What impact do sales quotas have on pricing?

Is that the result you really want?

Many companies have sales quotas that their salespeople have to meet to stay employed.  The rationale is that you need some way to measure the salesperson’s effectiveness.  No doubt about that, but are sales quotas the right tool?

Let’s say that you’re a salesperson who is nearing the end of the month well behind your quota. What’s your inclination going to be?  To cut prices, right?  Isn’t that the easiest way to make a sale?  This scenario plays itself out time and again in many organizations.

If you want to make the picture uglier, set quotas based on market share growth in a down economy.  “Never happen!” you say.  Not true, I spoke with a representative of a well-known, well-respected company that has a 5% market share growth target in the worst economy in 7 decades.  Why?  Their margins are shrinking so they’re trying to make it up in volume. No, this isn’t an isolated instance.   Every company that has cut its prices during the last downturn was doing so with the intent of growing or at least salvaging market share.

I know some of you are thinking “We don’t have to worry about our salespeople lowering prices. We set the prices.  They can’t negotiate lower prices.”  That may be true, but I’ll bet you allow them latitude somewhere so that they can close the sale.

Whether they’re able to offer better payment terms, free shipping, extended warranty or whatever else they have the ability to negotiate, they’re effectively reducing the price.  They’re incurring costs for the company without gaining any revenues in exchange AND getting a commission to
do so.

What’s the solution?  Don’t use a sales quota, use a gross profit quota.  Tier your commission program so that the salespeople get higher levels of compensation for higher margin sales.  This gives them an incentive to sell your most profitable offerings.

It’s counter-intuitive, but using gross profit targets instead of sales quotas align your sales force’s goals with your company goals.  This is another way to assure that infrastructure growth (your overhead) lags revenue growth.