You may not realize that US sales force compensation spending is over three times advertising spending. In 2006 sales force compensation was $800 billion, Meanwhile US advertising spend is estimated at only $187 Billion, in 2015.
Sales is the world's second oldest profession and its compensation is an evergreen question in sales for thousands of years. The trouble is, do whatever management, a large number of the sales force will tend to perform at only the average or poor level. Only about 20% of the sales force tends to perform at the exceptional level, by results. This after you do your best in recruitment,training and compensation. Once again the Jack Welch 4 E's an one P seems to operate in sales.
In terms of spending on sales force large scale aggregate studies (quoted in Chung,Steenburg and Sudhir 2014 ) show:
- If you increase your sales force spending by 1% your sales would go up by 0.34%
- If you increase your advertising expenses by 1% your sales would go up by 0.22%
- If you increase your price by 1% your sales would decrease by 2.62%
While spending on sales force gives slightly better results than advertising- it still does'nt explain why so much more spending on sales force compared to advertising. Here is our take:
You feel better about attribution: Attribution is the idea that you should be able to trace back a sale to the expenses you incurred on selling. This could be a particular ad campaign or the sales force commission or a price discount. You feel comfort when you can see your salesperson working.When you put a salesperson on a commission or bonus- they are zealous in ensuring that they get the credit and commission. There is no doubt that a particular salesperson got you the contract- particularly when commissions are involved. In off-line advertising it is much harder to attribute a particular TV ad to a sale.
An illustration of this is the case of a seller's agent in real estate. Commission for real estate sales is 6% which is taken by the selling agent from the selling price. In case there is a buyer's agent then the buyer's agent works with the seller's agent and each gets 3% from the selling price.The seller loses 6%from the selling price to the agent. In our example, the seller wanted to save the 6% and had "sale by owner," that had no agent.Upon seeing the buyer's interest ,the buyer agent goes to the "sale by owner" and demands her 3% commission. On the grounds that even though the seller does not have an agent but she(the buyer's agent) has a signed contract with the buyer. The seller naturally chooses to sell to another buyer who does not have an agent and does not involve any commission payouts to agents.
As advertising and delivery becomes more digital we should see less role of the sales force and its compensation. Also it is easily possible to analyze digital marketing data in terms of attribution than traditional advertising or a salaried sales force. Just think of airline tickets and holidays. The neighborhood travel agent in the US is almost extinct. Unless you need to make a very complicated travel plan you can book all your simpler trips online.
If you are in sales, a good idea is to move up the knowledge ladder i.e. if you are a travel agent its a good idea to specialize in destination weddings and customized package tours that are not easy to buy entirely online.