Latest / The Yield Doctor with James Deaker / Sales Incentives Should Align to Profit… Except When They Shouldn’t

Transcript

Sales Incentives Should Align to Profit… Except When They Shouldn’t · The Yield Doctor with James Deaker

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  In one of my previous videos, I made a
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  pretty strong claim. I said that sales
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  incentives should always be aligned with
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  profit. I'll link to that video here.
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  And it's true that for many of the large
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  publishers that I've worked with, profit
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  is the main objective. And so, in that
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  case, I believe that it's 100% true that
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  sales incentive should align. But that
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  framework is not complete. Over time,
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  I've worked with more and more different
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  types of clients, and I've come to a
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  more refined position, which is that
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  sales incentives should align with the
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  company's true objectives. And most of
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  the time, that is profit, but it's not
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  always. There are definitely a handful
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  of cases where it is the right decision
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  not to align your sales team to
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  profitability. So in this video I am
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  going to walk through five cases and the
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  fifth one is almost never talked about.
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  All right let's go through them. The
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  first one is when you are in a land grab
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  for market share. This is typically a
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  situation where you are launching a new
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  product or you're entering a new market
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  or you're trying to compete
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  aggressively. In those situations your
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  goal is not efficiency. The goal is
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  adoption. Your customers, you you want
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  them to use the product. You want
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  distribution. You want scale. And if you
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  tie your sales team too tightly to
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  profitability, what you're going to do
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  is find that they're going to avoid the
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  harder to sell products. And even if
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  those are strategically critical. So in
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  this case, it is completely rational to
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  say, I don't care about margin now. I
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  care about getting into the market.
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  All right. The second case which is
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  somewhat related is strategic accounts
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  or new logo acquisition. And this is a
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  variant on getting into you know more
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  market share but applied to the
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  individual customer level. There are
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  some customers that are simply more
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  valuable than the deal themselves. They
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  might give you credibility in the
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  market. They might become a case study.
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  They might unlock a whole category of
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  future demand. And in those situations,
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  you are not worried about the economics
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  of the current deal. You are making an
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  investment. You are effectively short
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  trading off short-term margin for the
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  long-term value. So again, it can make
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  sense to incentivize sales on winning
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  the account, not on the profitability of
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  that first deal.
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  The third situation is when you are in a
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  product validation or learning phase. In
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  my original example, I assumed that we
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  know which products are profitable, but
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  sometimes you don't. You're still trying
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  to figure it out. You don't know which
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  segments will work. You don't know which
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  use cases are going to stick. And you
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  don't know where the margins are
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  ultimately going to land. And in this
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  situation, the goal is learning
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  velocity. You want your sales team out
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  there selling, experimenting,
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  getting feedback, and generating data.
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  If you constrain them with profitability
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  targets too early, you'll slow that
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  down.
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  The fourth is when simplicity matters
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  more than precision. And one of the
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  things that I talked about in my
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  original video is that profit-based
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  companies often have compensation
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  schemes that are hard to implement. You
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  have data issues. You have to make
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  adjustments. You have to worry about
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  timing differences and sometimes that
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  just makes the plan very complex.
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  Salespeople don't trust the numbers.
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  They don't understand how they're
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  getting paid and behavior actually
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  becomes worse. not better when you
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  implement that scheme. So in some cases
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  it is better to use a proxy like revenue
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  even if it is not perfectly aligned with
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  profit because it is clear, it is
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  predictable and it drives consistent
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  behavior.
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  And now to number five, which I think is
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  a particularly interesting case and not
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  talked about very much, and that's when
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  sales doesn't actually affect the
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  economic outcome. Imagine a salesperson
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  whose job is to go out and secure a $1
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  million commitment from an advertiser.
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  They're responsible for getting the
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  budget, but at the time that they close
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  the deal, the details of the campaigns
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  that are going to follow are unknown. So
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  the mix of products, the inventory, how
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  the spend is allocated, all of that
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  occurs much later. So it might be
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  handled by a sales support team, by
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  account management, by operations, or
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  even by an algorithm. So in that
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  situation, if the salespeople can
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  influence the size of the deal but not
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  the profitability of the deal, then you
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  should not be linking them to profit.
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  And this creates an important principle.
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  You cannot hold someone accountable for
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  margin if they cannot influence the
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  drivers of that margin. So the right
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  answer in this particular case might
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  actually be a split model. The account
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  executive might be compensated on gross
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  revenue of bookings because that's what
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  they control. And the downstream teams
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  may be compensated on margin or yield
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  because that's what they control. So
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  stepping back, what does this mean? My
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  original position still holds. In
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  general, if you want your company to
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  make more money and be more profitable,
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  align your sales incentives with profit.
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  But the refined version is this. Sales
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  incentives should align with your
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  company's true objectives and they
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  should align with what the individual
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  can actually control. And in most cases,
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  that will point you towards profit. One
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  last cautionary note, don't be unclear
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  on what your company is solving for.
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  I've seen companies whipssaw back and
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  forth between thinking that they're
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  solving for profit or the ability to
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  grow top line and enter a new market. If
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  you're whipsawing like that, you create
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  confusion for years within your company.
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  I'm James Deika. I am the yield doctor.
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  I work with my clients on exactly these
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  types of problems. If you're facing
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  them, reach out to me, please. Thanks
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  for watching. Heat. Heat.