouth with 12 per cent, Buick, 8 per cent, Pontiac, 7 per cent, Dodge, 6 per cent, Rambler 4 per cent, Oldsmobile, 4 per cent, Mercury, 3 per cent and Chrysler 2 per cent. Of the remaining 2 per cent, the makes most frequent­ly mentioned were Cadillac, Volkswagen and Studebaker.

Another survey on the cost of salesman cars was recently developed by the Dartnell Corp. of Chi­cago. This survey dealt only with salesman-owned cars. The results indicated that the flat rate method of payment was the most popular method of pay­ment to salesmen operating their own cars on com­pany business. More than half-53.7 per cent-of the companies responding to the Dartnell survey said they pay their salesmen on a flat rate basis. The figure most frequently given was 8 cents per mile with the low at 4.5 cents and the high a 12 cents per mile.

Dartnell broke its survey down to include both national and regional companies. National companies with 0 to 25 salesmen scored the heaviest in favor­ing flat rate payments with 75 percent stating they use this method. Regional companies with 5 to 25 salesmen had the lowest percentage-46.7 per cent- in flat rate payments.

Following is a breakdown of the Dartnell survey with the percentages of flat rate payments and the high, low and mode figures:

It should be readily clear from the above figures that the problem of reimbursing salesmen for the use of their cars is confusing to say the least. It should be equally clear that because of varying conditions under which cars operate, it is foolish to set an arbitrary flat rate method of payment. Such a method overpays the high mileage driver and underpays the low mileage driver.

The Dartnell study pointed out that fleet authori­ties generally agree that the flat-rate plan for re­imbursing salesmen generally costs a company more than a sliding scale of mileage allowances, and in turn, this plan is more costly than one that reflects regional differences in operating costs and that segre­gates fixed from variable expense.

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It is interesting to analyze the pattern that de­velops in the Dartnell study. The larger the company the less likely that it uses the flat-rate method of reimbursing salesmen. In those national companies with sales forces of fewer than 25 salesmen, 75 per cent reimburse by the flat rate. In the next size cate­gory-companies with from 25 to 50 salesmen-the percentage drops to 60. In the next category-com­panies with from 50 to 100 salesmen-the figure drops to 59.5 per cent. In companies with 100 or more salesmen, only 40.6 per cent use a flat mileage rate.

Dartnell drew the following conclusion from the results:

"It would probably be hasty to conclude that large nationwide companies are more cost-conscious and better managed than average companies in other cate­gories, although such qualities doubtless are factors in establishing the pattern discernible in the responses. Probably more influential in setting such policies is the fact that in large companies the sums involved are substantial enough to be a matter of concern; so an effort is made to determine the most economical method, and it is worth the extra effort required to calculate mileage allowances on a sliding scale."

Dartnell notes that in smaller companies, the num­ber of salesmen and the amount of miles driven are not large enough to justify using the more com­plicated system. It is convenient merely to multiply the number of miles a salesman has driven by an unchanging factor.

"When salesmen drive a large number of miles per month, however, it probably pays a company to use a sliding scale in calculating the amount of money a salesmen is to be reimbursed. That factor, rather than number of salesmen, appears to be the most important single consideration." Dartnell said.

No clear cut pattern can be drawn from the re­gional companies that responded to the Dartnell survey. The size of the sales force in regional companies has no direct bearing as to whether the flat-rate method is used. In companies with five salesmen or fewer, 53.6 per cent used the flat rate method. In companies with more than 50 salesmen, the per­centage using the flat-rate method was 55.2-higher than any other category.

One of the strongest advocates of the flexible pay­ment method-whether it be for leased, company-owned or salesman-owned cars is Runzheimer & Co. of Chicago. While this is understandable, since the company is in the business of determining car allow­ances for clients, it has plenty of good arguments against a uniform flat allowance:

"When there are difficulties in driver-owned fleets they usually result entirely from the use of the same kind of uniform flat allowances which were in vogue when cars were first driven on business fifty years ago. Since then, cars have been completely rede­signed, streamlined and improved to meet present day needs."

"The same thing must be done with car allowance control plans; the methods of fifty years ago simply are not good enough today. Look carefully at car expenses and you will find that they are not static, but fluctuate from month to month. They also vary sharply from one driver's territory to the next. Simple differences in yearly mileages make a big difference in what each driver should receive. Therefore, your car allowance plan, too, must be modernized and designed to reflect flexibly and accurately these ever-changing costs and conditions in each driver's terri­tory. In this way you will get all of the important advantages inherent in driver-owned operation men­tioned previously."

Automotive Fleet fully agrees with the Run­zheimer statement. There is also another strong argu­ment that can be used against a flat-rate payment. Today, when morale and fringe benefits are becom­ing more and more of a sales factor, what happens when the salesmen who is being reimbursed at six cents per mile meets a competitor who is receiving nine cents per mile? The answer is obvious-he feels he is being treated unfairly and it is bound to reflect in his work.

Peterson, Howell and Heather, Baltimore-based fleet management firm believes that the soundest approach to take with a employee who has to use his own car on company business is to pay the employee what it actually costs him to operate his car while on business.

"To do this accurately-expenses should be figured on a per-mile basis for per-mile costs . . and on a fixed basis for fixed costs." PHH says. Here is their formula:

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Per mile costs: PHH suggests 3½ cents per mile as the proper amount to reimburse for running expenses-gas, oil, tires, minor repairs, etc. This is an accurate approximation of those costs which change in almost direct proportion to the number of miles driven.

Fixed costs: PHH suggests a flat $2.75 per day, (or proportionate amounts for weeks or months), as proper reimbursement for standing expenses-in­surance, depreciation, license fees, tax fees. etc. Here "car time" is purchased; miles make no difference. (If more liberal reimbursement for standing expenses is considered, the company may wish to repay on the basis of a five-day business week . . . regard­less of how many days the car is actually used for business).

Incidental costs: PHH suggests direct reimburse­ment for incidental expenses-tolls, parking, etc . . . . since these are outright costs, like meals and hotels, and are not affected by mileage or time.

PHH suggests that a salesman who drives his own car for business purposes be reimbursed at a total of the following rates: 3½ cents for every business mile driven, $2.75 for every business day the car is in use; the exact amount for the incidental expenses incurred.

The 3½ cents is based on "composite" running costs . . . (which, in 1961, amounted to 3.01 cents per mile). The $2.75 is based on "composite" standing ex­penses, excluding rental or interest on investment . . . (which, in 1961, amounted to $2.37 per day, assuming a 30-day month). The difference between these actual (average) figures, and its suggested reimbursement figures compensates salesmen for their inability to insure and operate their own cars as efficiently and economically as a company operates a fleet car.

One Way of Computing Costs

How much does it cost to operate a car for busi­ness? Here's a cost study method devised by Runzheimer and Co., Chicago auto management firm. Column 1 contains annual fixed costs determined tor the indicated basing point in each cost area. Costs include insurance premiums for comprehensive fire and theft, $50 deductible collision. $10,000 property damage and $50,000-$100,000 public liability cover­age: costs of state license, title, driver's and inspec­tion fees; and depreciation. Column 2 shows the annual fixed costs expressed as a fixed allowance per day, computed in terms of a 365-day year.

Column 3 shows the additional per-mile costs re­sulting from operation. It includes gasoline (regular), oil, greasing, washing, service maintenance; and tire repair, rotation and replacement. Cost of municipal license fees, property taxes, parking bridge and thru-wav tolls are not included because they do not lend themselves to standardization. Chevrolet model is a 1962 four-door Bel Air sedan. Pontiac model is a 1962 four-door Star Chief sedan.