In the ever-competitive field of dental lab sales to dentists, the design of sales rep compensation plans can be a strategic game-changer. However, when misaligned with overall profitability goals for the lab, they can backfire and lead to an unexpected reduction in the reps’ effectiveness and losses in profitability.
Dental Lab Sales Rep Compensation Models & Price Authority
Many dental labs compensate sales reps through a combination of base and commission pay. However, this is often combined with giving the rep price authority, meaning they have the authority to discount prices to a certain level per product. The thinking is that a compensation plan that includes commission, as well as some level of price authority, gives the rep the motivation and flexibility to win new accounts. However, this approach, while seemingly reasonable, also has its drawbacks.
“Discounting can sometimes become a substitute for sales training as it is a tool that requires minimal skill to use.”
Drawbacks of Discounting
To illustrate one such drawback, consider that a $10 per unit discount means the sales reps commission drops only 50 cents, while the lab loses a whopping $10 on every unit sold. Thus, the rep still earns a hefty $5, while the lab suffers a loss of $10 of gross profit for every unit sold. How’s that for a new way of looking at something?
Now, consider the impact of selling 50 units per day a $10 discount. Based on typical fixed expenses, this scenario would ultimately translate into a 35% reduction in bottom-line profitability. Meaning while the rep benefited from the discounts by closing deals and earning 90% of the commission, the lab would lose $120,000 in gross profit, over the course of one year, on just that one product alone.
The Power of a Solution-Based Approach Over Discounting
Now, I am certain there are people reading this saying, “but we would not have sold those units without the discount.” I had one such client where a highly experienced sales rep, in selling dental lab restorations and services to dentists, used discounts to win just about every new account, leading to very low gross margin sales.
I brought a new rep into the territory without experience in either sales or medical but trained in solution-based selling to dentists. In the same territory, the new rep, within three months, increased new customers per month by 600% with no free trials, no office lunches, no owner or manager involvement, and no discounts given.
“If sales reps believe discounts are their most viable way to sell, it could diminish their confidence in the products they sell or the lab’s capabilities and service overall.”
Discounts Aren't Always Good for Sales Reps Either
Granting sales reps the power to give discounts is a strategy that may not just erode dental labs’ profit but is also not so helpful to the sales rep. Pricing that becomes a primary sales tactic often inhibits the development of an effective selling process, training, and sales tools. If sales reps believe discounts are their most viable way to sell, it could diminish their confidence in the products they sell or the lab’s capabilities and service overall. Such an emphasis on price promotes a transactional approach to selling that overshadows the essential aspects of understanding a client’s challenges and proposing the lab as a solution to those challenges.
Price Optimization and Aligning Discounts with Cost Reductions
Pricing optimization and strategic planning can be potent tools to reduce the reliance on price discounts. For instance, a pricing strategy I created for one of my dental labs was based on four highly differentiated value categories called Essential, Premium, Premium Plus, and Boutique, further divided by 10 turnaround times each in both national and local price lists. This approach allowed us to tailor pricing to nearly every combination of value, considering factors like value tier, turnaround time, and any additional value created by being local for each product.
In addition, we offered discounts for options in the way the doctor worked with us that were commensurate with our reduction in costs, such as online case entry and faster, lower-cost payment terms. This is not including larger group and DSO volume discounts that were offset by any reduced costs that came with the higher volume, or any priority we may have placed on gross profit dollars, over gross profit margin.
Wrapping it All Up
To prevent the pitfalls that sometimes come with commission-based compensation, dental labs should:
Set Guidelines on Pricing Authority: Set strict guidelines or remove pricing authority altogether.
Training and Development: Invest in training sales reps in solution-based selling that uncovers the prospects’ challenges, needs, and frustrations, and proposes your lab and its products as a solution to them.
Redesigning Compensation Plans: Align compensation with desired outcomes like new customers, volume and retention rates, or a combination of all of them.
Pricing Optimization: Optimizing pricing for each product, customer type, tier or service level, turnaround times and other value attributes that maximize revenue potential, reducing the need for pricing authority at the rep level.
Paying sales reps commission while also giving them price authority often turns out to be a flawed strategy that rarely leads to more effective sales reps and almost never supports the dental lab in reaching its profit objectives. By training the sales team in solution-based selling and providing them with the training and tools they need, limiting or removing pricing authority, creating strategic pricing and crafting well-aligned compensation plans, dental labs can drive their top line growth significantly faster while also improving dramatically their profitability.
Contact 8&9 Consulting today to see how having the right sales compensation and other selling tools can make a difference for your dental lab.