Merely devising a robust strategic and tactical sales plan, even with solid metrics to measure progress, is not enough to achieve maximum results. If an organization’s sales goals are not aligned with individual incentives, the business is unlikely to realize its fullest potential.
As a result of performing about 100 commercial excellence engagements across virtually every major industry, we have a unique and compelling perspective on how to design sales incentives programs effectively. Several key factors need to be considered in regard to commercial activities:
- Total revenue (or volume) is important and should be part of the overall evaluation;
- Management should set pricing targets and should measure pricing performance;
- Management should measure changes in customer mix, to determine its effect on pricing and profitability in every sales rep’s territory; and Management should carefully tailor sales targets by rep and product line in order to encourage salespeople to sell a richer product mix.
Our experience has shown that incentive plans focusing exclusively on sales volume tend to misdirect rep performance because they do not emphasize pricing enough. For example, even if a rep hits her/his revenue target, margin decline from her/his price concessions may mean that the company earns less money than expected.
Our experience also shows that incentive plans incorporating gross margin or gross profit figures still do not ensure pricing excellence. The primary reason for this shortfall is the lack of actionability for a sales rep when gross margin figures change over two time periods. That is, the front-line sales rep is lost in a forest of variables, unable to clearly separate the price, volume, cost, product mix, and customer mix changes that all contribute to a gross profit change.
Our insight is to separate these factors and hold reps accountable only for those elements directly within their control. What kind of impact can smarter sales incentives have for you?