Pricing and sales compensation: Making it work

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How do you guide your salespeople and incentivize them for the most effective pricing. “Low bid” may win the job, but cost your business its profitability and even survival.

Pricing and sales compensation are among the messiest aspects of business. “Messy” because the wrong decisions can result in horrendous or wonderful results. On the good side, you’ll achieve the right volume of high-margin sales to keep your business in good health; on the wrong side, you’ll have higher-than-justified sales costs for unprofitable low margin (or worse) loss-generating sales.

The consequences of failure have become quite apparent at a community publication where I serve as a voluntary advisor (but wasn’t brought into the discussion until late in the game.) The publication’s sales representatives negotiated deals with advertisers way below the publication’s rate card — and (to add to the problem), the publication had no system to manage and monitor overdue accounts.

Gulp. I suppose taking a sale at a below-cost price is bad enough, but not being paid for that sale would just make things even worse.

In theory, the ideal fix to this problem is a variable compensation grid — sales reps which generate high-margin sales earn higher commissions — and they are not allowed to sell below the lowest marginal price available. But this leads to complexities and risks of a different sort. If there are no controls on high margin sales, the sales rep may be tempted to take advantage of a gullible or desperate client and charge far more than would be a fair price. This may look good short-term, but ultimately will damage the business credibility. And if things get complicated, you’ll need a computerized price management system. (This approach may work well in certain situations, such as if you are a building supplies dealer with a huge inventory and clients of different classes — the high volume client who pays frequently and on time might be programmed to receive better prices than the one-off or slow paying client.)

Probably the best strategy (and one I’ve used for many years), is to set a clear price grid and rules where the grid can be “tested” by the sales representative without requesting permission or authority — and another level where the sales rep must obtain managerial authority for pricing decisions. This allows room for some negotiation if it is appropriate, but prevents giving away the store. We also modify the sales compensation for certain types of sales which add to long-term viability and sustainability, again as long as they are within the pricing grid.

This article, What Behavior Does Your Sales Compensation Plan Incentivize?, provides some additional observations on this challenging topic.

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