Part two of a two article series focused on strategic channel incentives offers an example as to how to move from a flat SPIFF program to one that incentivizes incremental sales, which lead to better sales results.
People are complex and multi-layered—and so are their motivations. When it comes to designing an incentive compensation program that taps into these motivations to encourage positive behavior, it’s impossible to take a one-size-fits-all approach. Instead, it’s important to take some time upfront to define objectives and how to achieve even better results.
Establishing the Baseline Scenario
As a starting point, imagine a standard program where sales reps are paid $1 SPIFFs per unit. The chart below shows the different payouts to expect at different units of sales for a single salesperson.
Using a Classic “Bonus” SPIFF
One of the most common promotions is a straight increase of the SPIFF. Let’s say the company in the previous example now decides to pay $2 SPIFFs per unit (an increase of $1) for a set amount of time to drive additional sales. Compare the results to the baseline scenario below:
With the added $1 SPIFF payout, a salesperson who historically sells 100 units now got paid $200.
When behavioral analysis is applied:
- Every person is paid $1 more for each unit
- No increased discretionary effort is noted; same performance from most participants
- Essentially channel partners sell the same number of units for twice the compensation
Paying more for the same result will not drive desired behavior or help improve units sold. Deciphering the lost opportunity cost is the next step.
When comparing historical product sales with SPIFF sales performance, the data are likely to show the amount spent is greater for the same behavior.
Adopting Expert Recommended Incentive Structures
Using an incentive structure based on recommendations from our incentive expert analysts, the new promotion would look something like this:
The salesperson sold 100 units last year. Let’s continue the $1 baseline SPIFF, and as an incentive, triple their SPIFF for every additional unit they sell over their historical performance. Instead of $1, add another $2, bringing them all the way up to $3 per unit for everything over 100 units. Let’s look at the graph:
With the added incentive, a salesperson who historically sold 100 units, now sold 125 units, got paid $175 and saved you $25 for an additional 25 units.
When extrapolated across an entire salesforce, a sales incentive design like this helps with maintaining current unit sales; plus, reps are encouraged to shift demand to your brand. Even if most participants don’t sell more, no additional dollars are wasted to get the desired lift in sales.
Optimizing Incentive Structures Result in Greater Sales Outcomes
More precise and optimized incentive structures are a better investment and result in even greater sales outcomes, allowing budget dollars to be used as strategic investments in channel growth efforts. Look at the side-by-side comparison of the three examples below:
Let’s look at the investment and the incremental units generated at a few different levels assuming a salesperson normally sells 100 units:
- 75 Units
- Bonus Structure – Paid $75 in additional SPIFFs, received 25 fewer units compared to prior year
- Goal-Setting Structure – Paid $0 in additional SPIFFs, received 25 fewer units compared to prior year
- 100 Units
- Bonus Structure – Paid $100 in additional SPIFFs, received the same number of units compared to prior year
- Goal-Setting Structure – Paid $0 in additional SPIFFs, received the same number of units compared to prior year
- 150 Units
- Bonus Structure – Paid $150 in additional SPIFFs, received 50 additional units compared to prior year
- Goal-Setting Structure – Paid $100 in additional SPIFFs, received 50 additional units compared to prior year
- 200 Units
- Bonus Structure – Paid $200 in additional SPIFFs, received 100 additional units compared to prior year
- Goal-Setting Structure – Paid $200 in additional SPIFFs, received 100 additional units compared to prior year
The payout style on additional units sold—based on past historical performance—creates excitement and desire to achieve. And that’s the desired behavior you’re wanting to drive.
Every time a salesperson sells an additional unit, they’re rewarded with a “premium,” which makes them want to sell as many additional units as they can while the promotion lasts.
Design principals like scarcity paired with savvy forecasting and rule setting can help earn a highly optimized promotion investment.
Planning for the Best Worst-Case Scenario
Don’t forget to address escalating payments in this scenario. Playing the “What if…??” game forces us and our clients to think through what happens if channel reps sell above and beyond a historical number and exceed even reasonable projections. (It’s happened!)
While ROI could go down, the benefit is increased market share.
Revisit the idea that demand is fixed in most cases. If the channel sold three times what they normally do—because the incentive structure created the desired behavior change of selling more units to meet growth metrics—then you just got a ton of sales you wouldn’t have gotten before.
How much is it worth to take away those sales from your competitors? To gain mindshare with your partners?
It still will be a positive ROI—an incentive structure accommodates that. Can you afford to significantly increase sales and base a budget incrementally off additional profit?
The best way to put incremental sales incentives in place is by focusing on advanced segmentation and adding personalization to the channel program. Read more about how to do this here.