CHAPTER 1: Your Revenue Roadmap:
Driving Your Sales Strategy
with Sales Compensation
ON A CHILLY MORNING IN SACRAMENTO, I sat perched on a vinyl
bench seat, warily eyeing my rolling workplace for the day: an
18-wheeler, windows fogged from the cold, vibrating slightly as
its engine idled. My tour guide, Cliff, was a driver sales rep for a
major brewing company. Cliff climbed into the cab and slid over
to the driver’s seat, and we pulled away from the distributor’s
warehouse toward a 10-hour day of sales calls to convenience
stores, supermarkets, bars, and restaurants.
As we drove, we talked about how Cliff sold beer. He had
been with the company for a number of years and was very successful,
but he explained that his role had changed. “Two years
ago, I was selling cases of beer to store owners,” he said. “Now,
I’m trying to make the beer they already have move faster. I check
the signs, inspect the coolers, and try to get our beer in the best
position.” In addition to being a driver sales rep, Cliff had also
become a bit of a marketer, since the company had changed his
objectives a short time ago.
In the parking lot of a convenience store in a gritty urban
neighborhood, Cliff dragged down a hand truck. I followed him
to the back of the store and into a huge cooler that held cases
upon cases of light beer, regular beer, and premium beer in 12-
ounce, 16-ounce, and quart containers. Cliff looked through the
stacks, pulled the expired boxes, and loaded them into the truck.
He then lugged beer from the truck and packed it into the cooler.
As he did this, he talked to the store owner about what was selling
and what was not. Then he detailed the cooler display at the
front of the store, making sure the facings of cans and bottles
were aligned and that the packaging and tags for the week’s specials
were clearly displayed.
The brewery Cliff worked for had recently changed its sales
strategy. The old approach was to sell as many cases of beer as
possible, as often as possible, to as many retailers and restaurants
as possible. Cliff and the other driver sales reps were paid cents
per case commission to load more cases into the coolers, rotate
the stock, and pull out old beer.
Eventually, the brewing company realized that pushing more
bottles and cans into the back room of a retailer wasn’t necessarily
selling more beer to the customer. With competition at the
point of sale increasing over the years, sales out were less driven
by stocking the cooler and more driven by effective marketing.
Strategically, what was important to the brewing company was
selling beer to the end consumer. The company learned that the
consumption of beer was driven by TV, radio, and social media
advertising. Point of sale advertising, the company discovered,
was another driving force.
For years, the company had missed the opportunity to mobilize
the driver reps and had motivated them toward the wrong
goal. It had mistakenly promoted a transactional model of selling
into the back room. Finally, it realized what actually sold beer:
product placement, use of signs and displays, and matching price
points with competitors. But the question remained: How did
that translate to the sales organization? How could this strategy
convert to incentives that were meaningful to the driver sales
reps? The quest for that answer found me undercover in a convenience
store cooler, wearing a starched uniform with “Mark”
neatly scripted above my left shirt pocket.
We worked with the company to determine how to motivate
the sales organization with performance indicators that could
ultimately steer consumer preference. The company moved its
sales compensation plan off a purely volume-based plan and connected
it to the metrics and activities that drove beer consumption.
It developed performance measures that were focused on
merchandising, such as the number of facings, positioning the
product closest to the cooler handle, the placement of signage at
the retailer, the location of large displays, and competitive matching.
If its competitor’s malt liquor was in 32-ounce bottles, then
the company made sure its 32-ounce bottles of malt liquor were
positioned right next to them, hopefully with a larger number of
facings.
By understanding what influenced the purchase of beer and
connecting it to something that was important to the driver sales
rep, the company was able to change the behaviors of the reps
and get them to sell more beer. Now, Cliff did not just talk to the
store owner about how many cases of beer he wanted and yesterday’s
baseball scores. Cliff also talked to him about how the
beer was selling and ideas he had about improving the marketing
of certain products. Cliff talked about the positioning of the
product and displays, and he had statistics on how much that
could increase the volume. The store owner listened because he
knew Cliff’s advice was in his best interest.
Because Cliff’s compensation changed, his conversations
changed. Because his conversations changed, the results changed.
This retailer had struggled with the sale of premium beer brands
in this particular market, but the store owner had seen a dramatic
improvement in those sales over the past 24 months because of
Cliff’s marketing.
The company and Cliff had learned an important lesson about
translating the new sales strategy to the front line. The customer
had learned an important lesson about how to improve the results
for his business, and together the company and the customer saw
significant improvement in results, demonstrating the power of
sales compensation and its connection to the sales strategy.
Aligning to the Strategy
One of the first things our firm does when we look at sales compensation
is understand the sales strategy. We ask: How should
the priorities of the business be represented in the sales compensation
plan?
One of the ironies of sales compensation is that while it’s a tactical
program, it can churn up issues that are actually bigger misalignments
of sales effectiveness. For example, Cliff’s original sales
compensation plan paid him for generating pure sales volume, an
activity that was out of alignment with the company’s strategy of
positioning product competitively and playing an adviser role to
help the retailer grow its business. A transactional plan like this
would ultimately cause a breakdown in the company’s ability to
achieve its goals. Sales executives have to be able to distinguish
between issues that are related to sales compensation and those
that are indicators of bigger strategic challenges. They have to
know when they have a sales process issue that needs to be fixed.
Mike Kelly, former CEO and president of The Weather Channel
Companies, began his career years ago at Fortune magazine.
There, Kelly worked directly with the business customer—sometimes
the CEO of the company—who would have a personal
preference for a business magazine, whether it was Fortune or
Forbes or BusinessWeek. Because the decision maker was at a
senior level in the organization, it was important to understand
the corporate strategy. When Kelly took over the sales organization
of a new magazine, Entertainment Weekly, he took that customer
orientation with him.
Traditionally, a magazine would research target companies and
try to prove to clients and agencies that their audience was the right
audience, as opposed to trying to connect customers and advertisers
to the subject matter. But Kelly implemented a customized, consultative
approach, connecting advertisers to entertainment
marketing. Unfortunately, Kelly explains, “We over-customized it,
and the organization had a hard time making money.”
Entertainment Weekly was scheduled to be profitable after
two years, but by year five it was still losing money and Kelly was
feeling some pressure. “We would always point to our growth.
Our circulation growth was great, our revenue growth was great,
and everybody assumed, ‘Okay, at some point or another we’re
going to get to profitability.’”
Kelly enrolled in an executive education class at Columbia
University where he met Professor Larry Selden, who talked
about an idea called customer segmentation. Selden told his
class that the best companies understand not only who their customer
is but also what their customer’s needs are. They group
their customers based on needs as opposed to what they want to
sell them. By segmenting his customers, Kelly could understand
the profitability of each customer and each customer segment.
Then he could align his resources against those customer segments
that were most profitable.
“It was revolutionary for me,” says Kelly. “No one—and certainly
no one in the magazine industry—thought that way. All revenue
was good revenue. And we typically thought our biggest
customers, our highest volume customers, were the most profitable
customers.”
So Kelly took the customer segmentation idea back to Entertainment
Weekly, and his team analyzed the profitability of all of
the advertisers and all of their segments. They figured out that
cable advertising was starting to explode. Networks wouldn’t let
cable channels advertise on television because they thought they
would steal viewers. So cable had to buy print advertising; it was
the biggest, broadest reach they could get. Entertainment Weekly
had a smattering of cable channel advertisers, but it hadn’t been
a big focus. Kelly and his team had concentrated on what everybody
else was concentrating on: automotive companies and
health and beauty companies. They were big advertisers that had
a lot of appeal, but they were price sensitive. Kelly, however, realized
that the cable television advertisers were actually Entertainment
Weekly’s most profitable advertisers because they paid full
price. This was because they were time sensitive—they had to be
in certain issues of the magazine because a show was on a certain
night—factors that compelled them to pay a premium.
Kelly completely changed how his organization thought
about who its customer was, who its most profitable customers
were, and how it should go after its customers. He realigned the
sales force, putting more people and sales incentives on the most
profitable categories with strong growth expectations and fewer
resources against the customers for whom it was really just a
price buy. Kelly says:
We were supposed to lose money that year. We made money.
And then we went on to have 30 percent CAGR [compound
annual growth rate] for the next five years.
I learned that sales is sales. But there are principles of
finance that if you apply them to sales, including incentive
plans, you can accelerate what you do. I’ve brought that to
every other job I’ve had. We really try to understand who the
customer is and what our value proposition is to that customer.
Then we segment those customers so we understand
who the most profitable ones are and who they aren’t. We put
our resources behind that profit.
If your compensation plan doesn’t align with the strategy
and the segments you want to target, then you’re going to be
working at cross-purposes. It’s hard work to get an organization,
any organization, to start to think differently. And
in most companies, sales is product-focused or platformfocused.
They’re going to go sell their product wherever they
can. When a company becomes more customer-focused, all
of a sudden it starts to define the product mix based on what
the customer needs are.
The sales compensation program can support that customer
focus, run counter to that focus, or create confusion. In Kelly’s
case, the priorities of the sales strategy were well represented in
the sales compensation plan, and it drove the desired behavior.
