The Hidden Cost of Business as Usual
To hit end-of-quarter sales targets, many companies oversweeten deals and overextend promotions. The result? Orders explode in the last few weeks of the quarter and sales quotas are met. Good news, right?
Although many companies make up to half of their revenue this way, this strategy is likely costing businesses more than they imagine. Rush orders on raw materials, workforce overtime, large inventory fluctuations, and expedited delivery charges are just a few of the unavoidable consequences, resulting in margin erosion.
This model, dubbed the "sales hockey stick," has unfortunately all too often become deeply embedded in sales cultures, leading to an increasingly unstable way to do business.
Managing on the brink
Volatility in the market is exacerbating the hockey stick at the same time that profits are thinning and supply chains and channel structures are growing more complex. It has become harder to forecast demand, which makes sales targets less likely to be realistic.
In response, sales organizations and senior managers are pushing harder to make their numbers, increasing the force of the margin erosion vortex in which they are caught. There are no more periods of normality to reset, and the lack of predictability is reducing companies' ability to plan and make strong investment decisions.
In this environment, companies are recognizing the hockey stick as a multiplier of instability that they can ill afford. They are no longer willing to accept it as a normal way of doing business.
We have noticed that sales management, culture, sales compensation, and the overall way in which businesses are run quarterly together create the natural rhythm of the hockey stick.
Potential causes of the hockey stick effect
Channel incentives. One-time deals can become a recurring phenomenon. When that happens, a significant mismatch can occur between actual market demand and shipments to distributors.
Product quality. When a new product has quality issues, many companies are tempted to provide incentives to boost demand. Further, the drop in sales of a new product may trigger an unexpected spike in demand for existing products.
Sales compensation. The quarterly cadence of compensation calculations and payouts can encourage the sales force to offer whatever discounts are necessary to make their numbers. Even when payouts are made monthly, many sales organizations still measure on a prorated basis rather than using granular monthly targets.
Sales operations and deal management processes. These processes are often not considered in a hockey stick analysis. Yet the lack of real-time visibility into the channel and into the demand for specific products makes it harder to keep track of the different factors that can drive hockey stick spikes. Further, lack of visibility hobbles business planning and investment decision-making.
Culture. Pressure from Wall Street on quarterly earnings percolates down to the sales force. Whenever companies recognize performance based on quarterly goals, they encourage behaviors that can lead to lumpy sales.
Controlling the hockey stick
Companies can take three steps to increase predictability of sales throughout the quarter.
First, explore root causes to identify exacerbating factors that are making the hockey stick more pronounced (as mentioned above). Then determine the degree to which the hockey stick is affecting your business: Are there temporal events? Where are they? What is driving those events? How much do they cost?
Second, decide whether to invest in flattening the hockey stick as well as how much to invest. The problem exists in all industries, though it can be more damaging for companies with physical supply chains, many SKUs, and complex channels or routes to market.
Third, develop a prioritized plan, based on the root causes identified and the benefits desired. Examples of potential strategies include:
- Breaking the cycle of always providing promotions at the end of the quarter. Show the market that you are serious about spreading out sales. Provide occasional incentives during other parts of the quarter. Incentivize channels to purchase earlier in the quarter or to provide you with longer lead times.
- Optimizing S&OP processes. Gain better knowledge of your customers' and channel partners' purchasing plans. Use your sales and operations process (S&OP) to manage lumpy, inconsistent demand. Provide discounts rationally, such as primarily on products with high margins.
- Gaining visibility into the sales channel. Implement processes and select tools for this purpose. After all, what you do not measure you will not fix. And figure out why end customers buy your products rather than those of your competitors.
- Looking at the entire value chain. For channels, explore the relationships between sales to distributors, distributor sales to end customers, and distributors' inventory. Good sales pipeline and distributor management processes integrate such capabilities and enable companies to stay on top of emerging marketplace trends.
- Changing sales compensation plans. Set up a plan that combines quarterly goals as well as linearity. Make sales-out a bigger portion of the compensation plan. Calculate and pay out monthly rather than at the end of the quarter.
Taylor White and Phil Wong are principals at PricewaterhouseCoopers LLP. Taylor White leads global commercial (sales and marketing) excellence programs. Phil Wong leads PricewaterhouseCoopers' customer-centered strategy team for the technology sector and works with many high-tech companies in tackling strategic and execution issues related to their customer-facing functions, and in improving overall customer experience and success. Sudhar Govindarajan, a manager at PricewaterhouseCoopers, is focused on operational strategy, sales and channel effectiveness, and product development.