Now is the Time to Look at Territory Design and Sales Compensation5 Dec, 2011 By: Ed Carroll imageSource
Humans are creatures of habits. We like to do things the way we always have, many times resisting change because the belief is – “if it isn’t broke, don’t fix it.” I find this to be the case for many businesses in the Imaging channel when it comes to territory design (assignment) and sales compensation.
If you have not reviewed territory assignments or sales compensation in the last twelve months, you should be doing it now. You may ask why now?
Market changes necessitate a need to review. The way of the past is not the best way for the future in this case. If you are like most businesses in the industry, the core part of your business, equipment, is a mature market. If you look at copiers, for example, new unit placements have been declining since 2007 and are projected to continue to decline. Even printers having declined in 2007 and 2008, show little or no growth over the next few years.
So, designing a territory based on expanding market share in equipment sales for copiers or printers without consideration for past results, or reflective of the existing base, would be an example of territory design not reflective of today’s market conditions. Furthermore, compensating the sales professionals based on this could result in underperforming sales positions and higher turnover. Territory assignments need to reflect the opportunity, and the opportunity needs to match the expectation. Sales compensation needs to consider both. Why is this?
Good Territory Design
Let’s first focus on territory design. It is important to assign responsibility to sales professionals where the opportunity meets the expectation. It is equally important that the methodology used is consistent among sales professionals so as one sales professional does not have an unfair opportunity versus the other.
If you continue to assign responsibility without looking at the impact of the market changes or historical performance, it is inevitable that there will be situations where the opportunity exceeds the expectation. In this case performance will look good but you are most likely paying for underperformance.
Likewise, the opposite situation could occur as well, where the opportunity is far less than the expectation and therefore the chance of meeting expectation was never realistic. This results in underperforming sales positions and high turnover, driving up sales costs. (Turnover is one of the most costly expenses for organizations – a subject for another time.)
The key to good territory design is one that accounts for realistic opportunity. The design must have the same relationship to expectation (quota) for all sales positions. There should also be a minimum level of performance that warrants the position to begin with. Using the equipment example, an acceptable method for territory assignment and quota would be to base the opportunity on a percentage of machines in the field.
A copier dealer attempts to turn their base of machines on a regular basis. The ability to turn the base might vary from segment to segment but the goal is to upgrade the base. It is a core principle for equipment providers in this industry. Identifying the monetary value of the existing base or opportunity by segment for the business, and then separating to design territory responsibility by accounts or zip codes would provide a rationalized method of identifying the opportunity for each sales professional.
Using this as the basis for quota and applying a reasonable factor for growth (the same factor for all positions) would effectively put all sales professionals on a level playing field. Review of performance would be consistently applied to all positions. Further developing compensation plans that reward performance based on a methodology reflective of current market conditions would result in payouts reflective of performance. This would eliminate the situation of overpaying for areas not meeting opportunity and reduce turnover in areas where there is now a reasonable chance to achieve expected results.
Emerging Markets & MPS
Opportunities in mature markets are a little easier to identify as you have historical records to utilize as the basis for determining the opportunity, but what about emerging markets? What is a fair method to determine opportunity and expectation? In this case you need a fair basis that can be applied to all territories. The basis must be reflective of the market conditions, must be realistic and must warrant investing in this area. An example of this is MPS.
Most businesses do not have a well- established track record for MPS. There is no solid base of business to use in determining opportunity. Therefore, the method described earlier will not work. But what would work is utilizing relationship reasoning to make this determination. Industry statistics show that there is a six to one ratio of new unit printer to copier placements in the market.
So if you have a base of copiers in the field, is it reasonable to consider determining your potential printer opportunities based on the number of copier placements? I think it is. If I had a base of 1000 copiers in the field I could reasonably assume that there are 6000 printers within the same base of customers. From this I could determine a monetary value for the printers and determine existing opportunity by territory as a result.
Now, since this is a growing market, I would not want this to be the total expectation but a portion of the opportunity. I could then take this result and determine that this represents 40% of the opportunity and each territory is expected to generate 60% of their results from new prospects.
This would give you a consistent method for all areas and then you could model your compensation plan around the expected results. Like the first example, the result would be giving everyone the same reasonable chance for achieving expectation, and those that surpass the expectation are the top performers and those falling short need further attention.
It is important your sales assignments and compensation plans reflect the current business market, given the changes we are faced with moving from a mature business model to new areas of opportunity, like MPS.
The previous methods of determining these may no longer be used. You want the territories to be reflective of a realistic opportunity, you want the methods of determination to be consistent among all sales professionals, and you want the sales compensation plans tied into the opportunities & quotas so the outcome of pay for performance is truly, pay for performance.