In the last few years, the percentage of contractors relying on promotional finance options seems to have increased significantly. We haven’t done a study, but we recall the good ol’ days when promotional options were exactly that: promotional (and infrequent). However, times were difficult during the recession and sales were hard to come by. This created a strong incentive to transition from selling standard financing to offering same-as-cash or no interest promotions. And transition the industry did!
But times are changing. The economy has improved, consumers are increasingly looking to improve their homes, and economic growth looks to accelerate in future periods. This means the strong incentive to rely on financing promotions has become more of a weak incentive. Are you thinking yet about making a change in strategy?
We see a variety of methods to absorb the cost of promotional options. They range from awful (for the unintended consequences they produce) to reasonable. The worst structure is when the company absorbs the cost of promotions entirely. This SEEMS like a reasonable decision; you don’t want to negatively impact your sales team with the necessary financing option so you take on the cost. However, it has a major unintended consequence: salespeople take the path of least resistance. How much of your hard-earned profit margin has likely been lost simply because your sales team defaulted to a high-cost promotion when a lower cost option would have satisfied your customer? That’s just money walking out the door.
Other contractors pass the entire cost to the salesperson. This also has some unintended consequences, particularly if the cost of the promotion ends up wiping out the commission on the deal. I’m sure you see what’s coming…the financing question becomes the most important issue in the sale. Sales are lost as the salesperson abandons the lean deals in favor of those they can close with reasonable compensation.
Occasionally, we hear of contractors building the cost of the financing into their job costs. For example, if there is a $1,000 fee on the job, the price of the job increases by $1,000. This, as every banker would expect, results in a violation of Regulation Z, and we appreciate it when contractors don’t choose that path.
Maybe the best structure we’ve seen is a shared cost arrangement where the salesperson gets a healthy hit, but not so much to create bad incentives. You want the salesperson to offer the lowest cost financing first, so make that the best compensated scenario. But, if the deal can only be saved with promotional financing, you need to be equally sure that the hit to the salesperson’s pocketbook isn’t so large that it is not worth the effort.
How do you structure salesperson compensation to create the best incentives?