Do Sales Incentives necessarily Improve the Margins?

One of our clients in Pune had invited me to diagnose the problem of their poor margins. When I asked the VP-Sales he said,” We are facing this problem for the last three years, so last year we have launched an attractive incentive scheme, but still it is not producing results.”

Most of the sales managers intuitively feel that incentives lead to higher margins.  However the research carried out by Edward Deci and Richard Ryan at the University of Rochester and Adam Grant at Wharton say that the effectiveness of motivation varies with the task.  There are two types of tasks:  Algorithmic and Heuristic tasks.

  1. Algorithmic Tasks: are the routine tasks where the productivity of a person can be improved by contingency rewards also called as if…then rewards. Some examples include producing specific number of components on a lathe machine, a garment worker stitching garments etc. An incentive in terms of cash normally excites the attention of the worker. A typical example from sales perspective is : if you achieve 90% of your target, you get Rs. 25,000/- as commission, if your reach the target it is Rs. 40,000/-
  2. Heuristic Tasks: Heuristics is defined as an approach in problem solving, learning or discovery that employs a practical method not guaranteed to be optimal or perfect but sufficient for the immediate goals. Heuristic tasks are non-linear tasks which need complex, creative and contextual approach. There are no simple, right or wrong answers. Each solution that you offer has its own cost-benefit angle. Key account Managers who are dealing in project sales, or solution sales need to work on this complexity.

 

In the 20th Century, selling was fairly simple, involving less competition and a sellers’ market. Customers had no access to information. The seller’s job was to memorize the script, repeat the script verbatim, ask the customer about his requirements and close the order.  The selling process was algorithmic or routine. An incentive scheme did work fairly well then for such tasks.

However in the 21st century the scenario is changed in the following aspects:

  1. Paradigm shift from a sellers’ to a buyer’s market
  2. Thanks to internet, today’s customer is  knowledgeable about his requirement. Before the salesman makes  a call, the customer is aware of not only what the salesman offers but also the competitor’s offerings too.

Considering the above the salesperson’s role has changed dramatically from a dispenser of technical information to a problem solver, a  curator of information. Customer does not expect the salesman to tell the former about the latter’s offerings, but how the solution can help the customer either improve his profitability or control the cost.

Having been in sales training field for the last  20+ years, there is one ppt slide which I have not changed all these years which reads:

In a successful Sale, the customer talks more than the seller; however it is the seller who tends to talk more and dominate the conversation.

After the first group role play, it is observed that almost 75% of salespersons resort to excessive talking in a sales call. Sometimes salesmen talk to the extent of 80-85% of the call duration. This is the tradition, the legacy that has been carried by most of them. Some of the reasons attributed by the participants (sellers) for the excessive talking are:

  1. To connect with the customer
  2. To understand his/her pain points
  3. To close the order at the earliest etc.

But the major reason for the excessive talking is the inborn fear that if one keeps quiet then the customer may compare with the competition and put the salesman in a price trap.

The salesman as well as the manager look at selling as an algorithmic activity which is routine and numbers driven. The contingent rewards are planned in terms of incentive schemes. The result:

  1. In order to achieve the top-line targets, salesmen resort to distress selling offering huge discounts.
  2. Sometimes the payment terms are sacrificed where instead of collecting advance, the salesman agrees for a 90-day credit which quite often goes upto 120 days thus wiping out the profitability.
  3. Sellers resort to sell low-value products offering thin margins vis-à-vis high-value complex products with higher margins.

All the above approaches affect the company margins to a great extent. Would you agree that commission can do more harm than benefit in getting the desired margins? I am not against incentive schemes per se. What is crucial is they need to be used judiciously.

Rajan Parulekar | http://www.paradigm-info.com

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