Should a brand adopt group or individual sales incentives for its retail sales force? Could differences in brand strength or brand equity affect how brands incentivize their sales force?
In a new Journal of Marketing study, we offer a compelling reason for considering brand strength when designing sales incentives in brand-managed retail (BMR) sales settings.
For context: a BMR setting may be a store-within-a-store (SWAS), such as the cosmetics counters in most major U.S. department stores, or a brand-managed standalone store such as Aveda or Gap. Such BMR settings are typically staffed by the brand rather than the retailer, with the brand also having autonomy over inventory and pricing decisions for its products. Although BMR has been historically more prevalent in Europe and Asia than in the U.S., brands are adding SWAS offerings everywhere to reach new customers and to offer additional touchpoints for customers.
Our research team explores this dynamic retail context and investigates the sales incentives used in a variety of BMR settings. In our investigation, we uncover a significant variability in the use of individual and group sales incentives by brands in these settings. Some brands opt for individual incentives to motivate salespeople based on performance, others lean toward group incentives, and a portion adopt a combination of both approaches. This diversity in incentive structures prompted us to explore the underlying factors driving incentive choices by brands.
The literature shows that among other factors, brand strength and sales incentives affect the selling effectiveness of retail salespersons, leading us to conjecture that the differences in incentive choices by brands may be tied to the strength of those brands.
The Secret to Designing Incentives
We use a theoretical principal-agent model to investigate how brand strength may influence the relative profitability of different types of incentives. Our model assumes a BMR setting with salespersons serving a mix of consumers, including some who might be repeat buyers ready to purchase and others who are uninformed about the brand’s value proposition and need to be sold by the salesperson.
In designing incentives, a firm would ideally like to offer incentives only for selling to the uninformed consumer because this sale requires salesperson effort. Firms cannot usually observe whether a sale made by an individual salesperson was to an uninformed consumer; instead, firms have better information on whether the group as a whole sold to an uninformed consumer because the group output in this case would be higher than otherwise. Our analysis suggests that this information advantage of group incentives is more potent for weaker brands, resulting in the main finding that weaker brands may be more profitable with group incentives. Conversely, we find that stronger brands would be better off with individual salesperson incentives.
Weaker brands may be more profitable with group incentives. Conversely, we find that stronger brands would be better off with individual salesperson incentives.
An important qualification to our theoretical results: they apply to somewhat established brands and not to very weak brands. For example, Clarins and Estee Lauder are both established cosmetic brands, but Clarins ranks lower than Estee Lauder in many brand equity rankings and may benefit from using group incentives in its BMR operations, while Estee Lauder may benefit less.
Lessons for Marketing Managers
Our findings underscore the efficiency implications of aligning sales incentives with brand strength. We offer the following lessons to help Chief Marketing Officers make better decisions about individual and group incentives.
- Managers of BMR sales operations need to determine whether their brand falls on the weak or strong end of the spectrum. This empirical question is to be answered by data, which could be from brand equity metrics such as the revenue premium or from surveys that measure consumers’ knowledge, attitude, and emotional connection toward the brand. These data can help managers form a judgement about the strength of their brand and determine the best sales incentives.
- A combination of individual and group incentives can sometimes be better than having just one type of incentive, although this is less so for weaker brands, which may find that offering a group incentive alone is best.
- Our study underscores the importance of adopting a holistic approach when devising marketing strategies. For instance, when a brand allocates substantial resources over time to elevate its brand image, it is imperative for managers to evaluate potential adjustments to the compensation structures of their customer-facing BMR employees.
A limitation of our study is that it focuses on BMR settings, so future research could examine the applicability of our results beyond these settings. As seen from our empirical results, data from two different settings are consistent with our theoretical predictions. Yet, while the literature does not offer an alternative explanation for why brand strength may be related to the choice of group versus individual incentives, new alternative explanations for our results may emerge in the future.
Read the Full Study for Complete Details
Source: Wenshu Zhang, Jia Li, and Subramanian Balachander, “Group or Individual Sales Incentives? What is Best for Brand-Managed Retail Sales Operations?” Journal of Marketing.
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Wenshu Zhang is Assistant Professor of Marketing, Fairleigh Dickinson University, USA.
Jia Li is Associate Professor of Marketing, Wake Forest University, USA.
Subramanian Balachander is Professor of Marketing, University of California Riverside, USA.