Like supermarkets selling milk or eggs below cost, some salespeople try to "get customers in the door" by exploiting loss leaders. The strategy is one of the ways sales reps can game their comp plans, as discussed in my previous blog post and identified in recent interviews ZS conducted with sales compensation analysts.
As today’s economy grows increasingly complex, sales strategies take on higher degrees of complexity, which often leads to a commensurate increase in the complexity of the compensation plan, required to reflect the nuances of the sales strategy.
Good compensation design often involves trade-offs, and one of the most central is the trade-off between:
1) Designing a plan that captures all aspects of the sales strategy
2) Designing a plan that is simple and easy to understand
When plan designers do not negotiate the trade-off effectively, gaming opportunities emerge. In this blog, I’m going to discuss another gambit used when salespeople game the compensation plan through the plan components: the loss leader maneuver.
Most reps are charged with selling a broad portfolio of products. Inevitably, some products are easier to sell than others. The easiest products to sell are often those sold at a loss so that the company can get its foot in the door of a big buyer.
Well-designed compensation plans emphasize priority products through kickers, higher commission rates, SPIFFs, etc. Similarly, effective plans de-emphasize products that have lower priority. Comp plans that do not differentiate products effectively present a big gaming opportunity.
One comp analyst interviewed for this project lamented that many reps at her firm were selling too many loss leaders, making themselves a bundle while losing the company a fortune. She said brusquely, "This will change next year."
Here are three smart ways to combat the loss leader maneuver:
1) Create a separate comp plan component for loss leader products. This component could be weighted lower than the others.
2) Design the "loss leader" component with sharp decelerators to limit upside payouts
3) Reward sales for loss leaders at a lower commission rate, so these products are not the sales reps’ primary focus but rather are truly used as a foot in the door.
What other mechanisms have you used to prevent the loss leader maneuver? In my next blog, I will talk about ways in which reps exploit their comp plans by gaming the measures.