Dr Peter ColmanDr. Peter Colman, senior director, Simon-Kucher & Partners
Discipline 2: Assure Competence
Creating pricing rules and processes is valuable in limiting harmful conscious or subconscious behaviours by the sales force. However, even with these in place, a wide variance of pricing ability will usually still be observed ‘in the field’. This variance, caused by the inherent value selling abilities of the individual sales person, is too often left to chance. It is surprisingly common to find sales teams who have never had any value selling training. That is not to say they have not had training at all, but this has usually been product/technical in nature rather than commercial.
For example, interviews at a recent client revealed that entire sales teams, many of whom were responsible for negotiating seven figure deals, had never received any training in value selling. At another client, randomly surveying a sample of their sales force found a worrying number of individuals making errors when asked to calculate basic discounts and margins. Even in cases where commercial training is in place, these often fail to cover the fundamentals of pricing and are at such a generic level that the teams have not been able to apply the lessons within their day jobs.
To solve this issue, we typically use an approach of “learn from the best, apply to the rest”. This approach identifies the leading profit performers within the sales team for interviewing and workshops. Their techniques and behaviours, coupled with our best practices identified during similar exercises at other leading industrial companies are used to create training modules. The result is a bespoke, company-specific value selling training course, comprising theory, practical application, knowledge sharing and interactive exercises. The profit performers take on the role of championing the course, which helps overcome resistance to change, as the course is rolled out through the organisation.
As an example, the following training course was designed to ensure the answer was ‘yes’ to the following questions:
* Does your sales team understand exactly what impact a price reduction or non-price concession has on the overall profitability of the deal?
Is your sales team aware of the competitors you are facing in each geographic / product sector? What are their competitor selling stories?
* Does your sales team understand which factors drive your customers purchase decisions and how these factors vary by customer segment?
* Does your sales team understand what your true U.S.Ps are per customer segment?
* Does your sales team base their value argumentation around your customer segment U.S.Ps? Do they quantify the value in financial terms?
* Does your sales team understand your competitive positioning across your product portfolio?
* Does your sales team adequately prepare for negotiations and tailor their approach to the person / team in front of them?
* Does your sales team know when common techniques are being used on them and how to counteract them?
Discipline 3: Reward Performance
As discussed, it is the role of senior management to set up policies to steer the behaviour of the sales team and ensure they have the value selling competencies to achieve the best possible price. However, it must also be in the interest of the sales force to achieve the best price. Even with all of the policies and training in place, a poorly designed incentive scheme can have a detrimental affect on your company’s profitability.
Sales incentive schemes have clear advantages over paying sales teams fixed salaries:
* Sales employees are more easily steered: individual and company goals can be aligned and the employees behaviour guided efficiently
* Positive impact on sales employees’ motivation: Incentives increase sales motivation and performance
* Increased flexibility of personnel costs - in good times the incentives can be paid, in bad times the personnel pressure decreases.
The goals of the incentive scheme should be aligned with the company’s overall strategy. Companies often get this wrong. In the recent SKP global industrials pricing study, two thirds of executive managers claimed that their pricing strategy was margin driven. However, only 15% of sales people surveyed in a 2010 report responded that margin was the most important contributing factor in their incentive scheme.
The first step to design (or re-design) a sales incentive scheme is to decide on the objectives. The most common objectives are:
* Volume oriented objectives such as sales volume, sales volume growth, revenue growth, or market share growth
* Profitability oriented objectives such as contribution margin, EBITDA or price performance
Customer oriented objectives such as, penetration of a specific customer segment
In practice, incentive schemes reward a variety of performance criteria. More and more companies are creating multidimensional incentive systems. Sales revenue is still by far the dominating reference figure for reward systems. However, the consideration of price / margin performance is gaining in importance which is highly recommended.
Incentives must be significant to actually steer and change the sales force behaviour. It must be worthwhile for the sales person to fight for better prices on an individual deal. As a basic principle when implementing a sales incentive scheme, it can be shown that the variable component should be significant with a minimum expectation of around 20%. The sales incentive scheme can be capped at some stage, but this should be significantly higher than could realistically be expected. Additionally, a minimum level below which no bonus is paid if the minimum performance is not achieved must also be in place.
Another important element to consider is the frequency of the variable payments. Certain companies have, in the past, extolled the virtues of quarterly payments. Although it can be shown that prompt payments increase the adherence to the objectives, this can also involve a significant amount of overhead to manage. Annual payments provide limited financial risk for the company, and they limit the risk of short term oriented behaviour. For these reasons, annual variable payments are usually recommended, with quarterly/half-yearly evaluations of performance.
A final aspect to consider when implementing and especially when modifying sales incentive schemes is the internal communication. When modifying the incentive system, we recommend running the previous year’s financial data through the new incentive scheme to ensure what is suggested is indeed sensible and also to show the sales force examples of the effect of these changes on their income.
As a final note, be careful what you leave out of your incentive scheme. If you choose to incentivize on invoiced revenue, do not be surprised if you see the quantity of your off-invoice concessions rise rapidly!
* Steps required to achieve price execution excellence
* Attain transparency on pocket prices at a transactional level
* Develop pricing processes and customer specific pricing policies to steer your sales team’s behaviour
* Design your escalation scheme so that you don’t fall in to the 5% discount trap
* Learn from your best sales people, capture their techniques and roll out across your sales team
* Align your sales incentive scheme with corporate goals, measure and then reward desirable behaviour
Concluding Remarks …
Price is the most effective profit lever. The SKP global pricing study demonstrates that companies with high pricing power achieve higher profits and outperform their competitors. Companies with low pricing power annually forgo 30% of their profits.
Poor pricing performance is not a question of fate. So do not simply blame competitors and customers. Competing companies selling ‘commoditized’ products have vastly different levels of pricing power.
Achieving excellence in pricing execution is not a quick fix. It is a journey. Aim for continuous improvement.