We are currently working with a manufacturing company that has been hit hard by raw material cost increases. We’re talking double digit increases as high as 42% for certain components. This company happens to be in the chemical industry, enjoys generous profit margins, and wants to keep it that way. We can’t blame them.
They have asked us to help their sales force execute price increases. It seems that many companies struggle to get their sales organization to enthusiastically support price hikes and while there appears to be no outward resistance from this sales team, management wants to maximize the results.
While there are several elements to address in managing sales teams through price increase initiatives, the most critical is the incentive plan. Most companies that struggle with increases are rewarding sales reps on improvement in sales volume, not pricing or profit margin. It may be difficult to change incentive plans quickly but we have seen good results with temporary plans that reward short term price improvement results.
For example, consider a 90 day plan that simply rewards the sales rep a commission based on the actual price increase realized. I have seen companies offer as much as one half of the price increase, which is generous, and realize significant results. Most situations can be addressed with a much lower commission schedule. Also consider the amount of the reps total compensation and apply a commission accordingly.
We find that a commission for a price increase that contributes to 10% of the reps overall compensation plan is sufficient to capture their attention and get results. After all, it is only a short term effort. However, the payoff for the firm carries well into the future.
There are numerous additional schemes and one can be quite creative in developing an incentive. For some sales teams, vacations, merchandise and other tangible rewards are powerful incentives.
While incentive plans for sales reps are critical to price increase realization, there are a number of other critical details that require attention in order to successfully execute increases through the sales team. We will address some of these in future blog postings.
They have asked us to help their sales force execute price increases. It seems that many companies struggle to get their sales organization to enthusiastically support price hikes and while there appears to be no outward resistance from this sales team, management wants to maximize the results.
While there are several elements to address in managing sales teams through price increase initiatives, the most critical is the incentive plan. Most companies that struggle with increases are rewarding sales reps on improvement in sales volume, not pricing or profit margin. It may be difficult to change incentive plans quickly but we have seen good results with temporary plans that reward short term price improvement results.
For example, consider a 90 day plan that simply rewards the sales rep a commission based on the actual price increase realized. I have seen companies offer as much as one half of the price increase, which is generous, and realize significant results. Most situations can be addressed with a much lower commission schedule. Also consider the amount of the reps total compensation and apply a commission accordingly.
We find that a commission for a price increase that contributes to 10% of the reps overall compensation plan is sufficient to capture their attention and get results. After all, it is only a short term effort. However, the payoff for the firm carries well into the future.
There are numerous additional schemes and one can be quite creative in developing an incentive. For some sales teams, vacations, merchandise and other tangible rewards are powerful incentives.
While incentive plans for sales reps are critical to price increase realization, there are a number of other critical details that require attention in order to successfully execute increases through the sales team. We will address some of these in future blog postings.
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