Both kinds of metrics can motivate salespeople to concentrate their efforts on activities that improve pricing outcomes. Price-realization metrics can be an attractive option because implementation is manageable and because they don’t unnecessarily give away confidential margin information. However, they can create internal tensions because they focus on solution-specific price levels rather than prices for individual products. Margin-based metrics may be easier to communicate to salespeople and align their performance with the company’s margin goals but may lead them to focus on discrete higher-margin products instead of the overall customer solutions. They can also be hard to manage because product mix and costs change over time. And they risk exposing sellers, and often customers, to confidential cost information.

Decide how to assess performance. Companies have three basic options for measuring performance: the final pricing position, how much the pricing position improved, or a hybrid approach. (See Exhibit 3.) The hybrid approach defines desirable pricing outcomes by considering both the price position outcome and the relative price improvement. This approach typically works well for organizations with highly variable pricing performance across both customers and territories.

Consider two sales reps who sell in different territories for the same company. Rep A is a strong negotiator and is effective at offering discounts only when necessary to win deals. Rep B discounts aggressively to win deals, which means they have a greater opportunity to improve their pricing outcomes compared with Rep A. If each rep improved their annual margin performance by 1 percentage point, Rep B should earn less than Rep A, because Rep B has a relatively larger opportunity to improve pricing outcomes. Rep A should be rewarded for starting from a high baseline and still landing at a better overall price point.

The hybrid metric in Exhibit 3 is often implemented at either the territory or deal level:

• Territory Level. Reps are given authority to price within certain bands at the deal level, with their performance and payout based on their overall territory margin or price realization levels. At the end of the year, the table shown on the right side of Exhibit 3 serves as a payout reference table, based on the rep’s full-year price performance and the territory’s starting price position.
• Deal Level. Reps are given an overall revenue target and revenue credit multipliers depending on the price profile of the deal. For example, if a rep converted a $100,000 deal that had a “high” price improvement with an “average” starting price performance, they would receive an additional revenue credit to reward the improvement. Conversely, a poor pricing outcome would reduce the rep’s credit below the actual value of the contract.

Organizations can also use multipliers if reps secure favorable contract terms, including revenue commitments, prepay arrangements, contract length, and pulling future-year payments forward. These multipliers are often strong motivators for reps who may otherwise have no incentive to pursue margin-enhancing terms and conditions during negotiations with customers.

Determine the weight within the SIP. To influence a sales rep’s behavior, an incentive metric typically needs to account for at least 20% of the variable compensation target pay within the SIP. This also applies to price-based metrics. Rebalancing the relative weights of a plan’s benchmarks after the introduction of a price-based metric is challenging because all the measures in the SIP need to remain aligned with the company’s success metrics. Companies want to avoid rewarding salespeople disproportionately for outcomes that are relatively easy to achieve. At the same time, they may need to overweight price metrics for salespeople who are trying to achieve significant margin in more challenging situations. One such situation is the attempt to improve price realization in key accounts where upside may exist but can be more difficult to unlock when the customer has a sophisticated procurement function with strong negotiation capabilities.

How to Implement Pricing Metrics Effectively in the SIP

A company needs several inputs and systems to launch pricing metrics effectively in the SIP. These include:

• Measurement and Reporting Systems. These determine the ability to measure and report on pricing outcomes in the CRM and finance systems at the account, deal, and territory levels. Reporting provides both the finance and the sales teams with a consistent single source of truth for tracking performance. The data must be robust enough to ensure that payouts are accurate and auditable. Systems need to be set up need to minimize the risk of disputes between salespeople and sales compensation administrators.
• Clear Plan Documentation and Rollout. Salespeople need detailed explanations of how the pricing metrics work and how they will affect their compensation. These explanations should include sample deals and payout calculations as well as a summary of the desired activities and behaviors that lead to improved pricing outcomes.
• Pricing Enablers. These are tools and other assets to support salespeople in their efforts to improve price realization. They include pricing tables, value-based-selling templates, and pricing recommendation models and systems. They also include training on negotiation tactics and deal desks to provide pricing support.
• Targets. Each salesperson needs accurate and achievable targets for the pricing metrics. These derive from historical performance and the company’s strategic margin or discount targets.

Sales incentives are a powerful way for B2B organizations to achieve their financial objectives though better pricing performance. When a company wants its reps to price strategically, it can incorporate price-based metrics in its SIP to motivate and reward salespeople to make the right pricing trade-offs during customer negotiations. The right pricing metrics can accelerate sustainable, profitable growth aligned with the organization’s broader go-to-market strategy.