Sign Up for Our Newsletter
Don't Let Incentive Program ROI Myopia Blindside You
FOR IMMEDIATE RELEASE
Jon Lieb/Briana Shymkus
Incentive Research Foundation Study Demonstrates Value of Quantitatively Assessing All Business Functions to Accurately Measure Incentive Program Results
New York, NY (May 11, 2007)—How do sales incentive programs affect procurement and cost of goods? Shipping? Cash flow? The answers to these rarely posed questions are critical in assessing the bottom-line impact of sales incentive programs, revealed the results of a new study entitled Assessing the Impact of Sales Incentive Programs: A Business Process Perspective. Dr. Srinath Gopalakrishna, Associate Professor of Marketing, University of Missouri-Columbia, designed and executed the study at the behest of the Incentive Research Foundation, a non-profit organization that funds and conducts research for the incentive industry. A “business process” approach led to a net ROI of 84% following a distributor sales incentive program for a tool manufacturer – as compared to a projected ROI of -92% if the company had focused solely on sales growth.
“Developing an incentive program with a focus on sales growth alone is myopic,” says Dr. Gopalakrishna. “Their impact extends well beyond the sales function to other constituents and processes within the organization.” A preoccupation with sales growth with no consideration for other business functions can produce a domino effect including: 1) an adverse affect on cash flow, an important business metric; 2) a possible disruption in supplies leading to unforeseen procurement expenditures because of the need to procure additional raw materials, often at short notice, to support higher sales arising from the incentive program; 3) extra shipping costs of ordered merchandise; 4) acquisition of new accounts may involve other subtle aspects such as customer quality. For example, some new accounts may delay paying their bills, causing an increase in accounts receivable which can hurt bottom-line profitability, specifically cash flow and the management of short-term capital; and 5) planning for additional workers (even though it may be temporary) involves considerable expense including the cost of hiring and training new workers.
Dr. Gopalakrishna’s goal to establish greater credibility and accountability for sales incentive programs was met by establishing a strong empirical foundation for analysis, the use of benchmarks for a comparison of results and a cross-functional perspective to evaluate program effectiveness. The research focused on a distributor incentive program for a well-known hand-tool manufacturer based in the United States with stated goals of increasing net sales by $1 million and improving gross margins from 30.4% to 32%.
The distributor incentive program encompassed – and performance targets/reward points were established for – four dimensions: increasing the sales/purchase volumes of products, improving the invoice aging, providing the manufacturer with shipping date flexibility and increasing distributor knowledge and understanding of specific products to support sales objectives.
A benchmark based on the same sales period during the three prior years was established and the following variables were considered:
Monthly sales aggregated across the distributors
Monthly cost of goods sold (COGS)
Finished goods inventory at the end of each month
Accounts receivable at the end of each month
Cost of the incentive program
Additional costs incurred by procurement and sales (total: $570,000)
The net ROI for the distributor incentive program was approximately 84%, as compared to projected ROI of -92% if the company had focused solely on sales growth.
The results of Assessing the Impact of Sales Incentive Programs: A Business Process Perspective clearly shows that simply plunging into a sales incentive program without any regard for the likely impact on other parts of the organization may be naïve. Such a short-sighted view can generate serious and often unanticipated side effects for the business operation that may turn out to be detrimental in the long run. A business process approach, on the other hand, enables the planning and creation of the needed infrastructure and additional investments wherever necessary, to support the results arising from the sales incentive program.
About the Incentive Research Foundation
Assessing the Impact of Sales Incentive Programs: A Business Process Perspective is a follow-up study to last year’s Exploratory Study of Sales Incentive Programs. The Incentive Research Foundation, which sponsored this latest study, funds and promotes research to advance the science, enhance the awareness and appropriate application of motivation and incentives in business and industry globally. The goal is to increase the understanding, effective use and resultant benefits of incentives to businesses that currently use incentives and others interested in improved performance. A number of research initiatives by the Incentive Research Foundation are planned to investigate the value and importance of incentive programs. Please go to www.theirf.org for more information on this and other studies.