Sales Incentives and Commissions are common in many industries as a tool to improve sales performance internally or through Indirect Channels as Telesales or Retail Agents.
Usually, companies design their commissions’ models around a percentage (%) of the billed revenue because automatically rewards performance growth (5% of 10,000 is always more than 5% of 7,000).
Consider an Insurance Company that has two Life Insurance products in their portfolio, the Insurance Basic which has a price of $500 a year and another called Insurance Premium that costs $1000.
In this example the sales strategy is pushed through one telesales partner, by rewarding the partner with 5% of the first year bill of the acquired customer, which means that the Insurance company will be paying $25 for each customer that buys Insurance Basic and $50 for each customer that buys Insurance Premium.
So, at a first glance it looks like there is an automatic incentive to the Telesales partner to push Insurance Premium first, since the partner will make double the commission per each sale on the Premium product.
The insurance company must also understand his telesales partner perspective, since the time spent and effectiveness per each phone call is critical to the telesales partner business model.
If in this example the Insurance Premium product takes 4x more time to sell than the Insurance Basic product, the telesales partner will be only focused on the cheapest product (Basic) regardless of the briefing provided by the Insurance company, because per each Insurance Premium product sold ($50 commission) the partner expects to sell 4 Insurance Basic products, therefore he can extract more value in the same time ($25 x 4= $100 commission) by pushing solely the Basic product and...
Usually, companies design their commissions’ models around a percentage (%) of the billed revenue because automatically rewards performance growth (5% of 10,000 is always more than 5% of 7,000).
So… where is the flaw of the revenue approach?Most of the companies´ have more than one product on their portfolio, since they are aiming to extract the maximum value from each customer by upselling, so to better understand the issue, please check below.
In this example the sales strategy is pushed through one telesales partner, by rewarding the partner with 5% of the first year bill of the acquired customer, which means that the Insurance company will be paying $25 for each customer that buys Insurance Basic and $50 for each customer that buys Insurance Premium.
So, at a first glance it looks like there is an automatic incentive to the Telesales partner to push Insurance Premium first, since the partner will make double the commission per each sale on the Premium product.
Well… that is the flaw. Most of the commissions’ schemes don´t incorporate a key variable which is time.The sales pitch effort that can be measured by the average time per sale of each insurance product.
The insurance company must also understand his telesales partner perspective, since the time spent and effectiveness per each phone call is critical to the telesales partner business model.
If in this example the Insurance Premium product takes 4x more time to sell than the Insurance Basic product, the telesales partner will be only focused on the cheapest product (Basic) regardless of the briefing provided by the Insurance company, because per each Insurance Premium product sold ($50 commission) the partner expects to sell 4 Insurance Basic products, therefore he can extract more value in the same time ($25 x 4= $100 commission) by pushing solely the Basic product and...
... this brings a huge opportunity cost to the Insurance Company since they will have many customers that would have bought the Premium product, but instead were only exposed to the cheapest one.To address this revenue model flaw there are basically 2 solutions:
- Develop a commission scheme that also incorporates the sales pitch time/effort per product/segment, so you may get the expected focus from the telesales partner.
- Or hire 2 different partners and each one will be solely focused in one of the segments/products.
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