How to Reward Your Sales Team for Price Performance
For manufacturers and distributors driving toward margin improvement through pricing realization, the road to success passes through the sales team. The best pricing strategies, and the most robust pricing technologies will go nowhere unless the sales team is on board. Pricing execution at the sales level is key to realizing price improvement.
Three Key Criteria Must be Managed at the Sales Level:
- Build a solid pricing architecture that delivers reliable prices on every deal. Communicate your pricing strategy so that the sales team understands that the prices are optimized and will support their ability to achieve sales goals.
- Equip your sales team with value based selling techniques and tools so they can support the economic value of your offerings. Selling value negates selling on price, which is destructive to profit margins.
- Align incentives with price performance.
Many sales teams are still being rewarded based on increased sales volume. As sales representatives sell more, the reward, regardless of its calculation, increases, thereby encouraging sales volume. This approach does not support achievement of your profit goals. It ignores profit margins or price performance and encourages sales teams to discount unnecessarily and drive margins downward.
Some sales teams are rewarded based on profit margins. This is a step closer to improving price performance as pricing is a driver of profit margins. However, a review of the basic profit equation shows that cost can have a significant impact on margins:
Profit = (Sales Unit Volume x Price) – Cost
A closer look reveals that most sales teams can influence two of the three profit drivers: sales unit volume and, in many instances, price. However, most sales teams have little to no influence over costs and may coincidentally gain or lose profit margin on changing costs.
A solution to creating sales team incentives that reward better pricing is to focus a significant portion of the incentive on price performance. This means establishing product price targets and rewarding the rep for achieving or exceeding the target. The plan may also include a penalty for falling short on price performance goals. Of course, this assumes that reps have the ability to change prices through discounting or, in some cases, actually set prices.
The price performance incentive feature and the sales volume feature – the two profit drivers that the sales team can influence or control – can be combined. A 60/40 split between these ensures that both will receive proper attention by the sales team.
Sales incentives alone will not drive your sales team toward profitable pricing. But once you have achieved the ideal balance of reliable price points, strong value selling tools and a proper incentive plan, they will have the confidence, capabilities and motivation to help you move your business forward toward price and margin improvement.