Strategies are placed for organizations to build performance. With the right incentive organizations can reach new levels of their business.
By Paul Batista, Project Director, Cogent Analytics
No one ever stole an iron lamp from a hotel.
A company that manufactured goods made from iron, including lamps and nails, had established a compensation strategy for their factory workers, which consisted of paying them by the weight of the product they were making. After a few years and thousands of extremely heavy iron lamps and large and heavy nails, leadership realized that they needed to change the incentive program. It proceeded to incent the quantity of products they produced. In the case of the nails, the workers started making tiny nails that were not usable but were plentiful for incentive. They kept going back and forth on their strategy for years until they closed their doors.
What is Your Strategy?
Most organizations understand that the concept of business development involves three significant pillars: marketing, sales, and people. When developing strategic goals, the challenge is aligning them along these pillars while making sure we create metrics to measure that alignment accurately. It gives us the information needed to be able to influence change in behavior quickly.
In a typical strategic sales meeting where leadership is going through ideas to increase revenue, several strategies are usually discussed:
- Sell more products to the same customers.
- Sell the same products to new customers.
- Sell new products to existing customers.
- Sell new products to new customers.
- A mix of all or some of the above.
After a strategy is chosen, most businesses will develop a new commercial policy geared to incentivize the customers to meet the meeting’s goals. Commonly, Sales Management will convey these new policies and incentives to the sales team, set quotas, and develop a marketing plan for this initiative. These initiatives may include a discount for volume purchases, a new product line with promotional price and longer dating terms, an inventory swap initiative for more recent products, etc. What is crucial to understand is that no matter what strategy is chosen, we must consider how marketing is done and measured, how the sales team is incentivized, and what the incentives to the customer must be. There are many cases where we neglect how these three factors interact and how they must all be aligned.
Let us consider a wholesale company that sells a vast number of SKUs, in excess of 6,000, and they have about 1,500 active customers. They are actively seeking ways to increase revenue. Their current sales plan includes giving their customers discounts for the total volume of dollars and number of units purchased. They compensate and incentivize their sales force with commissions on reaching sales quotas in total dollars sold. Furthermore, their marketing focuses on how good their services are and how knowledgeable and professional is the sales team. Because of the large number of SKU’s they carry, it is brought up to the leadership team that 80% of their customers only purchase 1% of their products, which is around 50 SKU’s. This means that there is a massive potential for sales growth with their current customers and current product offering, the greater the average of product mix per customer, the greater the revenue. It is evident that for the company to increase the product mix per customer, they will have to take a different approach to what has been done in the past.
How will you Achieve Goals?
If we want to increase sales by increasing the average number of SKU’s that each customer buys, then we must incentivize that behavior, for example:
- Promote the customer to buy more product mix, for example, discounts when they purchase 50 additional different SKU’s, in increments of 50, (500-100, 101-150) and making it available for customers to buy less quantity of the same product, what is commonly known as being able to “break packs.”
- Build a marketing plan to present a value proposition to the customer with a product mix as the end goal.
- Build an incentive plan for the sales team around product mix increase by customer.
- Lastly, establish de duration for this initiative, how long will it run for, and how often are we going to review the metrics to measure progress?
Customer Incentives: As mentioned above, we build a series of discounts for purchasing different SKU’s in 50pc increments. Then we give the Customers a rating (A, B, C, D, E,…) if they fall into a product mix scale (50-100, 101-150…). Customers with an “A” rating will be the ones who purchase the greatest number of different SKUs, “B” the second greatest number, and so on until the final product mix established scale. Simultaneously, we make available for the customer to buy less than “pack” quantities, the advantage is that now they can buy less quantity of a specific product and can purchase more variety of products, hence increasing their product mix.
Presenting data specifically for this initiative is crucial to quickly know where the customer is and how he is moving up or down in the scale. The incentive must be able to be measured and readily accessible to management.
Marketing Plan: It is essential to realize that the marketing plan has two objectives, internal and external. To show the value proposition is as essential for the customer as it is to the sales team. They must be entirely on board and knowledgeable of the strategic objectives and how to introduce them to their customers. Aligning training to the goals is essential to the success of the plan. We set this example as a discount program, but the benefits will be presented far more than a discount. Strategy should revolve around the value proposition, it is not only a discount program, but it also delivers an improved cash flow for the customer; for example, by customers being able now to buy less quantity of an item, they may have less inventory with increased variety, minimizing the risk of being “stuck” with higher inventory of slow-moving items and introducing new products to the end-user, where they may achieve a higher margin or offer it at a lower price.
Sales Team Compensation: The objective is to increase revenue by increasing the product mix by customer, then the sales team must be incentivized accordingly. For example, if the customers are set to be graded on a scale to receive a specific discount depending on where they fall on the amount of product mix purchased, we can formulate that Sales Team members will receive a bonus/commission on the product mix increase for each customer and additionally when they move up on the scale. If they have customers in the E, D, C category, they will be incentivized to get them up to a B, C, and A while also receiving compensation for individual orders with increased product mix according to the scale. Presenting the Sales Team with the information on what is being tracked, how regularly, what is the progress on each goal will be an essential part in determining the success of the initiative. We will get to the metrics a bit further down.
Duration: Defining the initiative’s duration will need consideration in several aspects; time for training the Sales Team, seasonality of the business, and how aggressive leadership sets the returns. It should be noted that marketing campaigns and general sales strategies should not be set to less than six months of duration; it is essential to make sure that is there long enough to gauge market reactions and have enough data to make accurate and impactful decisions.
Let’s think about this approach for a moment. We seem to have all the pieces together of a complete plan; we set the incentives for the customers, sales teams, established a marketing guideline and defined a minimum time frame. Are they effectively aligned? How do we measure success?
Effective alignment implies that each team member, individually, across the sales and marketing teams are aware of what their tasks are and how they are connected to their goals, their department, and the company. Everyone must also understand what actions influence their goals and be aware that these actions, performance, and effort to achieve the strategic objectives are going to be reviewed and measured with a set of metrics where each member will have accountability.
To successfully choose the right metrics, we might consider perspective. This means having external data to be able to set goals that are defined by the market and by similar companies in the industry. But we might also want information from larger companies to anticipate growth as we scale. In our case, it could be a comparable company’ product mix sold by customer for example. We might want to know what the size of the product offering is, not only in gross dollars but on the specific initiative we are going to implement in the strategy. It is essential that the data is accurate and relevant to validate goals and provides context for understanding performance.
How will you Measure Performance?
Now that we have the framework, we can decide what metrics we can choose; metrics are specific and observable measures of progress, output, and achievement. In the case of our company, we are trying to make sure that we have a sustained increase level of product mix per customer, setting metrics that must be realized for the individual sales team member, for example, weekly data of the number of clients moving up or down the scale of product mix while tracking the total number of new SKU’s purchase by the customer. Management will set short-term and long-term goals and design a specific metric for this goal. As we know, it is also essential to be able for each team member to see their incentive progress; they can not only see what impact it has on the business goals but also with their own compensation. The purpose of the business must be stated, in this case, in the amount of product mix per customer increase, per the scale created, in relationship with total top-line sales. This will give the leadership the ability to see progress and reassess goals and milestones. The idea of effective alignment when we choose metrics is to be consistent across the business’s functions on how we are measuring the goals. These goals must be clearly defined and well communicated. Goals are key business objectives; they can include sales, efficiency, and productivity gains. It is important to understand that primary business goals are often linked and shared beyond department functions and should be the stimulant of a “waterfall” set of Key Performance Indicators (KPI) that extend to each team, team members and connects everyone to the goals.
It is often brought up by leadership teams that maintaining visibility into progress towards crucial goals can be a challenge; the combination of these two aspects leads to diminishing results and slow progress toward goals. In our example company, leadership had a strategic objective of improving revenue but operated with incongruent metrics that fail to measure the individual efforts toward hitting target goals and, in some cases, the wrong set of metrics, measuring an effect that had no direct impact on the business goals. This means that if we are going to increase revenue by driving more product mix to each customer, it will not be useful to measure only revenue per team member-only and revenue per customer only. We must choose the metric that has alignment with the functions, team, team members, and business. Navigating the fog of selecting the correct metrics also involves identifying what drives progress, alignment, and accountability. Often, leadership struggles to drive focus across function, teams, and individuals in complex initiatives and ongoing processes. Setting milestones will help to choose the right set of metrics; they are critical since they allow the leadership team monitor progress in terms of goals and it will also define the timeline to achieving them. Across the organization, team members can be held accountable for reaching milestones, and assign a set of metrics to track progress. Leadership team must be able to monitor these metrics and define actions and link them to milestones that support the objectives and goals.
Alignment and Accountability
Success is measurable and a simple and clear structure must be established in order to select and define metrics. Then, to drive alignment and instill accountability in every individual throughout the organization, they must all be “visibly” connected to each other in the organization connecting them to each other in the company and consequently to the strategic goals is key to an efficient strategy, unless we want to end a with a surplus of very heavy iron lamps.
Paul Batista is a Project Director at Cogent Analytics, a leading business management consulting firm based in NC consecutively ranked on the Inc. 5000 list. Paul has a global perspective on business management, specializing in finance and business development leading teams across the US and internationally to successful continuous improvement and growth.