Stunning News: Eliminate Sales Quotas to Make Profits

In every industry since the Great Recession began in December, 2007, it’s become twice as hard to make a dollar. But as a sales manager, you already know this, right?

All things being equal, there are four reasons for your sales demise:

1. The economy – there are no more boom times – markets aren’t expanding. Competition is tough. You really have to hustle.
2. There are simply too many products chasing too few dollars. Most of your sales come at the direct expense of your competition.
3. Technology and social media. If your salespeople are not harnessing social media – for customer research and word-of-mouth sales – they, and by extension, you, are behind the times. Web sites, radio, TV, newspapers, direct mail and the telephone directory to a certain extent no longer suffice to create a buzz. The Digital Age has created a mega consumer and businessperson information-overload. Not only are companies expected to brand themselves, so are salespeople. Generally, that means getting on MySpace to create sales opportunities if you sell inexpensive products and Facebook for higher-end inventory. And don’t forget possibly using Twitter, LinkedIn, Digg, Flickr and YouTube.
4. Not enough face time and customer appreciation. You need to ramp up the in-person exposure to customers. Too many salespeople do not see enough of their prospects and customers. And they commit a bigger sales-sin by showing too-little appreciation to customers. Seventy percent of customers buy elsewhere because they feel taken for granted.

For these reasons, sales have become a zero-sum game. In this downturn – more than in any other economic cycles – you can only gain when your competition loses.

So how do you motivate your sales team?

Unless you hand them sales leads, you need top performers to prospect and convert leads into profitable business relationships, and continually develop solutions to solve customers’ business problems. That can only come when they find needs to fill, target the right prospects, and create a happy buying environment while showing enthusiasm for their customers.

There are two other important considerations: How do you compensate them? How do you set goals?

All of these factors make sales forecasting more challenging.

OK, you’re thinking, “Tell me something I don’t know.”

New Sales Research

Sure, let’s consider research by a pair of marketing professors: Harikesh Nair of Stanford University and Sanjog Misra at the University of Rochester. Their research concludes that profits come easier if you end sales quotas. What? That’s tantamount to blasphemy in sales management, right?

The professors’ 2009 research at an unidentified Fortune 500 company – a contact lens manufacturer – shows a compensation plan sans quotas “resulted in a 9% improvement in overall revenues, which translates to about $1 million of incremental revenues per month,” according to a press release from the Stanford Graduate School of Business.

“The fundamental problem is that managers never know exactly how much time and effort their salespeople are putting into their work,” says Stanford’s Dr. Nair. “In the absence of such knowledge, they can only base payment on agents’ output, not their input.”

The school says an aggregate $800 billion is paid each year in sales compensation – nearly 300 percent higher than companies spend on advertising. But is it a good investment? Perhaps not. The professors’ test-subject company enjoyed a $1 million a month increase after dropping sales quotas.

You have been paying commissions and possibly bonuses based sales-quota performance. The idea, of course, is that salespeople are incentified to work harder to achieve goals.

But let’s face it: Salespeople sandbag – they game the system, and often postpone sales to look good later. So do sales managers.

Sales Confession

Yes, I also sandbagged in the 1970s as a young field representative for a group insurance company in California. I recall being the company’s No.1 producer in the northern California sales territory for nine consecutive months. One month during that stretch, I sensed my sales would be slower the following month. So I held off in submitting some car and home insurance policy applications. I turned them after the first of the following month, and led again. Why? I felt pressure to meet sales quotas.

My sales track-record earned the attention of two other well-known insurance companies that recruited me, and I quit seeking to climb new sales mountains.

As a new insurance agent at a competing company and despite a sterner sales quota system, my enthusiasm helped me to sell a surprising large number of policies in my first month on the job. My two managers were beaming. Then, I was very pleased when my regional boss bought a $100,000 whole life insurance policy and gave me credit for the sale by naming me the agent-of-record. The commission would be huge. I naively thought he was rewarding me for my first month’s sales achievement. I was overjoyed and salivating over my anticipated commission.

But I soon plummeted toward earth. I forgot the company was in the middle of a life-insurance sales contest. When the contest was over and within the 30-day free-look window, the manager canceled the policy. Then it hit me: Even C-level executives sandbag. But this time, it disillusioned me because it hurt my pocketbook – one of my early lessons in “what goes around comes around.”

Also, I learned too late about the quota differences between the two companies, and the impact on my performance. With a lower morale and reduced respect for the company, my sales decreased.

In the Professor Nair and Misra approach, they developed models in relation to the behavior of the manufacturer’s salespeople. The mathematical models determined the design of the compensation plan to forecast sales while evaluating the costs of inefficiencies associated with sandbagging.

The net result was the 9 percent increase in revenue. Whoa!

Motivating Salespeople

A side-benefit: Salespeople loved the new compensation model. “Most salespeople do not like quotas,” says Dr. Nair.

Amen.

But he admits the elimination of sales quotas may not work for every business. “What managers need to do is evaluate more carefully how the system is functioning for their own organization,” says Dr. Nair.

He suggests companies research the salespersons’ responses to various facets of the compensation plan and that they determine the impact on sales. “That can give a company a good base by which to evaluate what can happen if they do change the compensation system,” he explains.

“Dynamic programming” is what they call their mathematical approach in increasing profits.

“Firms now operate in an increasingly complex and data-rich environment,” says Dr. Nair.  “Those that understand how to harness the power of this data to cut through this complexity will enjoy a lasting competitive advantage.”

Agreed.

From the Coach’s Corner, ever wonder why your customers feel like a number?

Here are some Biz Coach strategies on compensation and motivation techniques:

1. Keep your compensation plan simple.
2. Make it easy for your salespeople to track.
3. Keep an open mind – test, test, and fine-tune your sales program’s effectiveness as conditions warrant.
4. Instead of a set quota for sales numbers, emphasize footwork. That’s right, emphasize footwork over quotas.

In requiring a certain number of sales calls each day along with a high-level of customer service, there has always been a noticeable difference whether I was in sales, management or as a consultant to clients. That’s been true in different economies – good or bad. Specifically, 15 sales calls a day – in-person as much as possible – have always improved morale and dramatically increased sales at the expense of competitors.

Related reading: The Seven Steps to Higher Sales, a link to the Biz Coach secrets for sales success.

This includes seven steps to higher sales, five value perceptions that motivate customers to buy, and the three-step process for overcoming sales objections.