Tag Archives: Deal review

Should the cost of customizing our product be deducted from sales credit?

Customization costs reduce the profit on a deal, and some companies would like to provide incentives to sales people to avoid unnecessary or costly customization. (Of course, some companies’ products are intended to be customized every time, so this would not be a relevant question for them.)

For busiensses that feel sales compensation support is needed to manage the cost of customization, the following approaches are prevalent:

A. Measure sales people on deal margin (rather than the sales value). If you can accurately predict the margin value of the deal, it is a good measure of the value created by the sales person. Many companies avoid this, however, because it results in hair-raising accounting at a contract level and lot of discussion and argument that can actually cut into your sales capacity. But if you can do this in a straight forward way, it is a great way to measure sales people.

B. Reduce sales credit for deals with “excessive” customization– so if a typical deal might include 20 hours of customization work, a similar deal with more hours of customization might have total sales credit (or payment for the deal, which is a little different from reducing deal credit) reduced in proportion to the additional customization work included in the deal. In this example, if the deal were for $100k in sales value with 30 hours of customization vs. 20 typically offered for this sort of deal, then the $100k might be reduced by $1,250 (assuming $125/hour) in recognition of the added cost of the added customization effort.

While either of these approaches will result in compensation-based levers to help manage excessive customizaiton, many companies will simplify the calculation by crediting and paying on the sales value of the deal, but directly managing customization through configuration rules and deal review in advance of proposals.