Our pricing consultants work extensively with sales teams to execute the price change recommendations that we deliver. As a result, we see a lot of different incentive plans that are intended to reward desired behavior. More and more we are seeing a shift away from plans that reward just top line growth to plans that reward based on margin achievement. On the surface, this certainly seems to be moving in a positive direction.
However, let’s look at the basic profit equation. There are three general profit drivers. They are sales unit volume, price and cost and can be presented in an equation like this:
Profit = (Sales unit volume x Price) – Cost
In looking at this equation we ask: Which of these profit drivers do sales professionals really have control or influence over?
Sales unit volume is certainly a profit driver that sales teams are expected to manage especially in wholesale distribution and manufacturing environments. While product offerings and market conditions can impact sales volume sales professionals are expected to manage within these forces to achieve sales results.
For many wholesale distributors and manufacturing companies, the sales team has the ability to adjust prices or even set prices within a prescribed scope. So, it is clear to see that volume and price are within the influence of the sales team.
However, in most situations, cost management (other than travel expenses) is outside the scope of control or influence of the sales team. Most costs are controlled by operations and purchasing.
So, how should this impact sales team incentives? Compensation plans should be designed to reward what the sales rep can control. Focusing incentives on volume achievement and price performance achievement is a reasonable goal. In many cases, our pricing consultants will recommend an even weighted balance between volume and price. A focus on price performance will yield higher margins in the early stages than a focus on volume. There are a number of options to creating volume and price based incentives. Contact our pricing experts in wholesale distributor pricing strategies to learn more.