Start with Why, a book written by Simon Senik, touts that you can inspire action by getting people to buy into your purpose. The ‘why’ discussed in the book is philosophical in nature yet has practical application. He explains why companies like Apple are successful versus ones with declining market share like K-Mart. His famous statement is “People don’t buy what you do… They buy why you do it.” This is perfect. Now you know everything you need to know to inspire change, right? NO! As you read that statement, you may have thought that on the surface it makes sense but you likely wondered to yourself, “Okay, so what?”
This is a similar reaction that your sales force had the last time they were informed by “upper management” that their performance needed to improve to meet their quotas so that margins could be met, or bookings could increase, or so the company would make their number. They have questions, and you must provide answers.
The easiest lever to pull in regards to margin, revenue, or EBITDA is often pricing. Your pricing, however, is very complex and raising prices is not as straightforward of a solution as it may appear on the surface. Your pricing strategy is only effective if you align the people who have direct control of your pricing – the sales team.
There are four simple reasons that sales forces aren’t aligned to pricing strategy: Value, Visibility, Alignment, and Understanding.
Salespeople often have limited understanding of company value compared to their competitors in the marketplace. Value, unlike energy, can be both created and destroyed. In fact, pricing has a very direct correlation to the perceived value of your company and your products. See a blog that I wrote about this very topic here.
A lack of understanding of company value can be detrimental and the profit and margins will suffer as discounting will become rampant. Our Pricing Practice Lead always coaches me that discounting is one-way street that never reverts regardless of market conditions. Like the Pringles slogan, “once you pop, the fun don’t stop” — once you discount, you can’t revert without drastic changes and more drastic repercussions.
Salespeople often don’t have good visibility into the pricing strategy. I remember working with a client that had a clear pricing strategy for setting prices. Their pricing practice lead was a seasoned vet, yet every time we talked to sales reps or sales operations, they would discount frivolously and make statements like, “I guess we keep the price high to allow for discounts.” This was indeed troubling. How could I have two conversations about the same topic and walk away with opposing opinions? I thought to myself, “No wonder we are here; the left hand doesn’t know what the right is doing or why it’s doing it.”
There’s a simple solution for this: Visibility. The quickest way to get the attention of a salesperson, or any person for that matter, is through their pockets. I think you see where I’m going with this. Align the pricing strategy to sales incentives. As a CFO, you likely care about margin, so you need to make your sales force care about margins as well. Mark Stiving, the guru of pricing, once told a story of a time when he was giving a training and 10 minutes into his session someone asked, “How is this going to make us more money? We are compensated on revenue.” Quota and incentives drive behavior. If there is no visibility into the strategy, how can reps behave accordingly? They can’t.
Piggie-backing off Visibility, we have Alignment. Reps must know what the strategists and pricing team are thinking, and their behavior must align to the company’s financial goals.
Margin-based incentive isn’t for everyone. If the company’s goals are to create long-term stability, then bookings may be a big emphasis because bookings lead to revenue, especially for SaaS companies. However, if you have a solutions business then profit and margin are key. Your sales team should be incented accordingly. Your payout curve should include steep excellence payout for desired levels of margin reached. As a CFO, you know your costs, headcount, and quota. Offer 2.5x-3.5x incentives for margins that exceed the target and start that payout early around 110%-120% of quota attainment. To get concrete on that number, simply take a histogram or bell curve of quota attainment from the last 4 quarters and determine where the top 5-10% of your sales team sit. There’s your excellence point. These are the reps that are driving profit and maintaining margin. This also gives the bulk of the bell curve an incentive to hit target.
Understanding is key for any change. When I was an engineer, I designed nuclear reactors for one of the largest nuclear manufacturers in the world. With the Fukushima Diiachi nuclear accident in Japan, the industry took a hit. Margins plummeted because we provided a product – the reactor – and governments were banning its purchase. We shifted to a pricing strategy that focused on margins, and that included materials and overhead. As engineers we were now required to log our time worked diligently down to the minute. We didn’t understand why. It was never relayed to us that time and materials were now a part of the pricing strategy. So, naturally, annoyed employees didn’t take it seriously. It felt like a mandate from corporate.
One day our manager called us into the auditorium and did a full presentation on why this initiative was important. He went through the old pricing model and then the new model. We now understood that we must accurately log hours because the customer was being charged by hours worked. We were then placed on an incentive plan that rewarded speed and performance. It all made sense.
Do your sales reps understand why margins are important? Do they know what the strategy is? I suggest you inform them ASAP. This is the path to building sales champions within the sales force because the best salespeople align their activities to their incentive plan.
To see if margin-based incentives is a fit for your business, download the margin-based pricing tool.