In difficult economic times, managing expenses takes on greater importance in the face of softer revenues. One expense in particular that rises to the top of the list of concerns is employee compensation. An article in the August issue of Inc. Magazine shares some ideas on how businesses can deal with this challenge. One of the issues featured in the article is managing the dilemma between product pricing and salesforce commissions. The story of Passageways, an Indiana-based technology firm that serves the banking industry, is shared as an example of one way to give motivate salespeople to protect price in negotiations with customers.
As Passageways’ clients felt the sting of the recession, they demanded greater price cuts from the company. To combat this problem, Passageways VP Paroon Chadha modified the sales commission structure, changing from a straight percentage of sales to a tiered system. Why was it needed? Salespeople who willingly reduced price up to 10% in negotiations were hurting their commissions only slightly but were costing the company much more in foregone revenues. The tiered system rewards salespeople that are more tenacious in price negotiations, paying a higher rate the closer the selling price is to a product’s list price. Conversely, the deeper a product is discounted, the lower the commission rate.
A tiered commission system like the one adopted by Passageways provides two key benefits. First, salespeople have a motivation for sticking closer to a product’s asking price. Giving ground on price is easy, too easy perhaps. Creating rewards for managing price (or inducing some pain for not managing price) is a great way to increase the salesforce’s commitment to the firm’s pricing strategy. Second, when price is not liberally discounted, you are protecting brand integrity. What does it say for a brand when its list price is regularly discounted several percentage points? It says the brand is not really worth the asking price. That calls into question the true value a brand possesses. Why put your brand at risk to have quality called into question.
Kudos to Paroon Chadha and Passageways. It is not easy to take a stand on pricing, but the fallout for not doing so can eclipse any benefits coming from an approach to pricing that is too flexible.
Inc. Magazine – “Special Financial Report: Employee Compensation”