Finding the Right Sales Incentives

Sales is an area where many companies still offer performance-based incentives – both monetary and non-monetary.

Why? It works. Multiple studies tell us that the right incentives motivate a higher performance than no incentive at all.

With sales, it is very easy to measure performance. Either you get the sale or you don’t. You know how much the sale is worth. And you can see if the value a salesperson is bringing in changes over time.

So setting incentives makes sense, if they improve performance. The company wins, the salesperson wins. Everyone is happy.

So how do you find the right incentive?

The truth is there is no one-size-fits-all incentive model. Each organization, each industry, and indeed, each salesperson is unique. What works for one won’t always work for another.

The key, as with anything else, is to test different models to find the one that works the best. Here are some possible incentive structures to get you started:

Make It a Competition

If you have a sales team that is all on equal footing, adding a competitive atmosphere can be an effective way to create incentives. Reward your highest performers relative to the rest of the group with monthly or quarterly prizes or bonuses.

  • Pros: incentivizes above average performance, gamification can make for a spirited atmosphere
  • Cons: may lead to distrust among salespeople, no incentive for mid-level performers who are not on top, poorer performances may hold a grudge, too much competition can be unhealthy

Flat Fee Commission

With a flat fee commission, each sale will lead to a financial reward. No matter how many sales a salesperson gets, they will get a financial award for each one. So the more they sell, the more they make.

  • Pros: clear and fair incentive, no competition among salespeople, incentivizes more sales
  • Cons: does not take value of sales into account, no incentive for personal growth, no limit to potential cost

Percent Based Commission

This is the same as a flat fee commission, but it solves for the problem of differing sale values. If each sale is worth a different amount of money to the company, there is no reason why the commission should be flat. A percent of each sale takes the size of the sale into account.

  • Pros: clear and fair incentive, incentivizes higher revenue, no competition among salespeople
  • Cons: no limit to potential cost, might sacrifice lower value sales to chase the higher commission

Tiered Commission

Whether flat fee or percent-based, a tiered commission structure incentivizes growth. Assign salespeople a monthly quota (or quotas) they must hit. Every sale above and beyond those quotas carries higher commission potential. They are still getting rewarded for every sale, but the higher their sales get, the more those sales are worth.

  • Pros: incentivizes growth, no competition among salespeople
  • Cons: no limit to potential cost

Mix and Match

The four models above are just a start to the possible sales incentive programs that companies can use. It’s possible to combine them, and alter them to meet your needs. For example, you might have a commission structure with a competition built in, so that everyone gets paid but the top performers get paid the most. Or you might have different incentives for each individual, based on whatever motivates them.

There are three keys to creating a sales incentive program that works:

  1. Make it clear and easy to understand
  2. Make sure it incentivizes the right behavior
  3. Make it flexible enough that you can tweak it over time to find the right balance between revenue and cost

3 Ways to Set Your Price (and Which Works Best)

There are three common ways to price a product or service.

  1. Cost Plus Pricing
  2. Competitor Minus Pricing
  3. Value Based Pricing

Cost Plus Pricing

Cost plus pricing is so named for the equation used to arrive at a final price. The person setting the price calculates how much it costs to create and sell the product, then sets the price above that number to afford an acceptable margin. For example, if it costs $10 to produce each good, and $5 in marketing costs to sell it, and you need a 10% margin to be profitable, then you will set your price at (10 + 5) x 1.1 = $16.50.

Competitor Minus Pricing

Competitor minus pricing gets its name the same way. In this model, all we care about is what the nearest competitor’s price is. We want to match it or beat it, so that we can use price as a way to attract new customers. If they are selling their product for $16.50, we want to sell ours for $15.99.

Value Based Pricing

Setting a price using value based pricing is more difficult than the two models above. But the principle is simple. Price your product based on the amount of value it provides the end user. Take into account the consumer’s alternatives, and their cost. Then figure out how your product is better or worse than those alternatives. For example, if a competitor offers a similar product for $15.99, but our product lasts twice as long as theirs, an appropriate price might be something closer to $29.99.

Which Works Best?

Pricing is not a one-size-fits-all decision. And no model is perfect. But of the three basic practices detailed above, value based pricing is best.

Why? Cost plus pricing and competitor minus pricing both have inherent flaws that value based pricing does not.

Cost plus pricing does not take into account the consumer’s alternatives. You are pricing based on your costs. But what if a competitor’s costs are lower. They will always be able to underprice you. In addition, cost plus pricing does nothing to maximize profitability. Perhaps you could sell it for more, but your formula prevents keeps you locked into a lower price.

Competitor minus pricing forces you into a low-price mentality that can be very difficult to succeed at. It forces you to cut corners and save money in ways that new entrants in a field can’t always do effectively. It keeps you from creating more value for your customers because price is what defines your offering.

When you use value based pricing you can take all factors into account and set a price that makes the most sense based on your specific offering, and the market you hope to win.

Ethical Questions for Marketers – Part 8

Welcome to the newest installment of our weekly blog series, Ethical Questions for Marketers. Each week we plan to introduce a new topic and explore it in detail, preparing marketers for the day when they face such a problem at their organization.

Last week’s topic was Deceptive Advertising.

This week’s topic: Selling with Sex

The cliché has it that “sex sells”. Any serious study of this myth has shown definitively that “sex doesn’t sell”. Instead, sex grabs your attention and makes you remember. But the sad news for marketers and advertisers using sex to sell is that all you remember is the sex, and not the brand or what they’re selling. And there is no correlation between seeing sexually-provocative ads and likelihood of purchasing the product they were selling.

But that doesn’t stop brands from using sex in their marketing. So the question here is whether or not it’s ethical.

In the United States, we live in a more prudish society than many European countries or those of Latin America, which are much more open to sexually-explicit imagery across the board. However, the US has opened up in recent decades, and remains well ahead of the openness of most Middle Eastern and Asian countries.

So as a society, we tend to be more open to brands using sex to sell to us than we used to. However, brands who engage in this type of marketing must be careful not to cross ethical lines.

For example, consumers are more alert to companies’ objectification of women or pushing trite gender stereotypes. Parents still want to protect their young children from exposure to overtly sexual imagery. And so brands would do well not to go for shock. It has the potential to backfire in ways that cause more harm than good, in the end.

Stay tuned next week for another installment of our Ethical Questions for Marketers series. If you have an ethical topic you’d like to see addressed, write us.

Zach Heller Marketing Week in Review

Are you incentivizing the right actions? Businesses are constantly looking for new ways to motivate their employees to be more productive. But often they stumble on misaligned incentives that actually don’t help anyone. Every incentive system should be continually measured against true business outcomes to determine whether or not those programs are truly helping the company in the long run.

Here are last week’s posts, in case you missed them:

  1. Ethical Questions for Marketers – Part 7
  2. Is There Such a Thing as Too Much Testing?
  3. When to Say ‘No’ to a Business Opportunity

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When to Say ‘No’ to a Business Opportunity

When you are just starting out in a new position, or just starting to grow your company, the incentive is to simply get things done. At times it can seem like you are making no progress, that no matter what you try your efforts are having little impact. That is a time when you will take any win you can get, and if someone offers you an opportunity, you will jump on it.

But what if you’re not in a situation like that? What if your business is growing? What if you have a lot of projects already, and they’re working? That’s when it becomes important to learn when to say ‘no’.

What types of business opportunities are we talking about?

  • Maybe a partner proposes a joint venture with a surefire new revenue stream
  • Maybe an agency proposes a new campaign that will put your brand in front of a whole new audience
  • Maybe your team has come up with an idea for a new version of the product you already offer

The opportunities are varied, but they share one thing – they all cost money and time to develop and manage. And while it may seem like a no-brainer to say ‘yes’ when the potential revenue from the new opportunity is staring you in the face, what we are talking about is diverting attention away from existing activities to do something new. So you must have a minimum reward threshold that you measure the opportunity against.

Each business or person will have their own minimum reward threshold, which will depend on the size of the business and current growth projections.

For example, if you are managing a brand that is bringing in $1 million in revenue per year, $100,000 opportunity looks pretty good. That’s 10% growth. But if you’re managing a brand brining in $10 million, all the sudden that same opportunity might look a little puny (1% growth).

Because most of us are already stretched thin as it is, adding new tasks for such a small opportunity might not be the best use of our time. So we need to say ‘no’.

Saying ‘no’ is hard. It can feel like you are turning down free money. But we must take on a different mindset to make the habit stick. What you are really saying when you say ‘no’ to an opportunity that does not meet your threshold is this – My business is worth more than that, so I’m going to hold out for something better.