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Archive for December 7th, 2005

Incentives and behavior

I was supprised at how much incentives influence behavior. Incentives comes in many different form: vacation, christmas party… and money. The other day a coworker was pissed at me about a $3 commission. (She didn’t know I credited it to her to begin with). Which makes me thinking the power of incentive, and how the right incentive can heavily affect your business.

Sales work on commission. Everybody knows that. But what you probably didn’t know is that almost every retailer (i.e. Brookstone, Herman Miller) offer a discretionary discount to help difficult sales. The more the item sell for, the more commission the sales associate gets. That seems to work perfectly as that aligns with the company’s bottom line, at the same time let individual sales associate make the decision on how much discount does he/she needs to give to make the sale. But what’s flawed in this picture is the numbers.

Suppose an item is $1000 and the discretionary discount is 20%. At a standard commission rate of 1%, the maxium commission that an associate can make is $10. But if the item sell for $800, to the sales associate, after tax, is only a $1.5 difference in his commission. When it’s a trade off between spending 20 minutes more to put $200 in the company bottomline or drop the $1.5 at the very begining to speed up the sale, most people will do the later.

What if there is a tiered commission structure that let the sales associate pick between giving the discount to one customer or another? Supposed we put the first 10% discount at 1% commision payout, and the second 10% at 10% payout. Selling the item for $900 now makes the associate $18. Each $10 subsequently will cost the sale associate approximately $0.75. The associate have the incentive to sell the item (cause even at $800 it would be worth $8), and even more incentive to sell the item at close to full price. That empower the associate to make his/her own choice in who to give the discount to.

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