Tip: Consider Cost-to-Serve in Sales Compensation Plans - Modern Distribution Management

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Tip: Consider Cost-to-Serve in Sales Compensation Plans

Basing sales comp plans only on sales and gross profit may negatively impact profitability.

Many sales compensation plans are built on sales and gross profit because they're easy to measure. But focusing solely on those factors may have a negative impact on profitability, says Tony Pericle, founder of Profit Optics, in Build a Better Sales Comp Plan. Distributors should consider the true cost of doing business, or the cost-to-serve, in a strategic sales compensation plan.

"While gross profit dollars measure profitability, it's only one aspect of profitability," Pericle says. If salesperson one brings in $10,000 one month on 75 customers, while salesperson two brings in $8,000 on five customers, "there's an order of magnitude difference" between the costs each salesperson is causing the company even though it looks like salesperson one made the company more money, he says.

Throw in other variables such as order size, order frequency and time spent, and the question of what truly constitutes a profitable sale – not to mention how to compensate for it – may become more difficult to answer. But including these factors will allow a company to truly reward the A players in the company.

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