Sales incentives are a fundamental driver of motivation and productivity within sales teams. They serve as a vital tool to encourage sales representatives to go the extra mile, exceed q, and boost revenue in your organization. However, the strategy behind how these incentives are calculated and distributed can be a perplexing challenge for businesses to tackle effectively.
Two primary approaches to sales incentives are booking-based incentives and collections-based incentives. Each has its set of advantages and disadvantages; choosing between them is a strategic decision that should align with a company’s specific goals and financial circumstances.
Bookings-Based Sales Incentives:
Pros:
1. Motivational Boost
One of the key benefits of booking-based sales incentives is the immediate motivational boost they provide to salespeople. By rewarding them based on securing deals and bringing in new business, this approach can drive enthusiasm and a sense of accomplishment.
Imagine a salesperson and getting to know that you earn cash upon closing a deal with the client. Salespeople will proactively start seeking new opportunities and, in the process getting into more conversations, increasing the probability of exceeding their quota and revenue for the organization. It also adds a renewed sense of achievement when they secure deals, contributing to the company’s overall success.
2. Alignment with Growth Goals
Booking-based sales incentives are an ideal fit for companies aiming to rapidly expand their customer base. Sales representatives are driven to acquire new customers, which can contribute significantly to growth.
Consider a telecommunications company looking to expand its market share in a highly competitive industry. They implement booking-based sales incentives for their sales team. Each new customer acquisition results in a bonus for the sales representative. This aligns perfectly with the company’s growth goals, as the sales team is now highly motivated to seek out new customers actively.
Cons:
1. Risk of Overcommitting
The pressure to meet booking targets can sometimes lead sales representatives to close deals hastily, potentially overcommitting on unrealistic terms just to secure a sale. This short-term focus may result in long-term challenges and dissatisfaction among customers.
Let’s consider a scenario in the real estate industry. A real estate agent is under immense pressure to meet her quota. To secure a deal and meet her quarterly booking quota, hastily promises extensive, unrealistic renovations to a buyer. The deal proceeds, but logistical problems arise, causing delays and added costs. The customer, expecting a fully customized property, is left dissatisfied, harming the agency’s reputation.
Here, the agent’s overcommitment to the sale led to lasting issues and customer discontent, underscoring the risk of overcommitting to achieve booking goals.
2. Cash Flow Challenges
Bookings-based sales incentives typically involve paying commissions upfront, which can strain a company’s cash flow. This is especially significant for businesses operating on tight budgets.
Let’s consider a business with smaller margins, like FMCG. They implement a bookings-based incentive program for their sales team, offering substantial commissions for each deal closed. As sales surge due to the incentive, the company pays large commissions upfront. This rapid cash outflow strains their tight budget, making it difficult to cover essential operational expenses, invest in product development, or hire additional staff.
Despite the sales success, the company faces significant cash flow challenges, highlighting the impact of upfront commissions on businesses operating with limited financial resources.
Collections-Based Sales Incentives:
Pros:
1. Ensures Cash Flow:
Collections-based sales incentives link commissions to actual cash collected from clients. This approach helps ensure financial stability by avoiding upfront commission payouts, which can impact cash reserves.
Example scenario: Consider a software company that offers post-sale support. They implement collections-based sales incentives, tying commissions to client payments. This practice safeguards financial stability, preventing upfront payouts from depleting cash reserves and enabling ongoing operations.
2. Quality Focus:
By incentivizing sales representatives to prioritize high-quality, paying customers, collections-based sales incentives promote sustainable, long-term growth. This aligns with a focus on customer satisfaction and retention.
Example scenario: An insurance company rewards its sales team for bringing in policyholders with a strong payment history and low claims. This quality-focused collections-based incentive ensures a profitable and loyal clientele, aligning with the company’s commitment to customer satisfaction and long-term growth.
Cons:
1. Longer Payouts:
Sales representatives may have to wait longer to receive their commissions under collections-based sales incentives. This delay can impact their motivation and financial stability, particularly if they rely heavily on commissions.
Example scenario: Suppose a real estate agent is working on commissions for client payments after property sales. While collections-based sales incentives promote financial stability, the agent might experience delayed payouts, potentially affecting motivation, especially if commissions are an important part of managing their day-to-day expenditure.
2. Reduced Urgency:
The delayed commission payouts in collections-based incentives may reduce the sense of urgency among sales representatives to bring in new business. They might prioritize collecting from existing customers instead.
Example scenario: Consider a financial services company using collections-based incentives. Sales representatives may focus on following up with existing clients to ensure timely payments rather than aggressively pursuing new clients. This shift in focus can diminish the company’s ability to expand its customer base and overall market presence.
3. Cost of Lost Opportunity:
An often overlooked factor in collections-based sales incentives is the cost of lost opportunity. When salespeople divert significant time and effort towards collecting cash from already-won accounts, they may miss out on new sales opportunities. This cost, which can include potential revenue from new customers or upselling existing ones, can sometimes outweigh the benefits of prioritizing cash collection.
Example scenario: Consider a software company with a collections-based incentive system. Sales reps focused on collecting payments from existing clients might miss chances to sell additional software licenses or services to these clients or acquire new customers. The potential revenue lost in these opportunities could outweigh the benefits of prioritizing cash collection.
Takeaway:
In conclusion, the choice between bookings-based and collections-based sales incentives isn’t one-size-fits-all. It depends on various factors, including a company’s growth goals, cash flow management, pay mix, and risk tolerance. It’s crucial for businesses to carefully evaluate their specific circumstances and objectives before deciding on the most suitable incentive structure.
Additionally, businesses should consider the cost of lost opportunities associated with collections-based sales incentives and balance it against the advantages of ensuring cash flow stability. In essence, the decision should align with the broader sales and financial strategy of the organization to maximize its effectiveness in motivating and rewarding sales teams. Stay tuned for the next blog that will focus more on the factors listed above.
