How To Pay Sales Incentives On A New Product
Congrats! Your company is going to launch a new product into the market next year. I am sure this has been a long-awaited release, and many hours have been spent in this effort. Most likely including your go to market strategy and the channels you will be using to sell this product. But have you considered how you will be incentivizing the sales team to sell this new product? If you have considered, great glad you have that set up. If you haven't considered, this blog is for you.
The two main ways to incentivize new product sales are:
- Part of the Sales Compensation Plan
- SPIFF
Let’s discuss each of these options in a bit more detail.
PART OF THE SALES COMPENSATION PLAN
The ideal scenario with all sales incentives is to include them in the sales compensation plan. Because if they are part of the comp plan then they are paid out of the target variable. However, in order to include the new product into the plan you have to be able to set quotas. Once quotas are set, the incentive will be paid in line with their achievement of quota.
The challenge with this approach is how reliable is the product in its early stages, and if you have claw back language in your compensation plan. I’ll give you a real-life example, there was a company who launched a product that was not fully vetted, but they wanted to please the customers since it was a highly anticipated product. The sales team did their job and sold many units, and received their commissions accordingly. However, shortly after the sales customers realized the product had flaws and cancelled their agreements. Per the sales compensation plan, commissions had to be deducted from the reps. As you can imagine, this caused frustration in the sales team because they did their part, but the product was not up to par. From the company perspective, they were paying commission and losing sales. In the end, the company had to absorb the cost of those sales because the issue was the product, not the sales team. To avoid this, make sure the product has fully gone through the required process, with proper QA before releasing.
In most situations, the compensation plan will not be the best option for new product launches. Reason being is that it is very difficult to set quotas for new products. A company can estimate at a very high-level projected sales but reality maybe very different. Then, if you take that a step further, and allocate that goal to individuals, you may have many sales reps blowing out quota or under-performing. Unless you have enough information to set the quotas fairly then its best to do option two, a SPIFF.
SPIFF
In general, most companies will use a SPIFF for new product launches. Because its simpler, and there are many unknowns still. The projected sales, performance of the product and market receptiveness is still to be determined. Despite it being paid on top of the target variable, the benefit of using this type of incentive is that it allows you to compensate your employees while determining the actual sales the new product will generate and not penalizing the rep if the product doesn't initially meet customer expectations. In addition, if it’s a set incentive amount per sale then you will know your expected expense for budgeting purposes.
As another suggestion, let’s say the amount you have in your forecast to spend on the new product SPIFF is not as attractive as you would like it to be. You can also add the revenue for the new product as a criteria for your non-cash awards. As an example, you can make the new product revenue a qualifier for President’s Club or Admirals Club (a type of boost for club eligibility).
CONCLUSION
Now you can choose which option works best for you, but in my experience, the best option is actually a combination. Do a SPIFF at first to get a better foothold on projected sales and any product issues, and then once you have enough data you can build it into the sales compensation plan in the following period. Keeping in mind, as always, SPIFFs are additional cash out on top of a sales compensation plan. However, with a new product SPIFF you will also be receiving revenue. Therefore its important for a company to cost model sales comp plans, along with SPIFFs, and review their CCOS before plan rollout.
The goal with sales incentives is to reward sales teams appropriately for their efforts in driving sales, in line with market pay and within a company’s financial constraints. If you want to learn more on how to build sales compensation plans and SPIFFs then checkout our sales comp course here.
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