COMPENSATION-PAY FOR WHAT YOU WANT
A few years ago, a private equity firm that purchased a company based on a simple throughput model recruited me to analyze their new investment from within. In short, this company sold spray tanning booths and the solution that the booths dispensed. The simple assumption was that the more booths that they sold, the more solution sales would follow. The number of booths sold was their key performance indicator, and they built their added compensation models around that activity. As such, the sales staff had its marching orders.
If you've never worked for a private equity firm, in my experience, they don't mind spending money, but they demand results, which is where I came into the picture. I'll spare you the details, but suffice to say the sales team they'd recruited, trained and compensated was selling booths and as such earning healthy commissions, but the throughput of high margin solution sales was not following. Worse still, the rate of booth sales was trending downward as was the average sales price and so were the sales staff's commissions. This lead to a downward spiral: diminishing KPI's augured lower sales, lower sales meant lower commissions and higher turnover - most notably departures of the best salespeople, who aggressively sought their desired earning potential elsewhere.
As the newly appointed director of sales, I was responsible for identifying trends, causes and building compensation models to ensure we were maximizing our returns on investments. Frankly, as a newcomer to the industry, I was at a loss as to where to look first, so I arranged a conversation with the latest addition to the sales team, who was having moderate success in selling booths relative to the veterans, to investigate what she was doing differently rather than assuming it was just beginner's luck.
Her ingenuity was simple and eminently logical in achieving the company's stated objective, which was to sell booths. She quickly realized that many of the salons she would call upon already had a booth, i.e., the tanning salon market was saturated, hence the diminishing booth sales. (In economic jargon, the original growth model failed to account for diminishing marginal returns.) However, she could generate some demand by offering to help these salons sell their older model booth to make way for the latest innovation in spray-tan delivery systems. Essentially, she employed a car salesman's playbook: sell new models via trade-ins on the used cars.
This was a classic instance when a short-run solution had an unintended long-run problem. Namely, these used booths created competition for our new models - both diminishing demand and increasing downward pricing pressure. Economists can visualize the outcome of such tactics, but without developing a new strategy it is difficult to transform policies within an organization based on theoretical concepts most everyone actively tried to avoid in school.
This is where data analysis enters the process. In particular, analyzing data differently often tells a different story despite it coming from the same source. Namely, I went about challenging the original assumption that each booth sold would yield higher throughput market-wide, and though it is necessary to have a booth to sell some solution a new booth is not necessarily sufficient to sell more solution.
Fortunately for us, I had access to historical booth sales and solution sales by location, so I could theoretically measure the correlation on a case-by-case basis, aggregate it for comparison over varying time intervals and ultimately develop a new business model for our company and sales team.
I will save the development of what became the Sales Analysis Workbook, or SAW as the sales team called it, for an article focused on using modeling to simultaneously assess your market conditions, consult existing clientele on best practices and collaboratively increase returns on investments. The immediate output of the SAW, or the 'eureka moment' that came from having a comprehensive analysis tool was identifying that the greatest indicator of throughput of a booth in the market was not if it was new or used, brand X or brand Y or it was a mom and pop location or part of a national chain. Instead, it was how many booths a location had on site.
Specifically, there was a relatively small number of salons with more than one operational spray booth in my data set, but these locations boasted nearly 50% more throughput per booth than locations that had only one. This was a transformative revelation considering when you compare two sales strategies: replace equipment vs. expand capacity, the benefits for both the salon and our firm where immense:
The chart above can be distilled to the respective growth rates. Previously, the sales spiel was 'buy a new booth and grow your spray tanning business by 25%,' which was good in relative terms but when put in ROI terms that growth rate might not be sufficient to justify investment in replacement capital equipment. Alternatively, the data revealed a synergistic benefit, i.e. improved productivity of existing capital due to the addition of capacity. Admittedly, there was some justifiable cognitive dissonance to talk through how and why this was in fact the case in application, but that is precisely the point of a well-informed, properly armed and incentivized sales staff.
As such, the added compensation model that came of this analysis wasn't a standardized fee structure per booth, but the new plan paid lavishly on incremental booth sales and added solution growth targets, because this activity accomplished what everyone wanted: restored KPI's for the private equity firm, increased throughput of booths and increased ROI for salons on capital investments. Additionally, aside from increased commission opportunities, the sales staff enjoyed having consultative, fact-based investment discussions with their clientele using a modified SAW to show real-world results to prove the economies of scale of adding capacity rather than feeling like used car salesmen constantly haggling over prices.
Ultimately, by utilizing data, everyone understood how to get what they wanted by paying for the proper activity.
Please contact Small World Recruiting to see how we might help you with staffing, compensation and analysis of your firm to ensure you get what you want when you pay for something you need.
Damien Feiklowicz, Strategic Advisor