How Should You Incentivise A Sales Team? 🏆 Podcast Ep. 20
In this episode of Pricing College – Aidan and Joanna discuss common ways to incentivise a sales team and why this can create issues if not in a strategic way.
Is your sales team incentivised to sell volume – or with pricing targets or metrics. Does your sales team understand and articulate value?
What can go wrong with a shoddy incentivisation plan?
TIME-STAMPED SHOW NOTES
[02:03] Types of Commission, Incentives, and Sales Plan
[03:35] Capped Commissions
[04:42] Gross Margin Plan Incentive
[06:19] Incentivisation system in a company
Today, we’re going to talk about sales, incentives, and plans. I suppose the reason why we’re going to talk about that is there’s a bit of a debate about whether sales are incentivised correctly. Mostly this debate happens outside of sales.
How to Incentivise a Sales Team
The sales tend to think that they are incentivised correctly and doing a great job and often, they are. Other people in the business, however, believe that the way they’re incentivised is driving profitability down. And it’s not producing the best results for the business over time.
I worked in companies where the sales teams were incentivised not by profit. Not even by the price that we’re selling out, but purely by volume. We spoke about cubic metres of product which was what the whole driver was and somebody would go out there and sell a lot of volumes. And the price that we’re selling out was not analyzed. It wasn’t looked at and it’s almost as if nobody cared.
There’s an old saying that anybody can sell $1 for 90 cents. And to some extent, that is true. The real skill in selling is selling a lot of products at a good price, at a profitable price. But doing that is harder than selling at a low price.
The thing I always say is:
Is your sales team incentivised to hold the ground on price?
Are they incentivised to not drop the price just when asked?
Because if they’re not, why wouldn’t they?
Why wouldn’t they just reduce the price to get across the line, be friendly with the customer, and move on to the next site?
So, just to ask that question and I suppose. Let’s look at some of the incentives and plans that most salespeople are on. And let’s think about:
Do they drive profitable revenue growth?
Or do they just drive revenue?
There’s a difference between the two.
Okay. So the first, incentives are things like sales quotas. It’s when a salesperson is being given a target set by their manager and they’re just got to hit that. After that, they get things called accelerators which kick in after they’ve reached their targets.
And it’s the percentage free on top of that, on-target earnings, again another percentage rate free add on to their salary. And they may even have things like contests in a month to drive revenue in that month.
Now, these are different from sales plans. You can have:
Salary base plans
Commission only plans
Salary plus commission
And as Aidan was explaining that volume-based plan which means you sell as much as you can. And they’re incentivised on doing that.
The final one, which is a new type of plan which is a gross margin commission plan. That’s when they are not just selling as much as they can. But it’s based on the margin on-sell and the profit they get from each of the sales that they make.
Disincentive plans: Incentivise a Sales Team
From my experience, an awful lot of sales incentive plans, to be honest, are almost sales disincentives plans. We’ve seen examples where people are capped certain at amounts, capped at certain commission levels per month.
It leaves the items just sandbagging when you’re moving sales around month by month. Sometimes, there’s even jealousy in the accompany by management if a salesperson is making more money than them. That’s seen as a bad thing.
What I would always say is, I think Joanna touched them. The last one she mentioned there was the margin was taken into account. When you’re putting together your sales incentive plan for your team:
1. What are you trying to achieve?
2. What do you want those salespeople to do?
3. What price do you want it to sell out?
4. Are they working in line with the pricing strategy that the company has?
5. And if they are those the incentive program, does it align?
6. Does it make logical sense?
7. Or is there so much congruence that will lead you to a situation where at the end of the month or the end of the quarter, you’re hitting numbers in one area?
You’re hitting the volume metrics, but you’re not hitting the profitability metrics.
Discount, Revenue, and Quota: Incentivise a Sales Team
There’s a lot of finance managers and even pricing managers would argue for the last plan for salespeople that margin, that gross margin plan. It’s because they think it discourages discounting. They think that discounting, just thinking about revenue-driving, revenue incentivises sales to discount to hit their sales quota.
However, there is some complexity with the gross margin plan which salespeople don’t like. And for good reason, it’s very hard to measure. The product base is shifting, distribution costs change, rebates are changing, territory changes, and customer value drivers change. And it’s very hard to measure margin based on that.
So often, salespeople say, “Well actually, we’re driving more revenue and margin. But you’re just not accounting for it.” I mean this is a fair enough call. And also, it’s a very complicated way of measuring. So, I always believe you need to keep things simple. I don’t think that looking at the top-line revenue is a bad thing for sales to do.
However, what I do believe is that the pricing manager or maybe the finance manager needs to get better tactics around discounting, and around margin management. In the first place, that’s not the job of a salesperson. That’s the job of finance and pricing.
I think, you can never say the exact system of incentivisation. Indeed, that will be determined by the company. What you sell, the selling structure, teams, and how that works.
But one thing I’ll say from my experience is sales teams are very logical people. The right logical people often have a very much target-oriented mentality. And at least the good ones do.
And with that, they’re pretty good at thinking through scenarios and what would benefit them. Logically in a company, if they’re incentivised to do something, that is what they will do.
So, are they incentivized to discuss value? Are they incentivised to say no and push back on discount requests? Because if not, they will do the logical thing which is just getting the number to wrap up the sale, reduce the price, make great friends and contact with that customer that will lead to repeat business.
But there’s no point in having repeat business – if it’s at a margin or a pricing point that is damaging your other sales teams or damaging your other products and your profitability.
So, you have to look at what you want to commit to achieving. And this way, the pricing manager or the pricing team really should be involved in setting the incentivisation programs. Or at least at a discussion level with the sales department.
1. What are you trying to achieve?
2. What metrics?
3. What incentivisation program?
Whether it’s commission, whether it’s at the end of the quarter rebate or something to the sales team. Think through how it works and then put it in place.
That’s right. It’s the role of the pricing manager to show what the real situation of maybe the discounting behaviour.
1. What’s the result of certain sales behaviours?
2. Why just looking purely at the top line is detrimental to setting profitable revenue growth?
3. Or why the volume-based approach is not good long term?
Bottomline: Incentivise a Sales Team
Often salespeople don’t know that they don’t have that information at hand. So, they think they’re doing a great job and they are. Some people innately do know how to sell on value and think about margin when they’re selling. Other people don’t do that naturally. But again it’s the role of the pricing team to inform the sales team and provide those tools.
Yeah, I think that’s it for me today. We just reached the end of the quarter, the June quarter. A lot of salespeople would be rushed to meet targets and hitting up their lead base. Those sort of things.
And when you want salespeople, you want them out there. You want them hungry and you want them to be desperate to get that sale in. The incentivisation structure is a key component for that and that’s where pricing becomes motivational. It helps you lead the company and helps you set the mentality of what to have. It’s not just about taking with numbers on a spreadsheet. But there’s that human element also that’s, you know, as important.
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