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Some Observations on Sales Compensation Plans

16 November 2010, 6:49 pm

I apologize for not having posted to this blog for a while.  In March, I agreed to lead the turn around of a business in the coin handling (high-speed sorting, counting, dispensing) industry.  Much of my time has been devoted to that endeavor.

Last weekend though, Norm Eagle – Director of Sales for Meta Health Technology, sent me an email summarizing multiple comments he’d collected on developing sales compensation plans.  As part of his evaluation of the sales compensation plan for his own team, Norm solicited input from a group of high-level sales executives via the Marketing Executives Networking Group (MENG).  MENG members are senior sales and marketing executives with business-to-business (B2B) and business-to-consumer (B2C) companies, both large and small.  MENG members lead sales and marketing organizations across the United States and around the world.  As you might expect from such an experienced group, the responses Norm received were full of valuable insights.

I share with you a slightly edited version of Norm’s summary below.  If after reading this post, you would like to contact Norm directly, please let me know and I will put you in touch with him.

********************************************************************************************************

FROM:        Norm Eagle
SUBJECT:   Summary Sales Plans and Incentives

Thanks again, lots of good advice and suggestions.  Here is a summary of all the information I received.

Everyone agreed that what is most important is that a Company knows where it stands in the marketplace as well as knowing what it wants to accomplish.

 Where does a company stand as to Market Share, Recognition, and Revenue, etc.?

  • Market leader
  • Startup
  • Middle of the pack

 Being honest about these answers allows you to better accomplish what you want to get done.

  • Increase market share
  • Grow revenue
  • ROI
  • Sell the company
  • Add new customers
  • Up sell to existing base

Certainly combinations of the above are the norm.  If a company is really looking to be sold, then their needs are going to differ greatly from the company that is staying in business.  If you are looking to sell the company, then driving revenue is of paramount importance and profit is usually less important.  Again there is lots of room for interpretation here.

Answers to the above questions will help you build sales plans and provide incentives for the salespeople. 

The advice and suggestions I received include driving revenue from new sales as well as from the current base of customers.  Most agreed selling to new customers was harder, took longer and was more costly.  Given the greater difficulty, the feeling was to pay a higher commission rate for those sales.  Sales managers justify lower commission rates for sales to existing customers because it is an easier sale.  Since you know the players, the sales process and, given you are doing well with other products in the account, up-selling will hopefully take less time and be less costly. 

There was some disagreement here and some felt you should pay the same commission on new sales and sales to existing customers.  Here, the justification is that the sale to the old customer is easier and could generate revenue for the company more quickly.  As a result, the sale is less costly so why not pay the higher commission rate.  I’ll leave that to others to decide which way to go.

There were a number of suggestions on sales plans and incentives for salespeople and they included:

  • Setup a “quick start” incentive – some extra payment or extra percent of commission for the first sale of the year or maybe the most sales by number or revenue for the quarter.  Anything to promote some fast deals.
  • Backload the sales plan to include retroactive money once quota is achieved.  On a million dollar quota, once your sales rep hits the million, pay a 1 percent retroactive kicker.  The kicker is now worth $10,000 for hitting quota.  This could vary based on quota.
  • Also set up more retroactive money for 150% and 200% of quota.
  • Some people suggested accomplishing the same thing by raising commission rates when you get over quota.  Pay 7% for all sales over quota instead of the 6%.  Raise the payout number again when your reps reach 150% or 200% of quota.  I use 6% as the starting number but that will vary by company and products and size of the deal.
  • Some suggestions for mid-year contests etc., special prizes for a weekend away for biggest deal of the quarter, gift cards and so on. 

The other topic discussed was what you pay on Term-Use deals versus Perpetual-Use deals.  I received a lot more suggestions on this one.  Perpetual Use was pretty easy as commission was figured on the value of the contract because it was all paid up front.  Here are the suggestions on commission of Term Use Deals:  

  • Pay full commission of the full value of the 5 year deal (I am using 5 years but it could be different depending on the deals your company does)
  • Pay full commission on the first three years and then a lesser commission on the remaining two years.  The reasoning here is that if the customer tries to back out of year 4 or 5 and doesn’t pay, you don’t lose as much money on paid commissions.   I have not seen this happen very often and in my experience it is very rare unless there are some problems with the product or service.
  • I have also seen dividing the 5 years into 60 monthly payments and then multiplying the monthly payment by 50 and paying full commission on that amount.  Taking out the 10 payments and not paying commission on that amount is charged to cost of money and waiting for 5 years to get all the money due.
  • Another suggestion was to pay some lesser percent on the full 5 year deal (maybe 4.5 out of 6) and then on the fourth year of payment the salesperson gets 1.5% retroactive payment of the original 5 year deal.  This would only go to the original salesperson so this might be a way to keep salespeople around longer and build long term loyalty.

Some additional points everyone seemed to agree on:

  • Keep your sales plan simple and understandable
  • Sales plan should match up with the goals of the company
  • Sales plans drive the desired behavior while rewarding sales reps for results
  • If the sales plan is set up right, salespeople make a lot of money and the company does extremely well.

I believe that is all of it and if I missed anything my apologies.  Thanks again to all that contributed.

Norman Eagle

Filed under Sales, Sales Compensation Plans.
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Inside Sales and Outside Sales – Working Together

18 March 2010, 10:02 am

When you employ both an inside sales team and an outside sales team, how do you divide your sales responsibilities?

Without a clear definition of responsibilities, inside and outside sales reps can battle with each other instead of with the competition.  If they battle over territories, customers and job roles, your customer gets caught in the middle. 

You can assign responsibilities for your reps in a number of ways.  I’ve successfully used these four divisions of responsibilities.  I have applied them individually and in combination.  You’ll need to evaluate your business and customers to decide what works best for you.

Inside Sales Outside Sales
Prospecting Account Management
Small Accounts Large Accounts
Dormant Accounts Active Accounts
Small Transactions Large Transactions

 

Prospecting vs. Account Management

Prospecting involves lead identification, lead follow up and lead qualification.  It’s vital to maintaining your company’s health and growth. Prospecting activities often involve high-volume calling with a low success rate.  Because of the low success rate, it generally does not make financial sense to prospect in the field.  The return on investment in time and travel is not justified.

Prospecting activities are ideally suited for inside sales reps.  Since your inside sales reps prospect their territories via the internet and telephone, they do not incur the extensive travel expenses that outside sales reps incur.  More importantly, your inside sales reps can contact many more prospects and follow up on many more leads because they don’t spend time traveling from one prospect to the next like outside sales reps do.

Account management focuses on developing professional relationships which become the basis for expanding sales, cross selling and developing new opportunities in different parts of your customers’ organizations.

Outside sales reps are very effective at developing deep account relationships through personal interactions.  During customer visits, they are able to develop relationships throughout an organization.  This often results in their uncovering unknown opportunities and expanding sales.  You can justify the higher cost of outside sales by applying the value of existing customers, the larger transaction sizes, and the higher likelihood of closing sales to your overall sales model.

Small Accounts vs. Large Accounts

Smaller accounts generate less absolute margin for your business.  Their order sizes are generally smaller and they order less frequently.  However, they are still valuable to your company.  I use inside sales teams very effectively to manage smaller accounts.  Your inside sales reps can manage a large number of small accounts and still drive a significant level of revenue and margin.

Each of your large accounts may be key to the success of your business.  Their higher revenue potential and profit value demand a high level of attention from your team.  Outside sales reps deliver the customer service and attention necessary to both develop the account and reduce the risk of losing a valuable customer.

Dormant Accounts vs. Active Accounts

Dormant accounts are accounts that have not placed an order with your company in over one or two years, depending on the length of your sales cycle.  Accounts may have become dormant for a number of reasons:  lack of need for your product, changing business conditions and economic conditions, or inroads by your competition.  Given that now dormant accounts were once active accounts, you likely have existing relationships with these accounts.  A good way to maintain or rekindle those relationships is to have your inside sales team call on your dormant accounts in an attempt to uncover latent opportunities and provide a level of customer service.

Active accounts require more direct contact.  They are more valuable to your company than dormant accounts.  If your active accounts are sufficiently large enough and important enough to your company, consider assigning outside sales reps to call on these accounts.

Small Transactions vs. Large Transactions

Finally, I’ve successfully managed territories by assigning sales responsibility based on transaction size.  I assign smaller transactions (i.e., transactions under $10K) to my inside sales representatives and larger transactions, which tend to be more complex, to outside sales representatives.  This enables the inside sales teams to focus on frequent “quick hits.”  The outside sales reps spend the time needed to close larger, complex deals.

Whichever way you choose to define responsibilities between your inside and outside sales teams, make sure you communicate them clearly and leverage the strengths of each channel to drive revenue efficiently.

Next, we’ll look at sharing commissions and handing off accounts from inside sales to outside sales or vice versa.

For more information, contact Wallace Management Group at (203) 834-0143 or email David Wallace.

© 2010, David P. Wallace

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Filed under Building a Sales Team, Inside Sales, Sales.
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Inside Sales vs. Outside Sales

11 February 2010, 6:37 pm

Business owners and sales managers frequently debate about whether to invest in an inside sales force, an outside sale force, or some combination of the two.  With inside sales, your sales reps visit with customers and prospects via the telephone, email, and internet.  They do not leave the inside of your office, hence the name.  Outside sales is where your sales representatives visit with customers and prospects at their business locations, outside of your office.

Generally, budget drives the inside vs. outside sales force decision.  Since inside sales reps incur no travel and entertainment expenses, companies with small or limited sales budgets often start with an inside sales force.  They view this as a practical trade-off.  However, there are variables to consider which may dictate that an outside sales team is a better investment for your business.

Consider the variables in this table to determine whether your company is better off with an inside sales team, an outside sales team, or a combination of the two.  A combination of inside and outside sales is generally preferred when you have a mix of variables that sometimes lean towards inside sales and sometimes towards outside sales.  We’ll discuss more of that later.

Inside Sales Outside Sales
Product or Service Cost Low High
Customer’s Perception of Product Value Low – Medium Medium – High
Product Complexity Low Medium – High
Transaction Size Small Medium – Large
Product Margin Small Large
Target Geography Wide (long distances) Narrow (close by)

Product or Service Cost

If your product cost is low relative to your customers’ budget, or if your product is a commodity, then an inside sales team may be a very effective channel to sell to your customers.  However, if your product has a high price tag, customers may want the reassurance of face-to-face contact with your company.  In these situations, outside sales may not only be preferred, but necessary.

Customer’s Perception of Product Value

Even when your product cost is low, if the customer’s perception of the product’s risk or value is high, you may be better off employing an outside sales team.   Shear bolts used in turbines are a good example.  The bolts themselves cost only a few dollars apiece.  However, if they fail to perform to specification, they may ultimately cost your customer hundreds of thousands of dollars in downtime and repairs.  The risk/cost ratio is high.  In cases like this, you’re much better off developing a personal, face-to-face relationship with your customer.

Product Complexity

Complex products or new applications for products can be intimidating to customers and prospects.  These situations often require the careful direction and reassurance that an outside sales representative delivers.  Inside sales reps can handle more complicated sales, especially using video demonstrations that are available via the Internet.  However, inside sales calls generally take longer to close than face-to-face sales calls.

Transaction Size

Inside sales teams can be very effective in identifying, qualifying, and closing relatively small transactions – from a few dollars to a few thousand dollars in size.  Dell Computer demonstrated this very clearly in the personal computer market.  However, when transactions are larger in size, whether by dollar amount or number of units that add up to a large dollar amount, customers prefer the relationships and commitment provided by outside sales representatives.

Product Margin

When your product generates a large profit margin for your company, you want to eliminate as many obstacles as possible to making the sale.  In these situations, face-to-face contact and personal relationships can go a long way to closing the sale efficiently.

Target Geography

If your company serves a large geographical area, involving an entire continent, multiple time zones or the world, you may find it necessary to employ an inside sales force.  Sometimes it is not logistically feasible to cover your target market with outside sales representatives.  Inside sales representatives can cover extensive geographies, time zones and cultures from one central location.

Combination Approach

If you need to have outside sales representatives covering a wide geography, consider supplementing them with an inside sales team.  The inside sales reps can generate leads, qualify opportunities and nurture leads.  This allows the outside sales reps to focus on key opportunities and imminent deals.  After deals are closed by the outside sales team, inside sales reps can maintain customer contact to ensure that your operations team quickly identifies and resolves customer satisfaction issues.

Inside sales teams and outside sales teams each have their own niche in which they work well.  However, try not to view the decision as “either/or.”  As your business grows, you will find that a combination of inside and outside sales teams can work well together, complement each other and allow your business to grow faster.

In my experience, I have used inside sales reps to close deals with short sales cycles. These transactions typically involve low cost, commodity-like products.  I complemented my inside sales team with outside reps that develop key account relationships.  I also used inside sales teams to develop opportunities early in the sales cycle with a hand-off to an outside sales rep. During the key decision-making period, when the customer needs personal contact and during the proposal development period, my outside sales teams were closely involved with the sale.  After the sale and product/service delivery, the inside sale rep followed up with the customer.

When you have multiple sales reps working together on the same transactions, make sure you clearly define each rep’s role and how each rep will be compensated for his or her contribution. This helps ensure cooperation across your sales team.

For more information, contact Wallace Management Group at (203) 834-0143 or email David Wallace.

© 2010, David P. Wallace

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Filed under Building a Sales Team, Sales.
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Managing Your Sales Force

3 February 2010, 9:18 am

Five key elements help you manage effective sales teams and grow a successful business:

  • Well-defined plans
  • Clear communications
  • Processes and tools
  • Performance metrics
  • Flexibility and adaptation

Well-Defined Plans

Well-defined, precise plans are roadmaps to success.  They present your goals and strategies for how you will achieve those goals.  Success follows when you develop specific plans for each part of your business:

  • Overall business – business plan
  • Functional areas – marketing plans, product plans, human resource plan, financial plan, etc.
  • Sales – territory plans, customer plans
  • Individuals – personal performance plans.

By documenting your goals and the strategies for achieving those goals, you’re in a better position to reach your goals.  This holds true at all levels within your business.  Without a plan in place, you are less likely to focus on your target and on what you need to do to succeed.  As Lewis Carroll wrote, “If you don’t know where you are going, any road will get you there.”

Clear Communications

It’s important to involve your team.  Once the plan is developed, successful execution depends on communicating it and getting “buy in” from the team that will implement it.  Clearly define your goals for your sales teams, management team and across the organization.  Deliver progress reports and communicate results of short-term and long-term actions. Clear communication establishes your expectations for every person in the company.  If every employee knows their role, they will work to perform it.

Early in my career, I limited access to business plans, goals and progress reports to a small number of key managers and executives.  I was concerned that my business plans were proprietary.  If too many people knew of them, I would be at a competitive disadvantage.  Similarly, I was reluctant to share financial information – information about how we were doing as a business, information about product lines that were losing money, information about lines that were very successful.  I didn’t want my team to be distracted by bad news or become complacent with success.  This approach doesn’t work.

This information must be made available to the employees who drive your success.  You need to trust your team to think and make decisions based on clear goals and plans.  You will experience greater success when you provide employees with the information that helps them measure progress toward their goals.

Processes and Tools

Efficient sales processes and sales enablement tools can yield highly targeted sales efforts and broad sales effectiveness.

Sales processes are the systems you put in place to collect data, share information, and provide customer-related decision-making tools for your organization.  They facilitate customer relationship management, gathering key account information, and making field sales forecasts. Successful sales processes are designed with two principles in mind.  First, design them to work seamlessly with your sales reps’ existing processes.  This reduces disruptions to their work habits and will make them more likely to use the new processes.  Second, design processes to deliver useful and valuable resources back to your sales reps.  Your processes need to save reps time and provide them with valuable customer or market information.  When reps perceive your processes as having value, they are more likely to use them.

Sales enablement tools also affect your sales team’s performance.  Provide your sales reps with tools that will improve their efficiency. These include:  technology (wireless communications for voice, email, Internet access; laptop computers with current software tools), presentations, collateral (both hard copy and electronic), proposal templates, contract agreements, pricing tools, and configurators. If these tools make the sales rep’s job easier, they will sell more effectively to their customers.

Performance Metrics

Performance measurements are a key element for motivating your team.  Plans, communications, processes and tools give your team direction, tell them how they can reach their goals, and give them the tools they need to execute.  But it’s the performance metrics that show your team that you hold them accountable for their success and failure.

Like a GPS in your car, performance metrics provide you and your sales reps with feedback telling them whether they are on track to reach their goals.  The more granular your metrics, the more closely you can help your team steer a path to success.  At a high level, important metrics include:  revenue, expenses vs. budget, and deals won or lost.  At the sales rep level, you can measure:  sales calls made, proposals delivered, new customers landed, and revenue by product, by customer or by geography.  At another level, you can measure:  the effectiveness of individual web pages, number of dials per day made by inside sales reps, or inbound calls generated per dollar of advertising spent.

Your key to success is measuring the specific activities that drive desired performance, balanced by the cost of measurement.  Measurements should cost little to gather, but provide valuable information on your team’s performance.

Flexibility and Adaptation

Finally, you need to be flexible and adapt your goals, plans, strategies and tactics to take advantage of changing market conditions.  Your plans should be dynamic documents, open to change.  The economy may grow faster or slower than you forecast.  New markets may open for your products.  Your customers or sales team may identify new applications for your products.  In situations like these, you must adjust your goals, adapt your plans, and demonstrate flexibility to move with your market.  Sticking with a plan, simply because it’s “your” plan, can have disastrous results for your business.

For more information, contact Wallace Management Group at (203) 834-0143 or email David Wallace.

© 2010, David P. Wallace

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Filed under Building a Sales Team, Sales.
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Sales Compensation Plan – Real-Life Example, Part 2

28 January 2010, 8:00 am

In our last post, we read about the negotiations a new business sales rep was having with her employer.  Here is the conclusion.

Reader [and Top Line Response]:

Firstly, I greatly appreciate your taking the time to get back to me, and share your insight.

I managed to address the following, so far, final agreement signed and terms are still pending.

- Percentage of commission on repeat business for up to 1 year. Previous contract did not have this (my mistake), and first round of negotiation they recommended 6 months only. i pushed for 2 years, but alas, no. [Top Line:] Good catch on the repeat business.  One year is not bad, but it will focus you on new accounts.  After that first year, your relationships should be fully transferred to account managers or partners in the firm.  It will not benefit you to continue working those relationships.  Also, at what point does an account become inactive and, therefore, eligible for you to prospect them again?

- Employer to honor the full 1.5% commission for 2009, for which I brought new clients and initial projects with 1.7 million revenue 2009. I brought over $3 million in opportunities, but we did not win them all. Ultimately I will be compensated 4% on that revenue, or 115K 2009 year. As I shared, they are trying to say now that I “did not do my job to warrant the full 1.5%” for which I highlighted that no one shared that with me at any point in 2009. They also tried to limit commission to 0.5% for a very desirable client I brought in, claiming that this client knew of our agency. It’s true one individual there had met with our Partner, over 2 years ago, but no opportunity came of it. when I started, I began building the relationship, i log all my correspondences, who I spook with and when, and presented that during a recent negotiation, for which I feel they will agree that I am solely responsible for bringing that opportunity, so that’s good. [Top Line:] Partners should live up to their agreements.  Any changes should be in writing and on a going forward basis, not retroactive.  Also, are they paying you on effort or results? If you are paid on results (i.e., how much revenue you bring in), then it shouldn’t matter how much effort it takes.  If they want to pay on effort, then the commissionable events should be clearly defined.

- Commissions paid quarterly agreed, previous contract was annually. [Top Line:] This is much better.  It keeps them from having too much buyer’s remorse when it comes time to pay you.  Also, with a small company, you don’t want to carry the risk that they won’t have the cash to pay you at the end of the year.

- When I was first hired, I requests 90K base and 3% commission, this was agreed and then partner came back with 1.5%, sharing that there would be no way that I could single handedly close new business. It’s true, there is always a team involved in the process, so there really isn’t the opportunity for me to handle the close, even if I wanted to. Partners do all negotiating. Unfortunately, in my agreement, it states that I get commission on clients i close, clearly this should have never been written there, and now it has come back to justify there reluctance in paying me. i highlighted the fact that we went from 3% to 1.5% specifically because I would not be expected to close, and they still came back with, going forward 1% commission. Adding that they seem to feel that I don’t do anything of greater value than their PR person?? I beg to differ. I see more value in being able to hand select clients according to our companies growth, build a relationship out of nothing, thus bringing in the best client they’ve had – at the start of a 5 year engagement for revamping their entire online business. Our company stands to make +5 million in revenue in 2010 alone., as we already have 3 SOW prepared for subsequent work. When I brought this client in 2009, the original SOW was $2.5 million, and our partner offered a discount to $1.4 million, so that directly affects my commission. Furthermore, our new clients comment time and time again, that while they get numerous “cold calls” daily, mine have been truly effective, mutually beneficial, and the only one they consider receiving. [Top Line:] You may want to stay engaged in the sales and negotiation process (even if only peripherally) to ensure the partners are not undoing the work you’ve already done.  It should also demonstrate to the partners that you do more than simply pick low-hanging fruit.

- There’s been talk by our operations manager, about the possibility of my employer paying me for all new introductions & meeting, thus, even if no opportunity comes from it, I get paid regardless. And this would replace all commissions. I’m a little suspect of this, but willing to see what they come back with. 2009, I arranged 21 new client meetings with stellar clients, from those we pitched 6 opportunities and won 2. From those 2, we have long term relationship potential. [Top Line:] This is not a bad idea.  However, they will need to clearly define the commissionable events and agree upon how much commission the event is worth.  I would consider this as an addition to your revenue commission or a partial replacement.  If you are paid only for the meetings, you will have no incentive to qualify the customers or seek larger deals.

I wish there were some way of knowing definitively, the value of what I do is for the company. Given the recent events, I feel slighted and not sure I can trust my employer, that he’s shown himself to “backpedal” and he has for the first time belittled me during our negotiation meetings, when all last year, he would say enthusiastically, “we’ll take care of you” and “your doing a great job!” I’ve thought about approaching the other partner, who runs the creative team, so not my direct supervisor and most likely completely unaware of my agreement. He seems to really value what I do. Somehow, I think this individual would be more generous and immediately accommodate to what I feel is fair. Again, I’m not asking for something that is excessive. [Top Line:] Unfortunately, I think your boss views negotiations as win-lose situations – if one party “wins” the other must “lose.”  This is bringing out his crudest personality traits because he sees himself as in a fight and does not want to lose.  You will need to move him to a win-win perspective.  This can be tough to do with some people.

- I don’t know what range the margins are in, and will try to find out. [Top Line:] It might be difficult.  Partners in small, private companies sometimes don’t like to share this information.  It’s a little like asking your boss, “So, how much do you make?”  You’ll need to finesse the issue and come at it from a pure business perspective.

- In terms of my role, currently, I a) open doors for our company to have introductory meetings with potential new clients b) build relationships with new clients to the point that they hand me an RFP, at which point, our partner and new business director come on board for an intro meeting, a proposal then get crafted by our new business associate, sometimes we have our business strategist involved, a team of leads then meet to pitch the project to the client, our partner negotiates and closes. [Top Line:] Keep stressing that sales are a team effort and you are a key member of the team.  Without you bringing in new prospects and customers, the rest of the team would have a lot less to do.  You also free up the partners to focus on what they do best.  I’d bet their strengths are not cold calling and prospecting.

- I highlighted that at 90K base plus 1% commission, as I bring more revenue yearly, my overall compensation percentage decreases… e.g. 3 mill/year I would obtain 4% overall or 120K/year, if I bring 5 mill/year I would obtain 2.8% overall or 140K/year. This structure doesn’t incentivize. Sadly, my employer won’t consider incentives. [Top Line:] You might consider proposing a quota system.  Set your quota at a level that the partners and you agree is reasonable, but a level that the company would not achieve without your involvement.  It may be set so that it’s a bit of a stretch for you.  Then set the commission up to quota to be 1.0% of revenue. Commission rates for achievement above quota should then be set at 50% (or 100%) above the base commission rate.  Then it becomes a win-win for everyone.  Quotas can be paid annually or quarterly.  Quarterly quotas keep you focused every quarter and allow you to have kickers throughout the year.  However, it limits your ability to have one or two deals carry you for the entire year.

Anyway, thank you again. I have had a hard time finding clear info around this topic, and really do appreciate your recommendations.

If you have any thoughts on this situation, send me a note, or add a comment below.

For more information, contact Wallace Management Group at (203) 834-0143 or email David Wallace.

© 2010, David P. Wallace

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Filed under Sales, Sales Compensation Plans.
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Sales Compensation – Real Life Example

25 January 2010, 8:00 am

Last week I had an email exchange with one of my readers.  This sales rep was in the process of negotiating (and re-negotiating) the sales compensation package.  I thought you might be interested in the exchange.

Reader:

I came across your Blog about Sales, and would love to get some advice.

Over the last year, I have brought stellar new clients to the interactive firm I work for, I’ve built strong relationships with key individuals within organizations, thus when RFPs and new projects come about, they come to us, or perhaps us and one other firm.

At the time of RFP being issued, the interactive firm partner and new business team take over, so my role is really bringing the new opportunity.

I have brought [Large Beverage Company],[Major Retailer], [Luxury Goods Company], [Regional Airline], [Domestic Airline], [Toy Manufacturer], to name a few, for which we have signed projects for 1.7 mill in revenue, with subsequent engagements currently in the pipeline at over +3 mill in revenue.

I would love to get a sense of what would be a fair compensation for what I do based on revenue. Should you have any insight, it would be greatly appreciated.

Top Line:

I’m glad you found my blog.

The role of new business rep is unique.  You have the toughest sales job of all.  Your calls are cold or, at best, lukewarm.  It sounds like you turn over leads once they’ve been qualified to the point of RFP.  Someone else does the closing.

For your compensation, I would look at a number of things.

  • What is the close rate on the RFPs you bring in?  The higher the close rate, obviously the more you’ve qualified the opportunities you work on.  This should result in higher compensation to you since the company does not need to expend resource at the back end responding to proposals you will not win.
  • Are you paid for bringing in RFPs or for proposals that your company wins?  It sounds like you share in the risk that the firm partner and new business team may not be able to close a deal that you have already won.
  • Are you paid on revenue generated, gross margin or projected margin on the opportunity?  I revenue, I would expect you to be paid a lower percentage than margin.  If you are paid on margin, does the company share with you what the expenses are on each transaction.  If you are paid on margin, you should know this information.
  • Are you paid on the initial business only?  Or, are you paid on follow-on business?   Typically, commissions on the initial business are higher and commissions on follow-on business are a lower percentage.
  • If you are paid on follow-on business, is there a time limit for which follow-on business counts?  Some companies will continue to pay you for all follow-on business.  Others will limit you for business closed within one or two years of the first transaction.  After that, the account management team receives the commissions.
  • What is the gross margin on the business you bring in?  Higher margins should generate higher commissions. So, if you are paid a commission on revenue and your deals usually have higher margins than other reps (say, account managers), then your commission rate should be higher.

Reader:

Thank you kindly for your response.

My current compensation structure is as follows:

  • 90K base + 1.5% commissions on revenue, 50K cap/year on commission, commission paid yearly.  Originally I requested 3% commissions on revenue, but since several other team members would be involved in seeing an opportunity to close, 1.5% was agreed.

I recently proposed a review of the compensation terms, that the 50k/year cap be removed, commission be paid quarterly, and commissions awarded on subsequent projects / revenue from clients i bring, since typically clients award us a small project and then a larger one thereafter.

My employer came back with 90K base, lowered to 1% commissions on revenue  - he now feels that my involvement in the sales cycle is minimal, 0 .5% commission for any clients that may have known of our organization prior, commission for 6 months on subsequent projects with the clients I’ve brought in, and is trying to now apply this recent 1% and 0.5% to clients I’ve brought last year, that I am due my 1.5% on, which is wrong.

I am standing by what I feel is fair, 90K/year base, 1.5% commission to include projects revenue for 1 year.

i should mention this is the first year the company i work for has employed someone like me, so there’s a learning curve. Clearly I’m successful and bring value to the company, but want to really be sure that my request is fair. Essentially getting compensated $145,000.00/year for new clients with projects at 3 million in revenue, or 4.5% – this seems reasonable to me.

Would love to hear your thoughts.

Top Line:

What you are proposing sounds fair to me.  However, much depends on the gross margin of the projects.  If the margins are in the 50% range, then 1.5% of revenue translates to 3% of margin.  I would consider this to be very low.  If gross margins are in the 25% range, then 1.5% of revenue translates to 6% of gross margin.  This is pretty good for you and not bad for the company.  It’s appropriate, though that they are reducing the commissions for not taking the deal all the way to close.  Is there any reason why you wouldn’t (or couldn’t) do that?

From your other comments, it’s apparent that you are their first new business “hunter” rep.  For them to try to change your compensation plan after the plan year is over is unconscionable.  I hope you have the original plan in writing.  I stand by my view that you should be paid for follow-on business, at least for the first year (especially since the first project tends to be small to “test the waters”).  Without your landing the customer in the first place, they would not have the follow-on business.  If they don’t pay for follow-on business, then you should be paid either (1) a much higher percentage of the first deal (like 20% or more if you take the deal to close), or (2) a fixed “new customer bonus” that reflects a percentage of the value of the customer for the first year or more.

Also, if they are going to limit pay on customers that may have known about the company, demand that they provide a list of those companies in advance with demonstrable proof that there is a relationship (not just knowledge).  Then you would not work on those customers at all.

My next installment will close out this interaction.  If you have any thoughts on this situation, send me a note, or add a comment below.

For more information, contact Wallace Management Group at (203) 834-0143 or email David Wallace.

© 2010, David P. Wallace

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Filed under Sales, Sales Compensation Plans.
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Lead Management – Managing, Tracking and Reporting

7 January 2010, 8:46 am

To generate leads, you’ve spent a lot of money on advertising, trade shows, telemarketing, direct mail, etc.   Plus you’ve spent more money qualifying those leads.  How do you ensure that your sales team will follow up on and close on your leads?  You need a system to manage your leads.  This system should also provide tools to track the leads and to report progress to management and the sales reps working on the leads.

Lead Management

Two keys to successfully managing leads are:

(1)    Make it easy for your sales reps to maintain the information and follow up on the leads;

(2)    Set the expectation that management will review leads and hold sales reps accountable for lead development.

Sales representatives manage their limited resources very efficiently.  If your sales reps need to work extra hard to qualify, follow up on, or manage leads, they are less likely to do so. However, if you integrate your lead management process into your sales reps’ established sales processes, you will significantly increase the likelihood that your reps will use the process.

Create a repository for leads and the data associated with the leads.  Integrate this database with your CRM system (customer relationship management).  This will allow a seamless hand-off to the sales team as leads become opportunities and prospects become customers.

Accountability is equally important.  Sales representatives need to know that you are committed to developing new business through new leads and that you will review the status of all leads distributed to your field sales team.  With a strong management commitment, your sales representatives will be more motivated to follow up on leads and report their results to headquarters.

Lead Tracking and Reporting

After your lead data is consolidated and maintained in a centralized database, the information can be analyzed and viewed in multiple ways to facilitate tracking leads and evaluating marketing campaigns.  Here are some reports you should consider creating:

  • Aging Report – presents leads by date to ensure action on more recent leads and immediately identifies leads that have been ignored by the sales team.  You can develop aging reports by: individual sales rep to evaluate performance, lead status (A/B/C), markets, products, and tactics.
  • Won/Lost Report – tracks your efficiency with closing leads. You can develop reports showing: initial lead status, markets, products, and time from lead identification until close.
  • Tactic Code Report – compares relative success of various marketing tactics.
  • Territory Report – compares leads by sales region, sales representative or other territory.
  • Competitor Report – identifies possible competitive weaknesses.

Finally, tie the lead management database to your order entry system so that when a lead becomes a sale, it can be tracked and sales reps can be rewarded.  This also provides you with key conversion information and allows you to track the success of your marketing campaigns.

For more information, contact Wallace Management Group at (203) 834-0143 or email David Wallace.

© 2010, David P. Wallace

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Filed under Lead Management, Lead Management, Marketing, Sales.
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Lead Management – Qualifying Leads

30 December 2009, 9:13 am

Sales leads are the lifeblood of your company.  They’re your link to new customers, new opportunities, and future revenue.  However, not all leads are of equal value.  The ideal lead identifies a prospect who wants to buy your product or service immediately ,has more than enough budget, is not price or term-sensitive, is looking to make a significant purchase, and has identified your company as the sole source.  Ideal leads rarely occur, if ever.  Usually, one or more of these seven variables affects the value of the lead:  decision timeframe, requirements, budget, price, terms, deal size and competition.

Your sales representatives will spend time on each sales lead according to the rep’s perceived value of the lead.  If the rep perceives value – easy to close, immediate decision, large deal size or significant follow-on business, and little competition – he or she will be more likely to follow up on the lead.  By establishing a good lead qualification process, you can provide reps with a reasonably accurate assessment of each lead’s value.

Lead Qualification Process

The lead qualification process involves gathering information about the opportunity and the prospect.  The amount of information gathered and the effort expended should vary based on the size of the deal and the timeframe involved. Smaller deals, deals with very short sales cycles, or low-margin deals do not justify a major lead qualification effort.  Larger transactions or leads for prospects that represent significant future business potential justify a much greater effort.

Once you’ve collected the data needed to qualify your lead, rank the lead “A,” “B,” or “C.”  “A” leads are the most important.  They represent significant opportunities with a high likelihood of closing.  Your sales reps should follow up on “A” leads immediately.  “B” leads are important, but may be smaller in size, less likely to close, or have other obstacles your sales team needs to overcome.  “C” leads are the least promising leads or they may require a significant investment of time and resources to close.  Sales reps should actively pursue “C” leads, but with a lower priority.  Over the life of a lead, you may adjust its ranking (from “A” to “B” or “C” to “A”, for example) as conditions change.

For complex, high-margin transactions, the following information is generally valuable when qualifying a lead and jump-starting field sales involvement:

  • Customer or Prospect – Is this lead for a new prospect or an existing customer?
  • Transaction Size – How large is the transaction?  What is the budget?
  • Timing – When will the prospect make a purchase decision?
  • Products and Services – What products or services are being considered or are needed?
  • Decision makers – Who are the decision makers at various levels within the company?  What are their levels of decision-making authority?
  • Contact points – Get name, title, address, phone, email address, area of responsibility
    • Procurement/purchasing –Who will make the vendor selection? Who will issue the purchase order?
    • Business Executives – Who will make the buying decision? Whose budget is paying for the transaction?  How does this purchase affect their business?  What are their relationships with other lines of business?
  • Prospect’s Level of Interest – Is the prospect actively looking for new suppliers?  Is the prospect interested in a particular product?  When does the prospect plan to make a decision?
  • Competitors – Which competitors are in the account?  What products do they supply?  What are their volumes?  Which customer business units do they serve?  Which competitors are being considered for this opportunity?
    • Size of company – How large is this prospect?  Is the prospect of a sufficient size that the sales representative will want to spend time developing it?  Is it large enough to warrant a call?  A visit when in the area?  Arrange a special visit?
    • Revenue – Annual revenues of the company?  Growth rate?
    • Number of outlets – How many locations, plants, stores?
    • Volume – How much business do they do in your market today?
  • Company’s product mix – What products does the company sell?  How much of each line?
  • Business mix (markets) – Into which industries do they sell?
  • Future growth potential – What is the company’s revenue growth rate?  Rate of product introduction?  Expected growth of the prospective application?
  • Corporate structure – How do the various departments and product lines relate to each other?  Which departments are strong?  Which departments are well positioned for future strength?

Who Should Qualify Your Leads?

You have several options to consider. You can use your marketing staff, inside sales team, field sales reps or outsource the function to a specialty company.  The option you choose will affect the quality of leads passed on to your sales force.  It will also affect how many leads are followed up on and how many ultimately produce new business.  You will want to select the option that will:

  • Accurately evaluate leads
  • Effectively leverage your resources
  • Deliver value to your organization at a reasonable cost.

First, evaluate whether it makes sense to outsource lead qualification or bring the operation in house.  Here are the key questions to ask when comparing an internal group with an outside firm.

  • Which represents the least expensive option?
  • Which one will present the benefits of our products/solutions to prospects most effectively?
  • Which one will gather the most information during the lead qualification process?
  • Which one will follow up most effectively with the field sales force?
  • Which one will qualify leads fastest?

Whether you use an internal or external group, it’s critical to properly train those responsible for lead qualification. They need proper telephone and sales techniques. They need to be motivated to act fast, with a sense of urgency because leads can go stale very quickly.  Leads must be qualified quickly and delivered to the field sales representatives while the opportunities are still hot.

To be most effective, lead qualifiers need to be thoroughly grounded in your company’s:

  • Products – Basic understanding of every product and where each product should be used.
  • Solutions – What customer problems your products can address.  Tools and services you have available to help your customers.
  • Markets – the different markets and industries you serve.  Your strengths and weaknesses in each market relative to the competition.
  • Sales organization – Your sales organization structure and responsibilities.
  • Qualifying criteria – Specific criteria used to prioritize leads as “A”, “B”, “C” or a non-lead, developed in conjunction with the field sales force.
  • Qualifying questions – Questions which help determine whether a prospect meets the qualifying criteria and to what degree.
  • Information gathering – Techniques for gathering as much information from a call as possible.  Includes:  questioning skills, listening, probing, and analyzing responses.

Sales leads fuel your company’s growth and help maintain its competitive position.  Make sure you fully realize their value.

For more information, contact Wallace Management Group at (203) 834-0143 or email David Wallace.

© 2009, David P. Wallace

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Filed under Lead Management, Lead Management, Marketing, Sales.
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Lead Management – Collecting Leads

22 December 2009, 1:57 pm

Sales leads are a product of the marketing engine that identifies new customers and new opportunity.  They represent future revenue and growth for your company.

Your marketing team develops programs that target prospects, generate interest and produce leads.  Prospects demonstrate interest by actively responding to an overture from your company or by positively responding to a telemarketing or service inquiry.  However, when a lead that is handed off to the field sales team is ignored or otherwise left to go stale, sales and marketing managers get frustrated.  With just a little effort before the hand-off, sales representatives will embrace sales leads as the valuable source of new business that they are.

Companies whose sales reps effectively follow up on their sales leads manage the process from start to finish.  You can do this too.  Incorporate leads and lead management into your sales processes, making it easy for your sales representatives to follow up on leads.  Build upon the resources your company already has in place, especially your customer relationship management (CRM) system, such as SalesForce.com, Siebel, Sage or Act!  It’s important to create a process that gathers as much qualifying information as possible and as quickly as possible before sending the lead to the field.  This increases the likelihood that your sales representatives will follow up on the leads quickly and reduces the amount of time the field is asked to spend on potentially unproductive work.

You also want to develop your lead management system so that it becomes very difficult for your sales reps to ignore leads or allow them to become stale.

The four stages of lead management are:

  • Lead Collection
  • Lead Qualification
  • Lead Nurturing
  • Lead Tracking and Reporting

Over the next few articles, I’ll discuss the stages of lead management and what you can do at each stage to improve your lead management system.

Lead Collection

Leads are generated through many channels.  Marketing programs produce leads that can come through telemarketing, direct mail, email, trade shows, blogs, social networking, pay-per-click advertising, SEO (search engine optimization) marketing, bingo cards or any number of other tactics.  Leads are also generated through attentive customer service reps or other customer-facing personnel such as accounts receivable reps or equipment installers.

It’s best to funnel all your leads through a single lead management function within your organization.  Create a single point of entry.  Ideally, this will be in your marketing department.  By having a single point of entry for leads, you’ll have better control of the evaluation, assignment, tracking and following up of leads.  With a single point of entry (and a single point of responsibility), you can also better measure the ROI of various marketing and advertising campaigns.

All marketing collateral, advertising, public relations releases and marketing campaigns should refer to a single contact number, URL and postal/email address for information.   This information delivers new business prospects directly to your marketing group responsible for managing new leads.

Encourage other departments to forward leads to your marketing department when they uncover opportunities.  Encouragement may be formal such as an incentive program.  With an incentive program, you pay employees a fixed dollar amount for leads they deliver.  To encourage qualified leads, pay more but only for leads that become closed deals.  Some companies build their corporate culture to encourage customer service and lead generation.  Every employee is trained to identify opportunities for the company to deliver additional services to its customers.

When your marketing department receives leads, it should “register” the leads, whether they come from employees or external marketing programs.  By registering leads, the marketing department can ensure that all leads are identified and followed up on appropriately.  This also allows you to measure the total effectiveness of your marketing programs.

Once leads have been received and registered, they need to be qualified.  Look for this topic in my next blog posting.

For more information, contact Wallace Management Group at (203) 834-0143 or email David Wallace.

© 2009, David P. Wallace

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Filed under Lead Management, Lead Management, Marketing, Sales.
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Sales Training

18 December 2009, 8:00 am

Sales reps are made, not born.  Plus, selling is a skill which has evolved from “getting people to buy” whatever you are selling to fulfilling customer and market needs with your products.  Like elite athletes, your most successful sales representatives are always “in training.”  They are learning your market, products and competition.  They’ve been trained to find prospects, identify needs, gain trust, develop solutions, and deliver value.  Truly successful sales reps do not sell by instinct.  They apply experience and training to direct the sales process to a successful conclusion.

Many company owners and sales managers hire sales representatives and expect them to go right out, call on customers, and start closing business.  This approach might work for high-volume, low-value commodity sales. However, it does not succeed with relationship-based sales of differentiated products or complex solutions.

If your business differentiates itself and its products from competitors based on features and benefits rather than on price, your sales force must be well trained.  They need to master:

  • Sales processes
  • Solution selling
  • Relationship selling
  • Features and benefits of your company’s products
  • Demographics and needs of your target market
  • Competitive positioning
  • History and culture of your company

Sales Processes

When you hire new sales representatives, including experienced sales reps, spend time up front to ensure they know the fundamentals of selling.  In particular, train your sales representatives how to sell using your company’s sales processes.

Sales processes include the basics – understanding the length and steps of the sales cycle for your product or service, sales call steps, uncovering needs, objection handling, relating benefits and features to customer needs, closing.  Sales processes also include your company’s specific sales management systems.  These include customer relationship management systems (CRM), order entry, contracts, customer service, shipping, operations, accounts receivable and collections.  Your sales representatives should understand how every operation within your business affects your customers.

Solution Selling

In today’s business-to-business sales environment, your sales representatives need to understand how to deliver solutions to your customers’ problems.  Given the opportunity, many sales representatives will sell on price.  When confronted with competition or customer objections, these weaker or less experienced sales reps will reduce your price in an effort to close the sale.  This approach is flawed because price is rarely a customer’s top decision criterion.  Plus, after you cut price, it’s nearly impossible to recapture the lost margin.  The next time this customer considers your company, he or she will pressure your sales rep to offer even deeper discounts.  Sooner or later, your position becomes untenable.

It’s best to train your sales representatives to sell based on features and benefits that meet your customers’ needs.  Train them to understand where your product fits in an overall solution for your customer.  Solution selling requires a higher level understanding of the customer’s business, needs and challenges.  The sale may be more challenging, but it will yield stronger customer relationships and better margins.

Product Features and Benefits

When sales representatives join a new company, they are usually well trained about product features.  What’s more important to the customer is the benefits realized as a result of using those product features.  If you train your sales reps to understand their customers’ businesses and needs, they will be better able to relate the features and benefits that address customers’ needs.

Market Demographics and Market Needs

Your sales representatives need to know and understand your target market.  Who are your customers and prospects?  How do you find them?  What are their business needs?  How can you help them?

Given time in the field, your sales representatives will learn much of this information in depth.  However, to hit the ground running and become productive as quickly as possible, you should teach them what you’ve learned about developing your market.

Competitive Positioning

It’s critical to know and understand your competitors.  What are your competitors’ strengths and weaknesses, target markets, products, features, benefits, and sales styles?  Who are your competitors’ customers and where are they looking to expand?  Your company has a marketing plan; your competitors do too. Learn as much as you can legally and ethically about those plans.

Keep your sales force informed about the competition.  Continually gather competitive intelligence from your sales reps.  Since they know what’s happening in the field, they are excellent sources of competitive information. Share competitive information across your sales team.  Every sales rep needs to know what is happening in other territories, with other customers.

Company History and Culture

Your sales representatives are your company’s face in the marketplace.  They need to know your company’s history and culture.  Teach them to emulate your business values.   Assimilate your sales reps into the culture you’ve created.  Use your company’s culture to drive success and leverage it as a competitive tool.

For more information, contact Wallace Management Group at (203) 834-0143 or email David Wallace.

© 2009, David P. Wallace

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Filed under Building a Sales Team, Sales.
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