Q1: Why DBK company is sensing that the current trend might affect their business?

(Max Words:
100)

The current trend: Slowdown in sales representatives transitioning to leadership roles.

Under the current business model of DBK, sales growth is the function of number of sales reps and
the productivity of each. The sales leadership program hits two targets with one arrow. It makes
sure that the leader increases the sales rep pool on one hand, and on other addresses the falling
productivity (which stagnates after 5 years) by adding more and more new people - having fresh
networks.

Thus, the above trend means the sales reps will be added at a lower pace and on top of that once
after exhausting their network in a few years their individual ability to drive more sales, will fall too.
All this will cause the revenue growth to stagnate.

Q2: What should DBK do? (Max Words: 150)

Recommendation: Commission Increase (26% + 6%) ; Price Increase: 5%

We recommend increasing the compensation from being a leader to (26%+6%) instead of (25%+5%).
The increase in direct compensation to 26% will help arrest to a certain extent, reduction in income
from overlap in sales. Increasing commission from Level 1 sales to 6% from 5% will help improve the
rewards to efforts ratio on being a leader which is the cause of the current problems faced by the
company.

2006 2007 2008 2009 2010E

Monthly Sales per Rep $648 $701 $705 $753 $781

Avg Pcs Sold 139 162 159 171 177
Avg Price $56 $52 $53 $53 $53

Since the increase in commission will have a stress on the company margins, we recommend
increasing the prices by roughly 5%. (Average Selling Price from $53 to $56 as was the case in 2006).
We do not forecast a reduction in demand due to this marginal price increase. The demand for
Women’s Jewellery is price inelastic, a, mere increase of $2.5 for women’s jewellery will not reduce
demand. The following table highlights the financial aspects of this change.

  Old Structure Proposed New Structure

  % Avg Sales Earnings % Avg Sales Earnings
Income Without Leader Status 25% 753.00 188.25 25% 795.62 198.91
             
On Recruiting 3 Leads 25% 414.15 103.54 26% 437.59 113.77
Income From Leads 5% 1944.00 97.20 6% 2054.04 123.24
Income With Leader Status     200.74     237.02
Additional Income from Old to New 36.28
Additional Income per Year 435.35

Assumptions
Market is inelastic to a certain extent (Women's Jewellery), a 5% price increase will have no impact
The women representative value absolute rather than the percentage return (since the average amount is small)
We are assuming a mere $12 increase in case of old structure was not worthy of the added burden of becoming a
leader and to other incentives were necessary