Would you reward your sales team for the sun rising and setting each day?
I didn’t think so. They can’t control how the days turn. That’s completely outside of their control and completely irrelevant to how they work within your company.
So why would you reward them for the margins they achieve?
The concept is the same – in most businesses, salespeople cannot directly affect costs. Their margin-based incentives, however, and compensation are heavily tied to costs.
Many companies stick to the traditional incentive structure of rewards for volume and margin. However, my team and I argue for a sales incentive strategy based on volume and price instead. I’ve broken down how they differ and how the latter sets up sales reps for success while the former sets them up for failure.
Incentives on Volume
Sales reps’ main responsibility is to sell, so incentivizing on volume is a no-brainer. Rewarding those who sell more makes sense. Unfortunately, if you stick with this single-angle incentive strategy, your company’s margins will suffer. Selling responsibly is also important.
The Failing Second Sales Incentive Strategy Element
To keep sales reps accountable for the lengths they go to close a deal, many companies add a second factor – margin. The sales team is responsible for the profitability of a deal. Unfortunately, this puts the sales rep at a pretty unfair advantage. Margin is equal to price minus cost. Can the sales rep control the first variable? Yes. The second? No.
The Better Second Goal
Put your sales reps in the driver seat of the factors they can control when it comes to profitability – namely price instead of margin.
Price-focused incentives promote profitable deals without holding your sales team accountable for uncontrollable variables. This keeps bad and unprofitable decision-making at bay.
Sales incentive strategy based on target price achievement also trains sales reps to sell on value. It pushes them to convince buyers that products are worth much more than the cost they’ve been assigned by the market. The strategy keeps your sales team from relying on discounts to close a deal. Furthermore, consistently selling on value builds a database of loyal and profitable customers.
How to Incentivize on Price
My team and I recommend clearly identifying a target price and holding sales reps accountable for selling as close to it as possible. Build an incentive formula that takes into account how close to target price the sales rep closes their deals. You can also incentivize on increases in price relative to a set base period.
Whichever method you choose, tier the incentive on carefully-considered parameters. They should aim to achieve maximum profit potential for the rep and for the company as a whole.
Note: you should also hold your pricing teams responsible for setting prices at maximum profitability. Otherwise, they’re putting your company and its margins at a disadvantage early in the game.
Empower Sales Reps to Sell on Price
Are you still forcing your sales reps to use Excel to calculate their deals? You shouldn’t be. They’re salespeople, not wizards. Let them do what they do best – sell. If you throw too much math into their processes, they’ll get frustrated and return to unprofitable methods.
In order for sales reps to really sell on price, they’ve got to understand how their pricing decisions affect your company’s bottom line. Excel can’t give them those answers. They need a pricing analytics tool that allows them to toggle a deal’s price options and make an informed (and profitable!) offer to customers.
Your sales team also needs profit waterfall analytics to separate profitable deals from unprofitable deals. Don’t forget to separate profitable customers from unprofitable customers.
How to Find the Most Profitable Sales Strategies
Sales reps must go through many iterations of trial and error when adopting new pricing incentives. Selling at a higher price isn’t easy for obvious reasons. Give them a better starting point by helping them identify their best strategies right out of the gate. You can find these insights directly within your historical sales transaction data.
Use your new profit waterfall analytics tool to separate your most profitable customers from your least profitable customers. How are they different? How are deals for each segment closed differently? Were the offerings different? If so, how?
Document your uncovered insights as lessons learned. Replicate successful tactics across the board to bring all customers to a higher level of profitability. We recommend rewarding those sales reps who share their tactics as well. Sales may be competitive, but increasing margins for your company should be a team-wide effort.
Extra Benefits of Price-Focused Sales Incentive Strategy
As sales reps emphasize price more, they feel less inclined to cater to customers chasing the lowest price possible. This leads to a customer database of more value-driven customers. And they contribute to a more profitable customer mix.
This sales incentive strategy also makes your company less dependent on a small segment of highly-profitable customers. As a result, you can increase long-term margin sustainability. If you lose one big customer, you’ll be okay, because a larger percentage of customers are highly profitable anyway.
Other Sales Incentives to Consider
Most companies shy away from highly-customized sales incentive strategy and programs. They just get too complicated and unmanageable quickly. However, sales reps are unique individuals. They have a greater chance of selling at their highest potential if they’re treated as such. Consider playing to their strengths while challenging them to work on their weaknesses.
Try, for example, rewarding sales reps on customer shelf life. The longer the length of a contract, the better off your company’s bottom line is. A long and loyal customer relationship also implies the sales rep sells on value and repeatedly delivers value to the customer. Reward this kind of behavior.
You can also incentivize sales reps to gain and retain “independent” customers. We all know what needy customers are like – they require too much attention and internal resources. They’re costly for your company in many ways, most of which aren’t obvious on paper. Consider rewarding your team members for finding and retaining customers who require little support.
Point Your Sales Reps in the Right Direction
You can emphasize how important your sales reps’ pricing decisions are until you’re blue in the face, but they’re going to need to see it to believe it. Do you have a pricing analytics solution in place that they can easily access and understand? If not, as we pointed out earlier, it’s time to implement one.
KiniMetrix goes far beyond most pricing analytics capabilities. The business analytics software empowers sales teams to isolate changes in customer and product mix. It determines the true impact of price changes on their company’s bottom line. KiniMetrix also includes profit waterfall analytics to immediately reveal the profitability of a customer, a deal, or the lifetime of a contract. See how the software can improve your sales incentive strategy and execution by viewing a video demo here.