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

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

3. 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

4. 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

5. Response Curve

6. 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)

7. 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)

8. 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?

9. Two extreme types of compensation systems
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

10. Types of systems (cont.)
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)

11. 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

12. Behaviors: 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)

13. Behaviors (cont.) 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.

14. Behavior (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

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

16. Which system when? Organizational Objectives
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

17. Which systems when? Business environment
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)

18. 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

19. 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

20. 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

21. ‘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.

22. Industrat Stock Prices22

23. Prediction Market 23

24. Licensing in Industrat
Product Technology Project Res Sus BCost
KALA PKALA
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 24

25. Breaking News
Firm 2 has announced completion of a KOREX prototype based on Technology 4.
Product Technology Project Res Sus BCost
PKEA
Firm 2 is offering the following standard licensing contract to any interested party:
Annual fee: $500,000, royalty: 10% 25