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Paying the Sales Force for Selling Profitable Business
Research shows that in some businesses up to 40% of customers are typically unprofitable and that often only 5% to 15% of customers generate 100% of company profits (see Jonathan L.S. Byrnes, Islands of Profit in a Sea of Red Ink, Penguin Group, 2012). Sometimes forces outside of a company’s control are blamed for adversely impacting profitability. For example, the 2.3% medical device excise tax which went into effect at the beginning of 2013 (as a result of the Patient Protection and Affordable Care Act) has that industry scrambling to find ways to cover that cost and still achieve aggressive profit targets expected by Wall Street.
Increased attention to sales profitability often causes top management to look to Sales and the role it plays in contributing to profitable results. This is because the sales force often has the opportunity to sell products at a high price point even though they may believe that price is an obstacle to winning business. Research by Ignite Selling (see “Are You Still Blaming Price?” www.igniteselling.com ) reports when buyers are asked to rank their top two criteria for choosing a vendor or supplier, price was only in the top two for 15% of those buyers surveyed. The most common purchase decision criteria were: post-sale support, supplier innovation, reliability, ease of use and price (in that order!).
If your company is evaluating the opportunity to place more emphasis on profitable selling and, one solution you are considering is linking sales profitability to the sales incentive plan, then our recent WAW article, “Connecting Profitability to the Sales Incentive Plan” will provide you with guidance relative to four key questions:
- Which sales jobs are best suited to the use of profit measures?
- What types of profit measures should be adopted?
- How much incentive weight should a profit measure be given?
- What changes in selling behaviors are potentially associated with sales profitability incentives?