Sales Management

MMM IV
Prof M.R.Koshti
Session 3
46 slides**

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Class test no. 1

Time 30 minutes
Each question carries 5 marks
Solve any TWO of the following.

1. Explain difference between Sales & marketing?

(5)
2. What are the objectives of Sales Management?
(Responsibilities towards organization) (5)
3. Explain difference between selling goods and
services on the aspect of Inseparability. (5)
4. Write a note on System selling. (5)

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Last session in brief

Selling of services
Services as opposed to selling of tangible

goods
The importance of system selling-in
contemporary environment
Selling process (Partly)**

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Todays topic
Sales Incentives and compensation
(Is money important?)**

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Motivational roles of the sales compensation

plan
Provide a living wage
2. Adjust pay levels to the performance
3. Provide a mechanism to demonstrate the
congruency between attaining company
goals and individuals goals**
1.

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Requirements of a good sales compensation

plan
1. Provides living wage in the form of secured
2.
3.

4.
5.
6.
7.

income
Fits with the rest of the motivational plans
The plan is fair (Does not penalize the sales
people for the factors beyond heir control, equal
pay for equal performance)
Easy for sales persons to understand
The plan adjusts pay to changes in performance
Economical to administer
Helps in attaining the objectives of the sales
organization**
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Designing a compensation plan

Defining a sales job
Consider the companys general compensation

structure
Consider the compensation pattern in community and
industry
Determining compensation levels (Average)
Provide for various compensation elements (Fixed,
variable, fringe benefits, reimbursement)
Special company needs and problems
Consult the present sales force
Make tentative plan and pre-test it
Revise if necessary
Implement and follow up**
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Types of compensation plans

Straight salary plan (Salary = F)
2. Straight commission plan (Salary = % x
sales)
3. Salary plus commission (Salary = F + % of
sales)**
1.

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Straight Salary
Salesperson paid a set amount of money

based upon hours or days worked

Often adopted when salesperson must
devote significant amounts of time to other
duties
Market research, customer service,
administration**

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Straight salary plan

Advantages?
Simple and economical to
administer
Stability of income
Proper attention to one
customer, as the
salesperson is not required
to handle too many
customers to earn
incentives**

Disadvantages?
Average performance as no
incentive for delivering more
Under compensates
productive and over
compensates poor
performers
difficult to adjust to changing
circumstances **

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10

Straight Commission
Adopted by performance-oriented firms that

pay salesperson for their achievements

Each person is paid a percentage of their
total sales**

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11

Straight commission plan

Advantages
Provides direct monetary
incentive
Provides a means of cost
control
Flexible as different rates for
different products can be fixed
Progressive (Higher
achievements can be
rewarded more)
Salesforce manages time
well**

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Weaknesses
Insecurity as consistent flow of
income is not assured
Sales people focus only on orders
and care less about transmitting
reports, customer service
Sales people pressurize
customer to buy
Sales people resist reduction in
size of sales territories
Ethics (order not shown in its
actual time)
Disputes over accounts **

12

Basis of commission
If volume (Market leadership) is important then sales is the

base
Collection if A/R is the concern
If the firm has excessive order cancellation then shipments /
billing, can be made base
To control price cutting by sales people?
Gross margin (Actual selling price standard transfer price
from production dept) can be taken base
Net profit (Gross margin Selling expenses) base
controls..?
Price cutting and selling expenses
Expenses reimbursed / not reimbursed**
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13

Combination Pay Plan

The combination plan is the most popular
Employed by more than 80% of the firms
May appear in many forms
Salary, commission, individual and group
bonuses
Salesmans income = Fixed salary + % of
sales achieved**

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14

Salary plus commission

Advantages
Security of stable income and
incentive for higher productivity
Motivation introduced by
commission/bonus
Management has greater
control and apparatus to
motivate sales force
A cooperative spirit develops
between salesperson and the
company**

Disadvantages?
Clerical costs are high
Disputes on fixed and
variable components ratio**

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15

Factors influencing design of compensation

scheme

1.
2.
3.
4.

Relation with product life cycle

Introduction .Straight salary
Growthstraight commission
Maturity. Break (auto pilot), training program in
good environmental locations, foreign trips, straight
salary--Decline. Added incentive for selling more
Company financially weak Commission
Long term relation with customer not required
commission**

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16

Factors.
Demographic characteristics
Age 20-28Bachelors.High risk, high
reward, aggressive company..Straight
commission or incentive
28-35..Married 1-2 young children,
established company and stability.Higher
basic + Incentive
35 and abovegrowing children, stability and
steady job.Straight salary**
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17

Bonus
A bonus is paid for accomplishing a specific

sales task**

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18

Fringe benefits (Company benefits 25 to

40% of basic pay
Insurance Life insurance, accident and

disability insurance, Health insurance

Paid vacations Sales persons with long
standing, high achievers
Educational assistance Study leave,
educational programs
Sales force benefits Company car, club
memberships**

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19

Fringe ..
Profit sharing
ESOP Employee stock option
Cafeteria approach Employee selects the

benefits that he wants from the basket

provided by the company **

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20

Ethical Compensation Issues

Major dilemma hire the best salesperson for

the lowest possible salary. Other dilemmas

include
Pay at, below or above market salaries?
Setting a cap on total pay?
Assigning lucrative sales territories?
Team vs. individual incentives?
Frequency of paying commission?
Pay discrimination (with non-selling staff)?**
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21

Sales Expense Plans

Unlimited
Per diem
Limited expense plan**

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22

Unlimited Expense Plan

All legitimate expenses are reimbursed
Plan has a number of advantages
Communicates trust to the sales force
Sales manager can focus on more important issues
Salesperson cannot complain that resources not
available to make sale
Sales force must be given guidance and

expenses must still be monitored to insure

sound judgment

Reimbursed expenses vary by country e.g.

entertainment and alcohol**
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23

Per Diem Expense Plan

The salesperson is given a set amount of money for

each day s/he is in the field

For example, Rs 1500 per day (No separate
expenses on lodging boarding, except customer
entertainment & local travel)
Budget can be set by multiplying rate times total
days sales force expected to travel
Single rate unlikely to work in all locales due to
varying costs
Sales manager must adjust per diem rates regularly
as prices expand or contract**
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24

Limited Expense Plan

The firm sets a maximum daily amount paid

for each category of expense

That is, Rs 1250 for lodging, Rs 500 for
meals, Rs 300 for auto rental, and Rs 200 for
miscellaneous
Limits firms upper travel expense limit
Must be updated and will vary by location**

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25

Case study

Sales compensation plan

Straight salary?
Straight commission?
Mix?**
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Sales and marketing plan

IBO Independent Business Owner /
Distributor
Two ways of income
1. Retail profit
2. Cash back (Commission) on monthly
purchase
For a distributor which component would be
higher?**

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27

1 Retail profit
Distributor buys products from the company at DAP

1.
2.

(Distributor Acquisition Price)

Distributor sells products at MRP, earns profit @ 20%
on DAP
E.g. MRP 375 DAP 313 = 62 i.e. 20% 0n 313
Distributor has complete freedom on
What products, what quantity, when to buy (No
quotas / targets / limit)
What to do with the bought products (Self use / Sell
them in his own sweet time)
Retail profit is realized by the distributor only
when he sells the products.
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Recruiting
The company on its own does not appoint distributors, however

for growth, it needs more and more distributors

Existing distributors have been given the privilege to sponsor
new distributors under them, train them in selling, and get
heavily rewarded for the sales performance of their recruits
and theirtheir recruits.
Cash back scheme determines the income that a distributor will
get from the performance of his recruitsand theirtheir
recruits..**

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2 way of earning income

nd

Cash back on monthly purchase**

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30

Point Value - PV
Objective To bring multi currency sales on

par
1 PV = 60 Rs**

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31

Monthly purchase in
PV (Point Value In a
Calendar month)

BV = Business volume
= DAP Taxes

Amount of cash back

as % of BV

1PV = 60 BV Rs

=>300

18,000

6%

=>1,000

60,000

9%

=>2,000

1,20,000

12 %

=>4,000

2,40,000

15 %

=>7,000

4,20,000

18 %

=>10,000

60,00,000

21 %

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Situation 1
Table

PV
300

You (Distributor)

BV

18000
1000
60000
2000 120000
4000 240000
7000 420000
10000 600000

%
6%
9%
12%
15%
18%
21%

purchase products
worth 50 PV in a
given month
Retail profit =
50x60x20%=600
Cash back = Nil
Your that months
income = Rs 600**
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Situation 2
Table
PV
BV
300
18000
1000
60000
2000 120000
4000 240000
7000 420000
10000 600000

%
6%
9%
12%
15%
18%
21%

You sponsor A, B, C
You, A, B, C, each

purchase products of 50
PV in a given month
(Group PV 200)
Your retail profit =
50x60x20%=600
Cash back = Nil
Your that months
income = Rs 600**

You

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Situation 3
Table
PV
BV
300
18000
1000
60000
2000 120000
4000 240000
7000 420000
10000 600000

%
6%
9%
12%
15%
18%
21%

You

You sponsor D,E,F

You, A, B, C, D, E, F

each purchase products

of 50 PV in a given
month (Group PV 350)
Your retail profit =
50x60x20%=600
Cash back =
350x60x6% =1260
Your that months
income = Rs 600+1260
= 1860**
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35

Situation 4
Like you, A, B, C, D, E, F each

Table
PV
BV
300
18000
1000
60000
2000 120000
4000 240000
7000 420000
10000 600000

%
6%
9%
12%
15%
18%
21%

You

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sponsors 6 distributors. Every

distributor purchases products
of 50 PV in a given month.
Group PV = 50+ 6x350= 2150
Your retail profit =
50x60x20%=600
Group Cash back =
2150x60x12% =15,480
Group A cash back =
350x60x6%= 1260
Same for(B,C,D,E,F)
Your cash back share = 15480
6 x 1260 = 7920
Your that months income = Rs
600+ 7920 = 8520**
36

Situation 5
Table
PV
BV
300
18000
1000
60000
2000 120000
4000
240000
7000
420000
10000 600000

%
6%
9%
12%
15%
18%
21%

You

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Each distributor of A, B, C, D, E, F
sponsors 6 distributors. Every
distributor purchases products of 50
PV in a given month. Group PV 50 +
6 (50+ 6x350) = 12950
Your retail profit = 50x60x20%=600
Group Cash back = 12950x60x21%
= 1,63,170
Group A cash back =
2150x60x12%= 15,480 (B,C,D,E,F)
Your cash back share = 1,63,170 -6
x 15,480 = 70,290
Your that months income = Rs 600+
70,290 = 70,890
SILVER PRODUCER ( who gets
21% commission in one month) /
Gold producer (Silver for 3
months) / Direct Distributor
(Silver for 6 months)**

37

Situation 6
In some month none

Table

PV
BV
300 18000
1000 60000
2000 120000
4000 240000
7000 420000
10000 600000

%
6%
9%
12%
15%
18%
21%

of the distributors in
your group, including
you, buys any product
Your income for that
month is
ZERO
What type of plan is
this?
Straight
commission plan**
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Situation 7
You

Table

PV
BV
300 15000
1000 50000
2000 100000
4000 200000
7000 350000
10000 500000

Sachin

%
6%
9%
12%
15%
18%
21%

200
distributors
What is your commission
if everybody does 50 PV
in a month?**

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Situation 8
When Sachin reaches 21% (Silver producer)....
Your cash back is nil on Sachins purchase

volume as per the differential formula

But company pays you 4% on Sachins
turnover for developing a self sufficient group
(21%) like Sachin, Rs 24000 pm
Emerald (3 Direct Distributors in your
organization)
DIAMOND (6 DDs)..Typical income Rs 4-5 lac
pm **
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 Executive diamond 9 DDs

Double diamond 12 DDs
Triple Diamond 15 DDs
Crown 18 DDs
Crown Ambassador 20 DDs

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Lifestyle of a Crown
Video

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42

What company is this?

Amway
Started in 1959
Operates in 80 countries
Turnover over 5 Bln USD
Home care, Personal care, Skin care, Health
Quality
100% money back
Products not sold through shops
Largest Direct Selling Company
Free enterprise No joining fees**
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43

Presentation / Assignment (10

marks) 2 Options
Option 1
Select any book on Personal Selling

Techniques
Read
Write a book review of 15 pages
Present
Marks
Presentation 5
Written document 5**
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Option 2
Selling assignment
Sell products worth Rs 500 (A)
Marks
Prospect list 1
Sales volume 5 (related to sale)
Presentation 4**

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Submit option in next session (Half

page)
Name
Roll No.
Option Book Review / Selling Assignment
(Change of option possible at any stage,

MMM VI)
Signature
2 marks deducted if choice not given in the
next session*****
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