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Product Management v. Sales: Profit Based Incentives for Both

May 2017 Product, Selling

Can both product managers and salespeople have their incentives and key performance indicators aligned to the corporate goal: profits?  Yes.  They can and should, but it won’t be the same for both and we need to get specific.

In my last article, Product Management v. Sales: Don’t Confuse Your Market, I explored how sales responsibilities could be aligned to customer assignments and product management responsibilities could be aligned to customer challenges addressed.  In this article, we take that one step further and explore performance incentives for both.

Goals and Incentives

Incentive alignment is a key element of organizational strategy.  In team endeavors, individuals need to know how their performance is measured and evaluated. And to encourage the team to drive performance in the direction the leader desires the key performance indicators need to be aligned with the organizational goal.

This much is known management science.  Unfortunately, implementation is spotty at best.  Let’s correct that.

In absence of an extraordinary situation, the real goal of any business is profits. Not top line revenue or margins measured in percentages. We are talking profit dollars (or euros, pounds, or yuan if you like), not percentages.

The key performance indicators of people whose decisions and actions directly impact profits should be correlated with the profit contribution of their portfolio of responsibility. This is about aligning individual incentives with organizational goals. Moreover, notice that we state their portfolio of responsibility as opposed to some general measurement of overall firm performance—but a specific area in which their decisions and actions determine their profit impact.

Product Managers

For product managers, a key performance metric that meets both of the above criteria, profit correlation and specific to their portfolio of responsibility, is the overall profitability of their product portfolio.

In terms of specificity, we mean the specific product portfolio that an individual product manager manages.

In terms of profitability, we mean the difference between revenue and the promotional and variable costs of their portfolio. Fixed costs are generally not strongly impacted by the decisions and actions of product managers, and therefore should not be included in their performance measurement. We include variable costs as product managers are responsible for product design and packaging, and therefore their decisions impact variable costs. We include promotional cost for product managers since they should be held accountable for their marketing communication efforts. And we include revenue as product managers are responsible for pricing, contributing to price variance policy decisions, and overall sales volume. Exposing product managers to the fluctuations in variable costs has generally not proven as contentious as doing so with sales managers, but if it is a challenge we would suggest using a proxy metric.

Sales People

For salespeople, a key performance metric that meets both of the above criteria, profit correlation and portfolio specific responsibility, are Deal Points.  Deal Points are a means to introduce profit-based incentives at the sales level.

Deal Points are measured at the transaction level and reflect the quantity sold and price capture like revenue, but importantly differ in their correlation to profits.  Deal Points reflect the profitability of the revenue gained by providing a sales kicker, which increases the reduction of the Deal Points key performance indicator faster than a Deal Revenue key performance indicator—as prices are negotiated with customers downward.

Since salespeople are specifically responsible for the quantity they sell and the price they capture with the customer transactions they manage, Deal Points are aligned with their individual portfolio of responsibility.  Since Deal Points don’t directly depend on variable nor fixed costs, they exclude issues, which are outside of the salesperson’s control.  Furthermore, since Deal Points are calculated using a Target Price as a basis, where the Target Price is determined by pricing and commercial policy, it specifically measures the impact of sales people’s decisions made during negotiation; not decisions made by corporate executives.

Same but Different

Both sales people and product managers can and should have profit based incentives. For sales people, their key performance indicator should be measured at the deal level, since that is what they manage. For product managers, their key performance indicator should be measured at the product portfolio level, since that is what they manage. While the specific metrics used for sales and product managers may differ, their aim is the same: focus individual’s decisions and actions on their profit impact to drive the organizational goal of higher profits.

 



About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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