Business-to-Business Marketing Sales Force Design and Management

Business-to-Business MarketingSales Force Design and Management Haas School of Business UC Berkeley Fall 2008 Week 6 Zsolt Katona 1

Comments/Suggestions Next class Decision times: 80-100min • Industrat • Midterm overview • Relate more to cases/lectures • Less time for Industrat • More info for first few decisions • More on Internet • More B2B theories Last three weeks Week 14: Online Marketing and B2B

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

1. Size of the sales force • The S-shaped response curve: • Dynamics of the sales response curve: What does the sales force do? • Estimation of the sales response curve: • Experimentation • Historical Data Analysis • Delphi Method

Response Curve

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)

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)

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?

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

Outcome based Little control (contact, authority) of management Decentralized Informal “Ad-hoc” Behavior based High level of management control Centralized Formal Structured (well-defined processes) Types of systems (cont.)

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

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

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

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

When are different systems appropriate? • In terms of achieving certain organizational goals • In terms of performing in different business environments

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

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

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

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

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

‘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.

Industrat Stock Prices 22

Prediction Market 23

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 24

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% 25

Business-to-Business Marketing Sales Force Design and Management