Researchers from Wake Forest University and University of California-Riverside published a new Journal of Marketing article that examines the dynamic BMR retail context and investigates the sales incentives there.
The study, forthcoming in the Journal of Marketing, is titled “Group or Individual Sales Incentives? What is Best for Brand-Managed Retail Sales Operations?” and is authored by Wenshu Zhang, Jia Li, and Subramanian Balachander.
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?
This new Journal of Marketing study offers a compelling reason for considering brand strength when designing sales incentives in brand-managed retail (BMR) sales settings.
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.
This study explores this dynamic retail context and investigates the sales incentives used in a variety of BMR settings. The researchers 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 towards group incentives, and a portion adopt a combination of both approaches. Zhang explains that “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. This led the researchers to conjecture that the differences in incentive choices by brands may be tied to the strength of those brands.
The Secret to Designing Incentives
The study uses a theoretical principal-agent model to investigate how brand strength may influence the relative profitability of different types of incentives. The 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.
“When designing incentives, a firm would ideally like to offer incentives only for selling to the uninformed consumer because this sale requires salesperson effort. While firms cannot usually observe whether a sale made by an individual salesperson was to an uninformed consumer, it has better information on whether the group as a whole sold to the uninformed consumer because the group output in this case would be higher than otherwise,” says Li. Balachander adds, “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.”
An important qualification to these theoretical results is that 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
The study’s findings underscore the efficiency implications of aligning sales incentives with brand strength. Below are tips 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 consumer surveys that measure their knowledge, attitude, and emotional connection towards the brand. This can help managers form a judgement about the strength of their brand and the best sales incentives for the brand.
- A combination of individual and group incentives can sometimes be better than having just one type of incentive, although not so much for weaker brands, which may find that offering a group incentive alone is best.
- It is important to adopt 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.
Full article and author contact information available at: https://doi.org/10.1177/00222429241249424
About the Journal of Marketing
The Journal of Marketing develops and disseminates knowledge about real-world marketing questions useful to scholars, educators, managers, policy makers, consumers, and other societal stakeholders around the world. Published by the American Marketing Association since its founding in 1936, JM has played a significant role in shaping the content and boundaries of the marketing discipline. Shrihari (Hari) Sridhar (Joe Foster ’56 Chair in Business Leadership, Professor of Marketing at Mays Business School, Texas A&M University) serves as the current Editor in Chief.
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Marilyn Stone is Director, Academic Communities and Journals, American Marketing Association.