Are your profit margins missing the mark?


Consider tweaking your sales compensation plan

Every business must maintain or increase their profit margins to continue thriving. With this idea in my back pocket, I searched the web to see what experts say would be the most effective ways to increase profit margins. One article I came across asked 30 experts from around the globe one question: what should a business owner focus on to increase profits?

The top five answers included:

  • Increasing prices
  • Reducing IT costs
  • Focusing on profitable customers
  • Reducing inventory
  • Renegotiating ongoing contracts

Hypothetically, all of these suggestions could increase profit margins. However, they really focus on expenses and ignore the sales opportunities that might exist to increase profit margins.

Of the 30, only one directly mentioned sales, and even then only focused on having “a solid sales pipeline” – much easier said than done.

Creating a solid sales pipeline takes the effort of an entire business strategy – everything from go-to-market strategy, lead creation, customer management and sales execution. In many businesses, these components are always a work in progress. With constant changes in market conditions and competition, these areas need to be assessed and changed as part of an overall business plan to be effective. In a world of instant gratification, these changes usually take time to manifest measurable results.

One area business owners don’t often consider (but certainly should) is sales objectives and compensation plans. Both of these can be changed easily and improve results quickly. The visceral nature of salespeople provides the opportunity to dictate their behavior being influenced by the way they earn commissions. By changing sales incentives, you can have a cascading effect on your business.

More often than not, sales representatives earn commission based on sales volume. This model results in behavior that sometimes isn’t desirable – selling the same products to existing customers at volume pricing and in turn, eroding profits.

A well-constructed sales compensation plan should produce a win-win situation. Margins should increase proportionally to earned commissions, and there are many ways to employ this model.

The idea that might come to mind first is to pay different commission rates on different products; so, the higher the profit margin is, the higher the commissions per product. If there are too many products to make this practical, using product categories could work. Not to worry, commission rates can be based on blended profit margins for a given customer or order.

In conclusion, there are a myriad of solutions that can be implemented to insure your sales team pursues the business that helps maximize both profits and commissions. How does your company’s compensation plan stack up? Does it incent the behavior you desire? I can help.