Commission sales:

I recently read an article about how companies often have a hard time getting their sales teams to implement new pricing strategies. The sales force often responds by offering increased discounts as to maintain the customer base, but effectively undoes the new pricing strategy. In the example I read, management responded by clamping down on discount procedures with tougher policies and greater “accountability” on the sales staff to follow set prices. From the perspective of the author, this “solved the problem.” It seems to me, however, that this is another example of over-utilizing supervisors to (inefficiently) balance out heavily unbalanced incentives. And so a good deal of energy is wasted by sales reps trying to get away with things and by management trying to stop them.

I wonder why administration doesn’t realign the incentives of the sales team along with implementing a new pricing strategy. When they reprice merchandise, why not reprice commissions? As far as I have ever seen, commission is a flat rate based on the total price of the product (with perhaps rates varying by a few product categories, and maybe a few “bonus items” with high commission). If sales staff earn a percentage of revenues, however, it clearly makes a bias to offer too many discounts. But the solution should be simple in this case where the effective costs of the merchandise are known. Companies should be able to offer a commission rate based on some measure of the profitability of the sale. Excess merchandise? Lower prices and/or increase commission. The supply team is already forecasting supply and demand, the pricing team setting the price for the consumer–why not also set a price for the sales rep?

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3 Responses to

  1. Michael Rapp says:

    I wonder if it is because this would mean, essentially, renegotiating the contract of the agent, and bargaining can be quite costly. I agree that something seems inefficient here though. And changing the pricing system does effectively change the value of the employee’s contract anyway.

  2. Ryan says:

    Oh excellent point! Yes, I agree that repricing does effectively change the sales rep’s contract, but (as you were probably thinking) it does so in a much more limited way. Since pricing is tightly tied to the success of the whole organization, it is less like a renegotiation than would be an arbitrary change in commission rates. Maybe this could be considered yet another inefficiency resulting from the costliness of negotiations.

  3. lisapow says:

    seriously?! you guys are nuts :)!!

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