October 16, 2007
Product vs. Service Sales Compensation
We have been running into this topic of late with offers in different industries and it is a real stumbling block for some companies. I have worked as a salesperson for both product sales and service sales with different commission plans. The crux of the issue falls on margin.
We typically recommend commission plans based on margins instead of revenue. Businesses grow by making money. Yes, a simple statement, but one that can be undercut by a discount-oriented salesperson.
If you provide a percentage of revenue to a salesperson as their commission plan, they are not incented to maintain the price. It is far more expedient for the salesperson to discount the price (at a small penalty to their wallet) to close the deal faster and move on. The problem develops when the salesperson starts earning a commission check for a deal in which the company lost money. That format is what we call upside-down.
Margin is a better incentive in that it does encourage the salesperson to maintain price rigidity in negotiations. Granted, they can still discount, but it should have a more direct impact on their wallet.
Let’s flesh it out more – product sales tend – tend – to have more predictable costs. That means gross margin commissions are more predictable.
Service sales, on the other hand, tend to have greater cost variance. Much of the variance is dependent upon operation’s success. I encountered this issue first hand when I was selling cabling infrastructures for computer networks. My commission was based on the final gross margin. If the installation crew made mistakes, I lost money. If they took too many breaks, I lost money. It was a bad situation that was exasperated by the fact that I had no control over the operations side of the business.
We prefer commission plans based on estimated gross margin. The key is to secure agreement from the operations people no the proposal. If they sign off on the proposal, it is they their responsibility to complete the job within the proposed framework. If they fail to deliver, the salesperson is not personally penalized for operational inefficiencies.
