When you want to move specific vehicles at your dealership, do you have a go-to mode? Customer discounts? SPIFFs?
A study completed this summer by researchers at Washington University in St. Louis and the University of British Columbia shows that commissions for sales representatives not only are a great motivator, but also provide a great opportunity for generating the most profits when applied strategically.
Increase commissions, or drop the price?
The study, “A Salesforce-Driven Model of Consumer Choice,” is one of the first to look at how commissions affect not just how much sales reps sell, but also which products are sold. It sheds light on how sales reps have the ability to sway consumers’ purchasing decisions, which changes the way that businesses – in this case, dealers – set up incentives.
Researchers used data from a large car dealership in Japan, combined with comprehensive and global literature research. U.S. dealership data can be difficult to obtain, they said, but they strongly believe that the study results apply to the U.S. and other markets.
One question the researchers set out to answer was Should businesses be using rebates, in terms of reduced prices, or should they be using commission-based approaches? With this particular dealer, data supported that increasing commissions as a way to sell off extra cars would be a better approach than dropping the price.
It also factored in times when reducing commissions was the profit-maker.
“If the product is selling really well, you might want to ask yourself: Is it selling well because of the push by the sales representatives? Or is it selling well because it’s really meeting customers’ needs very well and they’re just asking for the product?” says Raphael Thomadsen, Associate Professor of Marketing at Washington University in St. Louis and co-author of the report. “And if you think it’s the latter, then in those cases you want to reduce the commission.”
In another example, if the customer was just going to substitute a different car at the same dealership, then lowering commissions would be beneficial, since the dealer would reap profit anyway. If the customer was going to leave the dealership, and not substitute the product, then raising commissions was the strategy.
“You might not know on any one sale, but you might have a good idea if, for example, people who look at these certain cars end up buying any of your cars. Or do they end up switching to a competitor’s car?” Thomadsen adds. “Are [you] overpaying for the commission on this one vehicle that makes a lot of profit, if all that’s going to happen if they don’t buy this vehicle is that they’re going to buy another vehicle from you? One that also makes a similar profit margin?”
Holding onto your salespeople
Customer preferences, of course, always have to be carefully considered and factored in. Yes, you want to move a specific car, but only if it meets the customer’s needs.
Some customers can be matched to several different cars. The best salespeople are well educated on the features of all of the cars they sell, and can find a few cars that these customers will like, based on features.
Researchers found that sales reps who had been on the job for a while did better with commissions as incentives than those who were newer to the job.
“The sales representative can try to push certain cars,” says Thomadsen, “but at the end of the day, the sale that you got is going to be a combination of the customer’s preferences and how the sales representatives are incentivized.”
Although not the first time this type of commission-based research has been completed, it is the first time huge amounts of data calculations supported it.
“Our research showed us that not only do consumers have certain product preferences, but sales representatives and their incentivization through commissions has a powerful impact on sales performance,” the authors of the report say. “Our findings shed some light on how companies can strike the right balance to optimize sales.”
The study was backed by INFORMS, an international association for operations research and analytics professionals, and was published last month in its journal, Marketing Science.
What do you think? Have you tried increasing the commission on a certain product to move that product, rather than offering it at a discount to consumers? Write us at firstname.lastname@example.org.