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When Sales isn’t Paid on Profits — You Get What You Pay For

If your sales compensation plan fails to reward building value — and then pricing to it — you’ll get exactly what you ask from your salespeople. And all the bad things that come with it —especially if you’re a sales leader.  Let’s explore the implications.

While you’re reading this, you have salespeople working hard to win business that you don’t want. A lot of that is because of your incentive plan. When your people aren’t paid to increase deal profitability, many won’t bother. Sadly, this is the sales leader’s fault.  Salespeople may not be fully coin-operated, and they certainly aren’t bad or lazy…but they’re also not stupid. A comp plan that promises that you won’t push them to work any harder for a deal than they have to, they’ll win deals the easy way: by discounting.

The Obvious Outcome: Profits

We’ve all heard that “Nothing starts until a sale is made”. Curiously, nobody brings up that “Everything ends when sales aren’t profitable”. I just painfully watched this outcome at a formerly-great company.  What a shame.

For those who have never managed a P&L, let me make it simple.  Every top-line dollar discounted off a sale drops off the bottom line as well (there is no change in any of your cost lines).  Pricing dollars are profit dollars.

Think about it another way: in a price war, the only party who wins is the lowest-cost competitor (and no, customers don’t win. Very few of them actually want the low-cost option). If that lowest-cost provider isn’t you, stop playing a game that you can’t win.   That means stop compensating discounting dysfunction.

If you don’t reward pricing to value, you’ll get exactly the profitability you’re asking for.

The Next Outcome:  Affording Differentiation.

Customers choose suppliers based on differentiation, which makes differentiation the lifeblood of business, sales…and the currency of every sales organization. It’s as simple as that.

Your company can differentiate in multiple ways:

  • Product/service fitness for use,
  • Product/service image,
  • Post-sale (I call it between-sales) service,
  • Availability/convenience,
  • Saving one or more customer costs,
  • Making the customer more competitive,
  • etc.
  • OK, and the lowest price.

Look back at that list. They all require resource investments to develop. Yes, even achieving long-term cost advantage (operational efficiency) consumes resources. Differentiation isn’t free, it’s purchased. If your profit streams don’t feed the investments that build on your differentiation, you’re hollowing out your company.

If you don’t reward pricing to differentiated value, you’ll eventually get exactly the level of differentiation you can afford.

Another Bad Outcome:  Sales’ Place at the Table

I hear sales leaders complain that they and/or their function doesn’t get the respect it deserves. As a sales leader, did you ever ask if you’re getting exactly the respect you’ve built?

Imagine people in any other department of your company, all of whom work hard to maximize profit.  Now imagine them hearing some knucklehead in sales saying “it’s the company’s job to make a profit at this price”…then then being backed by the sales leader (no, this isn’t hypothetical.  It happens.). If sales don’t work toward the same thing (profit) as everyone else in the company, why would their sales leader “get a seat at the leadership table”?

I’ve heard sales complain that it is “unfair to pay us on profitability”.  Remember: sales not only works with an unobstructed view to customer value — it’s the main job is building value in customers’ minds. Given these facts, does this “unfairness” complaint — from the one function charged with building and capturing value — earn the company’s trust? Executives’ trust?  Would an executive dare to bring anyone who claimed that “unfairness” in front of their board? Should such a sales leader be anywhere on the succession plan?

Conversely, imagine this alternate reality: Sales is the function consistently bringing new customer value insights back to the hive for commercialization: driving focused innovation, powerful differentiation, impactful marketing strategies, and confidently capturing profitable pricing that pays for it all.  Would a leader of such a sales function deserve “a seat at the table”?

If you don’t reward pricing to value, you’ll get exactly the respect you’ve earned.

Perhaps Worst of All:  You’ll Get the Customers You Deserve.

Price-sensitive customers are the least loyal.  Often they’re the most demanding, most costly, hardest to service, make your people the most miserable and stressed, and consume disproportionate resources. If your people aren’t able to — or aren’t paid to — capture value, you’ll find yourself winning the worst customers…the ones your smarter competitors are thrilled to let you win…and Barry Trailer will be right again.

If your salespeople aren’t paid to co-create value, they’ll end up co-creating apathy.

How Bad Is It, Really?

The odds are, you don’t even know how bad your problem is.

It seems that only a quarter of sales teams have any profitability component in their comp plans. And that’s only the top level of the problem.

Every company should have deep analytics that tracks pricing/discounting behavior, and very few do. The overwhelming majority of companies don’t even track how much they give away in discounts every year, much less how/where discount dollars are allocated.  Even fewer have a robust price exception/ discounting system. For instance, can you answer this for your own company: Are pricing exceptions based on objectively measured customer value, the whiniest salesperson (OK, the salesperson best able to game your system), most politically connected regional manager, or something else?

CEOs and CFOs:  Do you even track how many discount dollars you spend, and how they are distributed? Can you break down how discounting dollars (or gross margins) are distributed by salesperson, sales manager, customer, region, etc.  If not, you’re probably bleeding profit dollars without knowing it. Your cost of sales may be twice what you think it is.

If you don’t measure your pricing practices, you don’t understand them…and you don’t know how much they’re costing you.

Rewarding it vs. Doing Something About it

This article focuses on your compensation plan, but it should be apparent that comp is only one leg of a stool.  The stool topples without a solid comp plan, but also can’t stand if comp is the only issue you solve.

Other legs of the stool are more directly focused on how to sell value – the behaviors getting rewarded under the right comp plan.  Chief among these are training and ongoing coaching: enablement, in the current vernacular.

Once your sales team wants to consistently build, measure – and capture — customer value, a lot of powerful outcomes materialize.

  • More sales at more profitable prices, which funds even more differentiation.
  • Sales opportunity reviews that discuss customer value display selling expertise, which drives the credibility of the sales organization.
  • Clear & objective measurement of customer value can drive objective, precise pricing and discounting decisions. Your whole company can objectively see why a given discount was needed.
  • More accurate forecasts, which of course drives credibility of the sales organization

Want to talk about anything in this article?  Post it below, or if you want to have a deeper dialogue, contact me. As always, please like and/or share it with your networks.

To Your Success!