Paying For Performance: How Compensation Can Have A Direct Effect On Sales Channel Behavior
The “carrot and stick” approach to drive results from a sales channel — or paying for performance — is not new.Channel Marketing
What often isn’t understood by channel partners (dealers, distributors, etc.) is that pay for performance is also about values — the values of the supplier (e.g., to increase margins, to be paid on time, etc.) and the expectations of the customer (e.g., 100% satisfaction, one-stop shopping, etc.) Put more bluntly, channel partners need to understand that they’re being compensated to help you increase margins, grow sales, and satisfy end-user customers — not just to sell!
Where should executive managers start in evaluating their sales channel pricing strategy? Channel Pricing
Your channel pricing strategy, and the individual elements of your channel pricing plan, must first be weighed according to the likelihood that they can help you achieve your values and business goals, as well as the expectations of end-user customers.
Can and do all channel pricing programs influence dealer/distributor behavior?
Yes, and be careful what you ask for. When you use a channel compensation plan to tell your channel partners what to do, chances are they’ll do it! And that includes changing their behavior — for good or for bad — to achieve the results you say you’re compensating them for.
For example, if you tell a channel partner to train all of his sales people on your product lines in order to receive a certain level of compensation, he’ll change his behavior and conduct the training. That’s because distributors are supportive of the concept of investing in capabilities that differentiate them from their competitors and thereby earn them differentiated pricing. It creates a win-win situation: you get more effective sales representation and your channel partner gets the differentiated pricing he wants.
Conversely, if you tell a channel partner he must achieve 15% growth in order to receive a certain level of compensation, he’ll change his behavior to do just that. But, the change could be for the worse. The sales that are achieved might be at the expense of customer satisfaction, quality orders, receivables, returns, etc. Often, the sales increase represents a shift in volume from one of your other distributors, resulting in flat sales to you, at a lower margin. In other words, the growth you pay the channel partner to generate might be completely contrary to your values and end-user customer expectations.
Why do suppliers have trouble converting their channel partner discount structures to a “pay for performance” program?
First, unless specifically explained, channel partners often do not tie the discount received from the supplier to the activities the supplier has asked them to perform. When channel partners do not see the value in the activities, they focus on the costs of the activities.
Second, many suppliers do not differentiate the desired activities and the relative discount amounts associated with those activities. Channel partners that do perform the desired activities would like to be differentiated/rewarded for their support (versus those that do NOT perform the activities).
Third, many suppliers do not “enforce” the activity elements of their compensation systems by taking functional discounts away when they’re not earned. As a result, they pay for performance that is not earned and forfeit the corresponding margin dollars.
Is sales channel compensation a critical factor in sustaining long-term profitability and market share growth? Channel Workshops
Carefully planned channel compensation systems do more than reward channel partners to sell. They also consider the values of the supplier and the expectations of the end-user customer and reward channel partners for helping achieve those goals.
In addition, channel compensation systems enforce the activities that the channels are being compensated to do by having a mechanism in place to prevent margin dollars from being paid to channel partners that do not earn them.
John Henderson is the President/CEO of Frank Lynn & Associates, an internationally recognized management consulting firm. To contact Mr. Henderson, jhenderson@franklynn.com or visit http://franklynn.com
