Rethinking sales commissions

Rethinking sales commissions

We understand that the behaviour we reward is the one we get. It is the way we train our pets.

Many also tend to overweight commissions when we pay salespeople, rewarding a set of behaviours, some of which may not be what we want.

Years ago, we learnt that paying piece rates in a factory resulted in quality problems, and myriad ways of ‘gaming’ the system to the detriment of the overall numbers.

Why have we not applied the same lessons to sales commissions?

I will not argue that the best salespeople do not deserve to earn more than the average. The question is how much more, and how do we increase the overall productivity of the investment in sales so that there is more to share?

The answer lies in the results of the enterprise, and the way the enterprise then shares those outcomes across all stakeholders.

Collaborative teams work in factories, we have used them successfully to improve productivity and quality while reducing costs for 40 years. It makes sense to deploy similar tactics in your sales force.

Sharing customer, competitor and market information, and the best practice sales techniques amongst all salespeople, learning from each other, will lift the average without compromising the best.

Not all salespeople need to be on the same salary, but they should all have a common interest in making the enterprise successful by maximising the impact of the investment made in generating revenue.

Bonuses paid to salespeople tend to be tied to volumes, and/or profitability of the sales they make. However, all sales are not equal.

Let’s assume the strategy calls for expansion into an adjacent market. There is marketing expenditure directed towards generating awareness of the enterprise, and the value it delivers in that adjacent market, but there are established competitors whose best interest is to see you fail. In that case, you need your best salespeople on the case, but they may be reluctant if most of their income is tied to commissions on the same calculation base as the easier sales. In that case, there needs to be recognition of the greater difficulty, as well as the strategic imperative.

There is no one size fits all template that will be useful to you.

However, starting by tying remuneration of the individual to the outcomes of related work groups, strategic priorities, and enterprise outcomes is a start.

Header cartoon courtesy of Scott Adams and Dilbert.

Why ‘RevGen” is far superior to ‘Marketing’ and ‘Sales’?

Why ‘RevGen” is far superior to ‘Marketing’ and ‘Sales’?

 

In the past, for the orderly management and convenience of organisations, Sales and Marketing have been kept by management in separate functional silos.

In a time of flattened organisation structures and the ease of communication and data sharing, this no longer makes any sense at all.

The evolution of the silos to one functional area of responsibility will remove substantial opportunity for the transaction costs incurred by turf wars, miscommunication, and unaligned objectives, to be eliminated.

From a customer’s perspective, how you are organised internally is irrelevant, they are looking for the products and services that solve their problems or address their opportunities in the most cost-effective way.

The vast majority of interactions a customer will have with a supplier will be cross functional. Over the course of a transaction, they will interact with sales, technical service, after sales service, and logistics, probably sequentially.

The power in the sales relationship has moved from the seller, who had control of the information necessary for a customer to make a purchase decision, to the buyer. In past days, the sellers only delivered the information that benefitted them, but those days are almost gone. This process has been gathering speed since the mid-nineties, and now dominates every transaction beyond small scale consumer purchases like groceries, and even there, the need to be clear about the ingredients, their sources and provenance is pervasive.

Both sales and marketing silos have the same ultimate objective: to generate a sale, and preferably a relationship that leads to a continuing flow of orders. The combination of the silos into one, Revenue Generation, makes logical organisational sense in this new environment, as well as better reflecting the way customers interact.

Sources of revenue.

Isolating the sources of revenue is a crucial component in effectively managing the revenue generation function. Luckily, the sources can be summarised into three areas.

  • Customers. Which customers buy what products, in what volumes, how often?,
  • Markets. There are many ways you can dissect a market. Geographically, customer type, customer purchase model, product type, depth of competitive activity, lifecycle stage, and others.
  • Product. Product type, mix, price points, lifecycle stage, margin, potential, and others.

Together these three axes form a three dimensional matrix from which your revenue is derived. The task of the RevGen personnel is to maximise the revenue today, and into the future, while minimising or at least optimising the cost of generating that revenue.

Type of Revenue.

Considering not only the source of the revenue, but also the type is a crucial part of the equation that will lead to long term profitability. Again, there are three broad categories into which all revenue can fall.

  • Transactional. One off sales that require little else at the point of the transaction beyond a mechanism to execute the exchange of goods for money.
  • Packaged. This category is by far the biggest, as it contains all sales that come with a ‘ticket’ of some sort. That ticket may be a guarantee of service, warranty period, assurance of quality via a brand, bundled pricing, promotional support, and many others.
  • Subscription. With the emergence of the internet, subscription sales are growing rapidly at the expense of the packaged sales. This exchanges the upfront revenue of a sale for an ongoing revenue stream based on use, time, or both product and service. The emergence of the ‘cloud’ has spawned a host of new business models that use subscription as their base, but it is not new. Xerox used subscription for decades by leasing their equipment, then charging for usage on top. Similarly, Goodyear moved their sales of tyres to the airline industry from a sale to a usage model in the 80’s to sidestep the simple fact that their tyres were more expensive, but lasted longer. This encapsulated the price sensitive nature of airline purchases, with the savings over time because their tyres lasted for more landings than did the opposition.

Thought about these variations all have resulted in an exploding range of business models over the last 20 years, making the task of managing the generation of revenue way more complex, and therefore also opening opportunities for those who can think creatively about the task.

When you need some creative outside experience in this complex menagerie, give me a call.

 

 

 

Train hard to improve sales and cash

Train hard to improve sales and cash

 

Cash is the final arbiter of commercial success. You cannot live without it, too much of it and you get lazy, too little and you are wheezing, struggling to breathe, living moment to moment.

There is a lot of advice around about how to manage your cash, reduction of debtor days, management of inventory, project progress payments, pricing structures and the ret. All are valid and should be managed explicitly.

One item not often considered in the context of cash is the sales process, the pre-order or sales pipeline, time and resources consumed in that process.

The Cash Conversion Cycle is usually started at the point where there is a direct cost to filling an order, or buying materials for inventory.

It is a small leap to extend it to a point at the beginning of the sales process. That might be at the point where a lead becomes a sales qualified prospect, whatever nomenclature you use. The point at which the odds of closing the sale increase past an inflection point of some sort.

Many sales pipelines I have seen are long, torturous, ambiguous, and subject to gaming by sales people to make their ‘numbers’. The advent of CRM systems, and the logging of prospects and the expected conversion rates to generate revenue forecasts has made fools of many senior executives.

In the absence of a disciplined and regular review of the numbers, they always tend to be optimistic, until the crunch comes, then it is a nasty surprise.

Sales, like everything else in a business that is repeated, is a process that can be broken down to its component bits, systematised and optimised. While normally hidden in the fixed costs of a business, the expenses incurred in generating sales consumes working capital. Any reduction in the working capital required to run a business, increases the value and profitability of the business. Therefore, treating the sales pipeline as a process to be optimised makes both financial and strategic sense.

Ask yourself how any sporting team that is successful over a period of time does it. The personnel changes, the opposition changes, but the success stays. An exemplar is the Melbourne Storm rugby league team. Few believed they could continue their long-term success in the absence of their three superstars, Slater, Cronk, and Smith, but they defied the expectations. How? I bet coach Bellamy has a playbook that contains all their standard plays leveraging the skills of the individuals in every position, which are practised and practised over and over until they are second nature. There will also be a set of plays tailored to the weekly opposition, and the individuals they expect to meet on the field, which are run over and over in the week leading to the game, so they are also second nature. In the heat of the game, nobody has to wonder what to do next, they have practised it.

How many businesses practice their sales game? Mapping out each stage, looking for the friction points and practising how they will be addressed, workshopping the best responses to all possible objections, and ways to smoothly move to the next ‘mini-close’ in the process.

Very few.

If you were to practice and practise while optimising, do you think the sales cycle would shorten?

Clearly it would, and it would also confirm those who are likely to become a customer earlier, and probably increase the net price at which they were converted.

Together that would shorten the lead time and optimise the leverage from the resources committed, leveraging the relationship between sales and financial outcomes.

As the old saying goes, ‘More sweat in training means less blood in battle’

Is your Pricing architecture treated separately to your tactical pricing?

Is your Pricing architecture treated separately to your tactical pricing?

 

Your pricing architecture should be driven by your business model.

Your tactical pricing decisions should be driven by the immediate competitive and market pressures.

They are different, and while not mutually exclusive, are, or should be, largely separate.

Business models generally evolve slowly, so pricing architecture changes slowly with them, but the tactical needs can vary daily.

Get the two mixed up at your peril.

Years ago I was in a meeting with the MD of the business I was working for, the GM of sales, and a senior manager of one of the retail gorillas, who was trying to extract substantial trading term concessions from us. The sales personnel had been under extreme pressure for some time, but had resisted successfully. The MD was ‘summonsed’  as a last resort by the retailer. Towards what became the end of the meeting, the retailer played the ‘ego card’. He observed that he had thought the MD had the authority to make decisions, but it seemed he had been wrong. The MD, sensitive to challenges to his ego, responded that he was indeed the man who had the veto authority, and proceeded to agree with some face saving but essentially useless caveats. This changed in a moment the pricing architecture of the business for the worse.

It proved to be a profound strategic mistake.

Sales people are often given the authority to vary prices tactically, but should never be given the authority over the architecture. Not because they cannot negotiate, but because they should be kept entirely separate to maintain the integrity of the pricing architecture and the connection to strategy.

In the story related above, the Sales manager had been explicitly denied the right to offer changes to the architecture without agreement of others in the senior management group, but retained complete tactical authority. This meant that there were agreed limits and trade-offs that he, and those who reported to him could make during a negotiation. This tended to hamper potential (read ‘promised’ by the retailer) volumes, but cushioned margin and ensured similar customers were receiving the same terms, within which the sales force was able to vary tactically to leverage our position as best they could. The MD by contrast had the power over the architecture, and the concession on the architecture completely moved the tactical ‘needle’ against us.

It is very hard in a highly contested market to move prices up, and very easy to move them down. The change in architecture moved the whole field for negotiation down which substantially impacted on long term margins. In addition, it also confirmed in the retailers mind that the ‘bottom line’ for the sales force could be further moved by challenging the architecture.

That business, sadly, no longer exists.

The ‘Prisoner’s Dilemma’ of price.

The ‘Prisoner’s Dilemma’ of price.

 

In competitive markets, price is a bit like a game, typified by the ‘prisoners dilemma’ of game theory, where two players acting in their own self-interest will result in a suboptimal outcome for both.

In the classic scenario, you have two people, suspects of a crime held in separate rooms with no means to communicate.

The copper tells each of them that if they confess and testify and the other does not, you will go free.

If you do not confess and the other does, you will get the maximum sentence of 3 years.

If both confess you will both be sentenced to 2 years.

If neither confesses, there is enough evidence to have you both serve 1 year.

The result is that if the prisoners act out of self-interest, the result is worse than if they had cooperated.

When you consider this in a competitive duopoly market, to keep it simple: what happens if one party cuts its price?

The other has the choice of cutting theirs to match, which inevitably results in less profit for both if competitor two cuts their price in response. However, if the reaction of the second mover is to keep their prices up, they might sell less, but very probably make more profit. The price cutter will be relying on selling more at the lesser price to increase profit, or grabbing market share which is usually the driver, because of the added volumes.

Given most organisations have KPI’s around sales volumes, the temptation to cut prices in the face of competitive activity is almost irresistible, despite the profit impact which is often ignored.

The Fountain Tomato sauce story: I joined Cerebos back in 1981. Fountain Tomato sauce had a share in NSW of about 40% of volume and 50% of value. Fountain sold for .72 cents for the 600ml bottle, I remember the numbers well. A short time after I joined, discounter Franklins brought out No Frills tomato sauce, on shelf for .69 cents,

The sales force was in a panic, as Fountain was a big part of their sales and they insisted that we had to drop the price to match No Frills or lose huge volumes.

I did the numbers, and convinced the marketing manager, and MD to overrule the sales manager, and we put the price of Fountain up, so it was on shelf at .81 cents, and we started advertising: ‘Rich Red Fountain Tomato Sauce’

The logic was that Fountain at .72 and No Frills at .69, were very close, so the consumer found it sensible and easy to save a few cents, as after all, they must be pretty much the same if the price was so similar.

However, at a price difference of .12 cents, very substantial in percentage terms, but not particularly significant in the mix of a weekly shop, consumers figured that they had to be very different. Fountain had to be the far better product, and the advertising we did confirmed that view. More tomatoes, no filler, ‘Rich Red Fountain tomato sauce’. Our volumes did drop marginally, and our profits went up.

This outcome was not just instinct, it was based on research and experience.

‘No Frills’ margarine was the very first cheap housebrand on the Australian market. It was proposed and supplied by the business that at the time owned Meadow Lea margarine, my employer. I had done quite a bit of research after the launch of No Frills margarine to understand the consequences, and so was lucky to be in a position where I had some understanding of the dynamics that were at play, without at that time having any solid idea of the psychology that drove them.

Later, both Fountain and Meadow Lea allowed the retailers to dictate their strategies, so redirected advertising funds into price promotions, boosting the retailers margins and destroying their brands. Both Fountain and Meadow Lea are now just ‘also-rans’ in their markets, (judging by shelf presence) and neither would be anywhere near as profitable as they were in their heyday.

The lesson is that the intense pressure to reduce price as a competitive reaction is almost always a very bad choice. Resist the pressure and protect profit, without which you will be out of business.

 

 

Where is the SKAM in Marketing and Sales

Where is the SKAM in Marketing and Sales

 

In many major companies, there has been a number of new positions created in the last decade to try and accommodate the changes in the strategic and competitive environment.

Among them has been the ‘Chief Revenue Officer’ (CRO)

In some cases, this reflects the need for increased collaboration and sometimes convergence of marketing and sales. In others, it is just the fashion, the latest management fad.

This seems to be particularly the case in businesses where another of those-acronym driven fads has evolved, ABM, (Account Based Marketing)

The barriers to the integration of Marketing and Sales are high, and deeply set into the functional status quo of most organisations, and highly resistant to change. However, the emergence of digital tools has accelerated the trend, and the recent Covid challenges have been a catalyst for further and quicker evolution than would otherwise have been the case.

For years I have been advocating ‘Alignment’ of marketing and sales to the needs of specific customers, and the ways to achieve that outcome.

Removing the Marketing and Sales labels has proved to be useful to the integration. The emerging combined function recognises that the responsibility of each is simply Revenue Generation, or ‘RevGen’

The first substantial consulting assignment I had 25 years ago introduced my client, a domestically owned multinational supplier of ingredients to the food industry, to Strategic Key Account Management. (SKAM)

We went through a process of identifying the specific needs of key customers, and tailored our marketing and sales effort, to the expressed and often jointly uncovered needs of customers, with whom we engaged in the process.

Those workshops and subsequent implementation efforts are as relevant now as they were 25 years ago, probably more so. It is now just a component of Revenue Generation, a descriptor of the best way to make profits by delivering value to customers.

The core assumption of SKAM is that that only by doing one or more of the following, could we be successful.

      • Assisting our customers to increase their sales,
      • Actively reducing their costs,
      • Increasing their productivity.

We set ourselves the task of identifying how we could achieve at least one of those three things, preferably two, and focussed our efforts on delivering those outcomes.

Predictably, it was a successful initiative, customers loved the collaboration. Inventory levels reduced, as customer service levels and responsiveness increased, generating increased trading profits.

Perhaps it was too successful, as the business was then sold by its parent company, at a very high multiple to a multinational competitor.