Salesforce Design

							Business-to-Business Marketing
   Sales Force Design and Management

        Haas School of Business
             UC Berkeley

               Fall 2008
                Week 6

               Zsolt Katona




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               Comments/Suggestions


• Industrat
   –   Midterm overview                    Next class
   –   Relate more to cases/lectures
   –   Less time for Industrat             Decision times: 80-100min
   –   More info for first few decisions


• More on Internet               Last three weeks
                                 Week 14: Online Marketing and B2B
• More B2B theories


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                     Sales Force

1. Size of the sales force

2. Allocation of the sales force

3. Compensation of the sales force

4. Motivation of the sales force




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            1. Size of the sales force

• The S-shaped response curve:

                                         xa
             s( x )  s0  ( s  s0 )
                                       b  xa


• Dynamics of the sales response curve:
       What does the sales force do?

• Estimation of the sales response curve:
   – Experimentation
   – Historical Data Analysis
   – Delphi Method

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Response Curve




                 5
         2. Allocation of the sales force

• Sales teams
   –   Salesperson - Account representative
   –   Engineer - Systems Engineer
   –   Service and Support
   –   Administrator

• Specialized sales teams
   – by industry
   – by geography
   – by transaction type (e.g. open bid, re-buy, RFP)




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            Sales force allocation

• Allocate Sales teams by macro-segments (i.e
  according to specialization)

• Allocate Team members by micro-segments (i.e.
  according to decision makers in the DMU)




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          3. Sales force compensation

• Approach 1: To what extent should the sales force be
  part of the firm
   – Transaction Costs Analysis (Williamson)
   – Q: Where are the boundaries of the firm?


• Approach 2: How should the “contract” be designed
  for the sales-people (agents)
   – Agency Theory - Contract theory
   – Q: What proportion of the salesperson’s compensation is
     salary vs. commission?




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             Two extreme types of
            compensation systems

• Outcome Based:           • Behavior based:
  Performance evaluated      Performance evaluated
  on a few observable        on observed behavior
  results (e.g. sales)       set by management
                           • Mostly fixed
• Mostly variable            compensation (salary)
  compensation
                           • Company bears the risk
  (commission, bonus)        of low sales
• Sales-person bears the
  risk of low sales



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            Types of systems (cont.)


Outcome based                Behavior based


• Little control (contact,   • High level of
  authority) of                management control
  management                 • Centralized
• Decentralized              • Formal
                             • Structured (well-defined
• Informal                     processes)
• “Ad-hoc”



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 Behaviors that result from the different
                systems

Behaviors are a result of:

   – Self selection: In the long-run only certain types of
     employees stay with the firm

   – Adaptation: Even the same employees adjust their
     behavior to the incentive system




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                     Behaviors:

Outcome based              Behavior based
• Focused on tangible      • Less focused on
  results                    tangible results
• Often work harder        • Often work less hard
• Good at individual       • More team oriented
  selling
• Willing to take risks    • Risk averse
• Entrepreneurial          • “Implementor”
• Independent (freely      • Cooperative/tolerant
  disagree with              (agree with
  management)                management)

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                 Behaviors (cont.)

Outcome based                   Behavior based
• Stronger customer             • Weaker relationship
  relationship                    with customer
• Takes more customer’s         • Takes more company’s
  side                            side
• Less loyal to company         • Loyal (job switch less
  (switches job easily)           likely)
• Very interested in            • More interested in “self-
  tangible results ($, trips,     rewards”: feeling of
  etc.)                           achievement, personal
                                  growth, etc.

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                Behavior (cont.)

Outcome based              Behavior based
• Has less knowledge of    • More knowledge of
   – product line             – product line
   – company                  – company
• Often substitutes        • Works “smarter”
  analysis with effort       (analysis, expertise)
• Somewhat more likely     • Less likely to engage in
  to engage in ethically     ethically questionable
  questionable behavior      behavior




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When are different systems appropriate?


• In terms of achieving certain organizational goals

• In terms of performing in different business
  environments




                                                       15
               Which system when?
             Organizational Objectives

Outcome based                Behavior based
• To achieve short term      • To generate long term
  tangible results (sales,     results
  market share, etc)            – implement a complex
                                  strategy
• To lower overhead
                                – achieve loyalty/control
• To promote
                             • To teach salespeople
  entrepreneurial sales
  spirit                     • To grow good managers
                             • To promote teamwork
• Generate knowledge
  about customers


                                                       16
              Which systems when?
              Business environment

Output based               Behavior based
• When output is clearly   • When inputs are better
  measurable                 observed than outputs
• When output depends      • When output is vaguely
  strongly on                related to behavior
  unobservable behavior      (uncertainty)
• When sales process       • When sales process and
                             products are very complex
  and products are not       and require non sales-related
  too complex                activities (traveling)



                                                      17
                       Mixed systems
• Extreme outcome/behavior based systems almost
  never exist
• Mixed systems:
   – commission is some proportion of salary
   – management control exists but limited
• Mixed systems need to be consistent: incentive
  structure has to fit the level of control (authority)

 Motivation (effort)




                                        Coordination
                                                          18
     Examples of inconsistent systems

• Low salary/high commission
   – Activist managers
       • want reports
       • severe sales-process policy
   – Result: conflict


• High salary/low commission
   – No managerial support/direction
       • Manager is out, selling
       • No monitoring of behavior
   – Result: wasted resources



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   Summary on compensation systems

• Each system has its advantages and drawbacks
  (avoid management fads)
• An optimal system is probably a mixed system
• The system has to be consistent
   – Don’t send conflicting signals to salespeople
   – Don’t ask actions that you cannot get/observe
   – Avoid having conflict between management and salespeople




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                   ‘Soft’ motivation (IMAGE)
• Beyond financial incentives, the sales force also needs to be motivated
  psychologically: internal marketing

• The tension is between
    – fueling competition between salespeople
    – making sure they feel “safe” (to avoid unpredictable/unproductive behavior).


• Some basic principles:
    – People like to compete against other people instead of abstract standards.
      (competition based on rankings).
    – People become de-motivated if they are too far ahead or behind others.
    – Reward system needs to be fair on average only.
    – People need unexpected rewards (surprises) to be motivated (wear out).
    – People prefer frequent and small rewards to infrequent large ones.
    – Large rewards promote counter productive political behavior (gaming).
    – Competition needs “face-saving” device not to de-motivate the losers.

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Industrat Stock Prices




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Prediction Market




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             Licensing in Industrat
Product        Technology     Project         Res    Sus       BCost
KALA               2          PKALA          10000 50          280
Firm 1 can license this project to another firm that does not have
Technology 2 (sample licensing contracts).
Custom contract: you license all current and future projects
developed based on a technology (like in joint ventures).

Product        Technology     Project        Conv Cond BCost
LAME            5 (LOMEX) PLAA               100     200       750



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                  Breaking News
Firm 2 has announced completion of a KOREX prototype
based on Technology 4.

Product        Technology     Project          Res   Sus     BCost
   -               4          PKEA           10000 50        160
Firm 2 is offering the following standard licensing contract to any
interested party:
Annual fee: $500,000, royalty: 10%




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