Top Sales People Really Don't Make the Best Managers

The conventional wisdom is straightforward - the top individual performers don't always make the best managers.  That old adage holds true especially in the field of sales.  Many people believe that the best sales people don't make the best managers.   Is it true?  New research examines this assumption, drawing upon one of the most extensive databases ever collected to research this topic.  

Alan Benson, Danielle Li, and Kelly Shue examined data on salespeople at more than 200 firms. These scholars analyzed how individual performers did prior to promotion.  Then, after these individuals were promoted to managers, they examined how the performance of their new subordinates was impacted.   The richness of the data enabled the scholars to compare salesperson performance under this new boss vs. other previous supervisors.   What did they find?  Chicago Booth Review reports:  

The best salespeople did not make the best managers: demonstrated sales skill, as evidenced by managers whose sales doubled before their promotion, corresponded to a 10 percent drop each in the sales performance of new subordinates.  The typical newly minted manager is in charge of five people. Therefore, the doubling of a manager’s sales predicts a total team sales drop equivalent to half the sales of one worker.

Thus, the conventional wisdom is true.  Moreover, the negative impact of promoting the wrong people is substantial.  Companies need to understand the skills and qualities required to become good sales managers, and based on that analysis, they must change their promotion criteria.  Meanwhile, they must find other ways to reward top individual performers, rather than using promotion as a key incentive.   

What's the Best Incentive Compensation Strategy for Salespeople?

Harvard Business School Professors Doug Chung and Das Narayandas have conducted an interesting new study about compensation schemes for salespeople.  They conducted a field experiment with a Swedish electronics retailer.   The firm used a monthly quota system to motivate and reward salespeople.   The scholars tested the effect of shifting to a daily quota system.  What did they find? Overall revenue increased with the installation of a daily quota system. HBS Working Knowledge summarizes their conclusions:

They found that sales productivity increased by 4.9 percent, on aggregate, under the daily quota scheme. But the results were more dramatic among the lowest quartile of salespeople—those with the worst recent sales records in the company. That group saw an 18 percent increase in sales productivity under the daily quota.

Chung explains that low performers are susceptible to falling behind in a monthly quota scheme, becoming less motivated or less capable of meeting their quota the further they fall back. “So they just give up,” he says.

A daily quota, on the other hand, provides “a fresh start every day in which past performance does not affect current payoff and thus does not disturb current motivation,” the researchers write. “For high-performing salespeople, because they are more immune to the disutility of effort, even if they experienced bad luck earlier in the month, they would put in the additional effort necessary later in the month to meet their monthly quotas.”

However, this finding is not the end of the story.  The scholars also examined the type of products that these employees sold before and after the change in quota scheme.  As it turns out, the retailer sold many more low-priced goods with the new quota scheme, but fewer higher-priced, higher margin items.  Why?  The higher-priced items took more time to sell.  Thus, the daily quota system created a powerful incentive to push the items that were easiest to sell (the low-priced goods).  

What's the lesson of this story?  You have to decide what your strategic objectives are.  If you want volume, a more frequent quota makes sense.  If you are interested in being very successful at the high end of the market, then you do not want the quotas to be as short term in nature.  

The Customers You Do Not Want

New product launches often do not succeed.   That's the unfortunate reality facing many business leaders.  Strong early sales presumably are a leading indicator of a profitable success story to unfold in the near future.  However, some new research suggests that not all early sales, and all early customers in particular, are a positive thing.  Scholars Eric Anderson, Song Lin, Duncan Simester, and Catherine Tucker have conducted a new study examining new product launches.  They have identified a set of customers that they call "harbingers of failure."   If these customers are buying your new product, you might not want to celebrate... you may want to become concerned, quite concerned.   Here's an excerpt from Kellogg Insights: 

The researchers found that just 40 percent of new products are still in stores three years later, a number in line with previous estimates. But critically, a product’s chances of succeeding depend not only on how much is sold but also on who is buying.  The surprising finding is that when sales increase to a segment of consumers whom the authors label “harbingers of failure,” then the new product is more likely to fail.  This finding contradicts nearly every metric of new-product success: How can more sales signal that your product is about to fail?  

Who are these harbingers of failure?  Apparently, there are a set of consumers who consistently demonstrate unique niche tastes.   Their preferences clearly fall outside the mainstream.   According to Kellogg Insights, "Harbingers with a history of making four or more repeat purchases of a failed product are nearly twice as likely as other customers to buy another product that fails."  If these harbingers are involved in your early market research, they may convince you to launch a product that is ultimately going to fail.  So, you have to be on the lookout for harbingers long before launch.   The scholars suggest talking to consumers about the OTHER PRODUCTS that they like, not just the product that you are launching.  If they like mainstream popular products, you are probably on solid ground.  If they cite other niche products that have not become hits, you should be cautious.  They might be harbingers of failure. 

How do we value things?

NYU Professor Adam Alter wrote an article for The New Yorker recently, in which he examined why we often do not value things properly.  He tells the story of how an elderly man tried to sell eight spray-painted canvasses in Central Park on a recent weekend.  The canvases were painted by a highly accomplished British artiest, who had sold two of pieces for more than $3 million several years ago.  Yet, on this Saturday, the elderly man selling these pieces on Banksy's behalf could not command very high prices.   In fact, the art was worth more than $225,000, yet he collected only $420.   Wow.  What an amazing disparity!  Why?  Alter argues that, 

"Beer and art share an awkwardly named property: they’re “inherently inevaluable.” Some concepts are easy to evaluate without a reference standard. You don’t need a yardstick, for example, when deciding whether you’re well-rested or exhausted, or hot or cold, because those states are “inherently evaluable”—they’re easy to measure in absolute terms because we have sensitive biological mechanisms that respond when our bodies demand rest, or when the temperature rises far above or falls far below seventy-two degrees. Everyone agrees that three days is too long a period without sleep, but art works satisfy far too abstract a need to attract a universal valuation."

In these situations where products are "inherently inevaluable," we look to certain cues to try to ascertain the value of an item.  Unfortunately, we pay attention to all the wrong cues.  Is the product sold at a fancy hotel or a cramped restaurant with outdated furniture and decor?   Is the product sold by someone in a fancy suit or a shabby t-shirt and jeans?   As Alter says, " We’re swayed by all the wrong cues, and our valuation estimates are correspondingly incoherent."   Think for a second about the types of products that you buy that may not be easy to value.  What cues command your attention?  Now, think about the products your firm sells.  What cues do you present the customer?  Are they helping to increase or decrease the perceived value of that product?

Should Companies Rethink the Practice of Offering Product Bundles?

You've all seen plenty of promotions that offer two or more products for one bundled price.  Think of a combo meal at McDonald's, an offer for an airline ticket and hotel reservation, or a special for a blazer and pair of slacks.  Does offering these bundles make sense?   New research by Aaron Brough and Alexander Chernev suggests that companies should proceed with caution.    Chernev explains that, " When we show people a burger and ask them how many calories it has, they might say 500. For a side salad, they might say 100. But if you pair the same burger with the side salad, people will often think that the whole meal has fewer calories—say 400—than the burger alone. That seems counterintuitive, as if the salad somehow has ‘negative’ calories.”  The scholars document a similar effect on consumer willingness to pay.  They conducted experiments in which they paired expensive items with an inexpensive item in a bundle (example: a home gym and a fitness DVD).  They found that bundling decreased customers’ willingness to pay substantially.  In fact, consumers sometimes end up valuing the bundle less than the expensive item on its own!