A disconnect between the pricing strategy and sales incentives can hurt a company's bottom line. Ron Kermisch, a partner in Bain's Organization practice, details the four steps that are important for optimizing margins and incentives, and improving front-line behavior.
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Read the transcript below.
RON KERMISCH: It's no great insight to say that sales incentives drive frontline behavior. What we find all too often is a disconnect between the pricing strategy and those incentives. And often, the frontline compensation plans have no incentive to drive margin or to drive pricing specifically. This was a situation of a building equipments manufacturer with whom I worked recently. And what we found was that the vast majority of their deals were priced at the minimum allowable margin. And when we dug deeper, what we found was that their sales incentives plans were solely based on volume. And as a result, salespeople had no incentive to try to push price. They just had the incentive to get the job done.
And so we took them through the four steps that we think are really important to optimizing margins and optimizing incentives. And the first is getting clarity on the purpose of the pricing strategy. So for example, is it to drive margin or is it to expand sales? The second was to align the incentive plan with that strategy. Thirdly, is to give the salespeople visibility. So in this client example, we actually built a very simple tool that allowed salespeople to understand the impact of greater pricing on their own comp. And then lastly, we set up a loop, so that management can actually monitor and see what's happening and respond real time. In the case of this client, it dropped 300 basis points to the bottom line almost immediately. And what we see for the vast majority of clients is that restructuring sales incentives has a huge impact on their margins.
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