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:

ID-10066167 Ambro1. 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 also means using social media to create sales opportunities.

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.”

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.

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. Do you 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.

From the Coach’s Corner, here’s related reading:

“Forget about the business outlook, be on the outlook for business.”
-Paul J. Meyer 

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry. 

Photo courtesy of Ambro at www.freedigitalphotos.net

Seattle business consultant Terry Corbell provides high-performance management services and strategies.