Sales Incentive Programs

Posted on July 10, 2007

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I am currently working with Altos Research, a real-time real estate information service based in Mountain View, CA, in a part-time role. Currently, the sales force consists of the CEO, me, and well, that’s it. My role with Altos is to develop the overall sales strategy and long term organization.

We were discussing the longer term issue of sales territories as the company grows, deliberating over much revenue per sales rep should be the base of a territory, and then looking at how to compensate salespeople. Altos is a service with low customer attrition/turnover – probably less than 5% of the customers that sign up as paying customers cancel their service subscription, with an equal percentage that will likely upgrade their service plans, thus increasing the revenue per customer. A 95%+ retention rate! One of the reasons for this low attrition rate is the incredible level of personal attention and service that we have been able to provide to each customer. A key objective in the long term strategy is to replicate this high level of service as the company grows.

Our discussion turned to a philosophical conversation on how much to focus a bonus/commission structure for future sales representatives on new customer acquisition vs. growing a given territory base.

The key factor to remember with sales people is this – whatever compensation program that you establish for your salespeople is exactly what you will get. If your compensation program rewards new customer acquisition, then you’ll get new customers. But if you do not have a dedicated customer support team – and most start-ups rely on their sales reps to double as customer service reps – you’ll also have to deal with a higher attrition rate as your overall level of customer service will decline.

Salespeople are inherently selfish people, and I mean that in a good way. They often view themselves as the free agents in your company that are seeking to maximize their personal return – that’s why they work on commission/bonus and that’s why they are willing to take lower base salaries as a percentage of compensation than anyone else in a company. So, if your sales programs are focused more on new customer acquisition, then you absolute number of new customers will certainly increase. But at what cost? There will be a trade-off that will be evident in a higher churn rate. If your market has a finite number of potential customers, a high churn will impact the long-term growth of your company. Unless to you able to expand into new markets, you’re sales reps will eventually reach the end of their call list, and going back to prior customers that have dropped your service in the past may be a far more challenging sale.

Finally, it is important to take a look at you customer acquisition costs versus customer retention costs. If your acquisition costs are high relative to your retention costs, and your service is one that provides the ability to constantly upsell and upgrade your current customers, a sales program that drives this behavior in your sales force is probably a better option.

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