When managing a sales team or creating a sales compensation plan, the definition of a sales territory must be clearly understood.
Many people make the wrong assumption of thinking that sales territories are limited only to geographical areas. The truth is that a territory assigned to a salesperson may as well consist of a certain group of clients or a specific product. Each company applies its own strategy on how it segregate sales territories.
The most common ways of dividing sales territories are:
- By geographical area (for example countries or states).
- By industry (finance, education, software, etc).
- By clients account size (big or small accounts)
- By products (one salesperson may focus on a specific product while another salesman specializes on a different one)
The sales compensation plan
After understanding what a sales territory is, the next step is to learn about compensation plans.
Sales compensation plans come in many forms. They may be based on commissions, bonuses or similar incentives.
The purpose of a compensation plan is to award the sales force with a monetary reward for every successful contribution made to the company in order to keep them motivated. The salespeople are provided with an objective which the company expects them to achieve in a certain time period, as for example to bring in 500.000$ from their geographical territory until the end of the year.
The sales territory and the compensation plan are both linked together. Without either one, the other would not be effective.
While talking about the sales compensation plan with the head of sales of a technology company, he pointed out how frustrated some salespeople on his team were with the incentive plans that applied to them. After discussing the topic for a while, we both came to the conclusion that the real problem wasn’t the compensation plan itself, but the territories the salespeople were assigned.
Both are very well linked together, one supports and relies on the effective planning and execution of the other.
If at the beginning of the year a salesperson gets a certain objective assigned, the first question that will cross his mind will be which territory he will be working on in order to evaluate if the goal set by the company is achievable.
Allocation of territories
The correct and fair allocation of salespeople for different territories is an important aspect in order to design an effective compensation plan. An optimal allocation needs to cover two main aspects.
It should follow the companies strategy and be fairly distributed among salespeople to avoid an imbalance of revenue opportunity.
The process of allocating territories
The assignment of the territory for each salesperson should ideally happen before the start of a new business year.
It is best to avoid big changes throughout the year in order to allow salespeople to familiarize themselves with their territory and deliver optimal performance.
Qualitative and quantitative aspects are of great help while deciding which people to allocate on different territories. One of the most common approaches when segregating the sales force is taking each salespersons revenue potential and their current performance into consideration.
Mid year changes
Although performing changes on the territory allocation is not recommended, sometimes it might be inevitable or even required in order to increase or maintain the companies performance.
Mid year changes should ideally be avoided unless they are vital and essential for the success of the company.
Reasons for a change
There are a number of reasons for performing changes in the territory assignment of salespeople, some of them are:
- A salesperson leaves the company. Salespeople abandoning the company leave territories deserted. Customers who were being serviced by the salesperson are in need of a substitute, so do other territories that may have lost momentum because of the void created by the salesperson that left.
- When new salespeople join the sales force. Most new salespeople joining the company will already have prior experience in a certain territory. A common mistake some companies tend to make is to put all their effort into hiring new salespeople and ignoring which territory suits them best. As a result, the freshly hired salesperson may not perform as well as in previous jobs and lose motivation quickly.
- When a certain territory is underperforming and a quick response of the sales management is required.
This one is obvious. After thoroughly analyzing each territory, sales managers may find out that some of them are overperforming whereas others may require a change in the allocation of salespeople.
- When the company decides to implement a change in their strategy.
In case the company decides that a certain area requires more attention, changes in the allocation will possibly occur.
- Changes in the target customer. Sometimes customers needs change because of a new trend, a new law or other factors. As company’s require to adapt to the customer’s needs …In these cases companies will have to adapt to those needs and maybe reallocate their salespeople.
- The launching of a new product.
A new activity will change the revenue potential and the dynamics of the company. As a result, this may influence the way in which salespeople are segregated in different territories.
Territory assignment is a very important aspect to have in mind when developing a sales compensation plan. It requires constant monitoring by the sales management in order to deliver optimal results. Many complaints about the incentive plan reported by salespeople aren’t originated by the compensation plan itself, most of them are due to bad territory allocation.
Changes to the allocation during the year, as to any other part of the sales compensation plan, should be avoided unless it is absolutely necessary for the effectiveness of the company. They should always be reviewed judging by the potential of the salespeople, so they can be reallocated whenever it is necessary.