Most commercial challenges consist in offering a reward (often monetary) to the salespeople who make the most sales. This “pay for performance” approach has proven to motivate sales staff to work hard to improve sales performance. But today companies are not only waiting for sales people to make sales but profitable sales. This implies that commercial management can set clear and measurable margin targets. For example, when a producer of industrial machines * organized a commercial challenge on gross margin instead of sales, the message to the sales force was clear and immediate impact. The salespeople granted fewer discounts and concentrated their efforts on the most profitable product lines, which led to a margin growth.
Business Challenges and Business Goals
Conversely, in the case of a medical imaging company the experience was a failure. Frequent changes in production costs, distribution, and variations in discounts granted have transformed the calculation of margins by sales territory into a nightmare. The plan was abandoned after only a quarter.
Challenge Commercial: and if we Rewarded According to the Margin
- Who can reward at the Margin?
To help you determine if you should consider rewarding your salespeople based on the margin, start by asking yourself two questions.
- Is profitability a Priority?
Sometimes companies sacrifice profitability in favor of objectives such as increasing their market share, blocking a competitor, or entering a new market. Consider rewarding your sales force with profitability only if profitability is a strategic goal.
- Do your sales forces have real Control over the Margin?
Traders who sell only one product at a price have no impact on the gross margin; they increase the profit mechanically by increasing the volume of sales. Thus there is nothing to be gained from the challenger according to the margin: the result will be the same. Traders can increase the gross margin when: 1) they can act on the price and / or 2) they sell several products with different margins. Challenger sales forces based on profitability only make sense if at least one of its two conditions applies.
How to Encourage Salespeople to favor Margins?
If profitability is both a strategic and controllable priority by salespeople, then these four additional questions will help you determine the best approach to obtain more profitable sales.
- Can you measure the Gross margin at a Territory?
Sometimes it is too complicated or too expensive to estimate the gross margin in each territory within a reasonable period of time. If the cost is too high, consider other options to encourage more profitable sales. (See questions 3 and 4).
- Do you want to share Profitability data with your Sales People?
If you want to protect the confidentiality of your profit margins vis-à-vis your customers and competitors, you should avoid sharing margin data with your sales force. Some companies have succeeded in organizing business challenges on relative margins, i.e. artificial margins that reflect the relative profitability of the products (among them), without revealing the real margins. However, the relative margins still reveal a lot of information. If confidentiality is a priority, consider other ways to encourage more profitable sales. (See questions 3 and 4)
- Do salespeople Influence Price?
If the cost of measuring and sharing the gross margin per territory is too high, then organizing a commercial challenge on the average selling price is a good alternative to encourage profitable sales, when salespeople influence the price. For example, during a commercial challenge, an office supplies manufacturer had an incentive plan with a multiplier linked to the actual average selling price. For sales made below 3% of the base price, the salespersons were paid the base commission. For sales signed between plus and minus 3% of the base price, the salespersons earned the base commission times a multiplier of 1.1. For sales concluded above 3% of the base price, salespeople received the basic premium times a multiplier of 1.25.
- Do you want to Boost Sales of Products with the highest Gross Margin?
If measuring the gross margin is too complicated, reward according to the category to which the product belongs: priority or not. For example, a technology company had created a reward program for its business challenge with two product categories: “strategic products” (the most recent products with a high strategic importance and a gross margin above 50%) and “Essential products” (older products with an average gross margin of 30%). Salesmen received a 5% commission on strategic product sales, but just 2.5% on essential product sales.
The commission rate difference encouraged salespeople to focus on products with the best gross margin, thus improving profitability. Thus the commercial challenge is the ideal time to align the sales people on the financial objectives of the company by rewarding at the margin. But this is only possible if the salespersons have control over this margin.
Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
Love my efforts? Don't forget to share this blog.
