New Sales Commissions

In the process of digesting all of the regulatory change that is being thrown at our industry, it is easy to overlook implications for change and later realize that we are behind the curve. One area that seems to be a potential trouble spot that we need to get in front of is sales compensation.

Many providers compensate their sales reps with a formula that is in some way connected to the gross profit generated by the rep. Competitive bidding will cause an enormous decline in gross profit margin for most providers (without respect to location). On top of that, we should expect an increase in cost of goods as a result of a pass-through of the excise tax imposed by the recent health care reform act, making gross profit even thinner.

Profits that can sustain a business will not be achievable with the current percent of revenue being consumed by the sales function. So, a forward-looking transition to new commission structures should commence now. Whatever the new structures look like, a one-size-fits-all kind of solution won’t be practical. Providers with Medicare contracts in competitive bidding areas will have different customer acquisition dynamics than those in rural areas. That should be considered in the design of the commission structure.

Regardless of the dynamics associated with customer acquisition, sales compensation as a percent of revenue will have to decline. That does not mean sales compensation must decline, but to keep that from occurring, providers will have to make the way for sales reps to become more efficient. Some of the places that hold part of the solution include market intelligence, target markets, sales metrics, differentiation, communication channels and technology.

Managers should start with sensitivity analysis to begin to frame their target. After determining the new (most likely lower) percent of revenue that can be allocated to sales compensation, attention has to turn to how to sustain the sales force. If increased sales per rep is a part of the plan, then consider these possibilities.

• Market Intelligence Does the company know everything there is to know about who influences the purchasing of what kinds of DMEPOS? Who in the market is seeking to benefit from that influence, and what is the value proposition they are using? Which entities might enter the market, including start-ups, manufacturers and providers in contiguous and non-contiguous markets? To the same extent that managers and sales reps accept incomplete market intelligence, they must also accept inefficient sales efforts.
• Target Markets In this context, markets should be defined with product-payer combinations. Years ago we established that all markets are not equal. Gone are the days that a sales rep can spend a breath asking for anything short of the best customer or be compensated for acquiring an off-target customer. The way to determine a company’s best customers is to apply activity costs to the product-payer combinations and identify those that make the greatest net profit contributions. Gross profit margin analysis will produce deceiving results.
• Sales Metrics These must reflect the target markets and the company’s progress in acquiring the target revenue. They must also be reflected in the sales compensation, evaluations and communications with the sales team. Frequency and timeliness of reporting are critical and may require changes in business processes to achieve frequency goals, and technology to achieve timeliness and productivity goals.
• Differentiation This may be the most promising area for companies to increase sales effectiveness. Differentiation is about creating, communicating, and proving that you have the best value proposition in the market. Think of the value proposition as what you give in exchange for what you ask the referral source and the patient to give up. The referral source gives up time, risk to reputation, etc. The patient gives up time, money, risk of quality of life, etc. Market intelligence will help you understand the needs of the value proposition.
• Communication Channels Our industry is deeply entrenched in one-on-one communications with referral sources. Opportunity exists, and efficiency demands, that some of that effort be replaced with Web-based channels. Social networking is one of the areas for which new norms must be developed. Another is provider websites. The role of the website must evolve to something similar to the role of a sales rep — identifying leads, nurturing leads and converting them into referral sources or patients.
• Technology Providers need to learn from their vendors. Most of their reps don’t go to the office; they operate from home with mobile technologies that let them manage customer relationships from the road. They also get feedback on their standing via mobile technologies. For example, plenty of opportunity exists to deliver in-services to several doctors’ offices at the same time with webinar technology, for sales reps to write call reports on smartphones or WiFi-enabled laptops, and to fax and print documents with portable equipment. Consider your sales compensation structure now to get in front of a potential problem.

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Wallace Weeks is founder and president of Weeks Group Inc., a Melbourne, Fla.-based strategy consulting firm. You can reach him at 321/752-4514 or [email protected].