Tag Archives: Product launch

We’re launching a new product – what’s the right compensation arrangement for the first year?

While putting incentives in place to reward sales people for their important contribution to the successful launch of a new product is smart, there are a lot of ways to get it wrong. We’ll list the common pitfalls below, then offer some guidance about getting it right.

Common pitfalls in product launch sales incentives

  • Putting the new product sales into the main quota/goal. New product launches may have schedules, but we know that they often slip, or turn into a phased launch. In addition, it’s very difficult to predict how fast demand will pick up, especially by sales territory or customer. For these reasons, adding the expected sales from the new product into the sales goals is almost certain to result in unintended side-effects for any compensation plan that depends on a goal (and that’s most of the plans we’ve seen).
  • Offering an incentive that is not right-sized. If the incentive is only available to the first few who sell the new product, it may be out of reach for most. If it is too small in value, it may inadvertently send the message that these sales aren’t very important. And if it’s too large, you may distract sales people from their important responsibility of keeping the non-new part of the business thriving and growing as well.
  • Making new product success essential for maintaining historical compensation levels, then failing to deliver the product (on time or at all). This is in the disaster category and should only be risked (via high-stakes incentives) if the success of the new product is a bet-the-business imperative.
So, how to get it right? Generally, the idea is to offer enough of an incentive to make it worth whatever effort and risk is involved for the sales person, but not so much that they lose focus on other important results, and to do this without undermining the integrity of the core sales objectives (quotas).

Keys to successful product launch incentives

  1. Be realistic about “when” and “how fast.” And since you probably don’t really know, work with ranges rather than point estimates. For example, We expect to start selling in the first quarter with the first deliveries in April or May. We hope to sell 400 units by mid-year, but realize it could be as few as 200. The total year should end with 500 – 2500 units sold.
  2. Determine what this means for each sales person, again in ranges. Recognize that, especially initially, some may get good traction and others may get nothing at all. For example, We expect about 25% of our sales people may sell 100 units or more this year, another 25% will most likely sell 20 – 100 units, and most will sell fewer than 20.
  3. Determine an affordable-yet-attractive payout rate. Make it worth 15% – 25% of the target incentive for those who “do well” (those who sell 20 -100 units in the example above), and 20% – 30% of the target incentive to those who do really well (more than 100 units in the example above). Options here include:
    • A simple commission in payout/unit sold, or percent of sales value (use margin as the basis for this commission only in very low margin businesses like distribution). For example, if we want to give the person who sells 50 units $2,500, the commission would be $50/unit.
    • A declining commission so that the first few sales are the most valuable to the sales person, and the rest (once it’s gotten easier to sell it) are still valuable but less so. For example, $100 each for the first 10 units, then $37.50 for all units from #11 onward. Alternatively, if a fast start is important, the rate could decline through the year. For example, $100 for all units sold in the first half, $50 for all units sold in Q3, and $25 for all units sold in Q4.
    • An accelerating commission so that the more that is sold, the more is earned per unit. This works more like traditional commission plans, and is a common arrangement. However, in a new product launch, those first few sales are likely the hardest, so this type of commission mechanic is not usually the best choice.
    • An objectives-type bonus opportunity for those responsible for high-influence customers. For example, $2500 payable when XYZ Customer commits to ABC product in volume of at least 100 units over the next 12 months
  4. Monitor and adjust during the year. You’ve left your core goals alone, so you don’t have to worry about them. And ideally you’ve documented this opportunity in a presentation or addendum, and not in the primary sales compensation plan document (so you don’t have to officially modify it if you change this incentive). You may find as the year goes by that your incentive isn’t rich enough, or isn’t targeted as well as it could have been. If so, it’s OK to add to it to make it more attractive, or adjust timing if the product is delayed (for example, extending it into the first quarter of the following year). However, it’s not a good idea to “take back” an opportunity you’ve put out there for your people if it turns out that they are doing “too well.” That’s a “problem” you have to decide to live with once you’ve launched.
Please share your own experience and ideas in the comments section below.