Pay for Performance - It’s a path to success!

Published in Furniture World

“My bottom line is 14%.” That was what a member of one of our performance groups modestly reported recently. “Wow!” and “How?” That was the reaction from the audience.

In a time when businesses with decent profitability are reporting around 5% net income, this company is at the top of their game. Are they just lucky? Are they an anomaly? I think not. I’ve seen similar break out performances many times – in ALL economies.

It comes down to this: to win you must create a business environment that breeds success – everywhere.

You see, a prime reason why top performing companies outperform their average performing peers is they pay extra when their people achieve better results. These successful businesses align their self interests with their employee’s self interests. They have a well executed Pay for Performance strategy (PFP). They understand that everyone deserves to make money – especially when they make the business money.

In this article we will look at how to create a winning PFP strategy for your furniture business. Be sure not to miss Chart #1 on the following page. It provides detailed examples of how you might implement your strategy.

The goal with PFP is to reward performance on the upside, above normal performance levels. This is not intended to replace your regular salaries or bread and butter sales commissions. It is intended to focus people’s attention on helping you accomplish certain business objectives. PFP costs you nothing if executed correctly since you only pay when productivity is increased. Best of all, it gives people a vested interest in your success by focusing their attention on your organizational goals. There are five basic steps to implementing a winning PFP strategy:

Step #1
Set Performance Objectives

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“I don't care how much power, brilliance or energy you have, if you don't harness it and focus it on a specific target, and hold it there you're never going to accomplish as much as your ability warrants.” ~ Zig Ziglar.

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Goals and micro-goals are the basis for PFP. You must know specifically where you need improvement to establish proper goals. Furthermore, you must know specifically how to make that improvement. For example, suppose you realize that your warranty close rate averages 10% on sales that can have product warrantees. Knowing that the best performing operations can close over 90%, it tells you that this is an area of opportunity. Set a performance objective to improve warranty sales. If you achieve this micro-goal, your bigger goals of increasing sales and gross margin could also be realized.

Step #2
Determine The Payment

Once you have your target set, you need to define the motivating element. Define the “carrot” for the “rabbits” to chase. This should be customized to your situation and your people. It could be money, paid time off, merchandise, dinner vouchers, sports’ tickets; you name it, and don’t be afraid to be creative and fun. Let’s say that you interview your sales associates and find that cash should be the “carrot”. And just for fun, let’s make this a team PFP program. After working the numbers, you decide to pay $1,000 per quarter to all sales associates for a 10% increase in the warranty close rate over the previous quarter’s close rate.

Step #3
Define How It Works

Keep it simple. Have the performance metric and term of measurement clearly defined whether it be a month, quarter, or year. Have the people that are responsible for performing, track and measure the metric that you are trying to improve every week. This will keep you moving toward your target. By measuring along the way, you can see if changes in strategy, methods, or further education are needed. When it comes time to assess the final measurement, you will already know if you have obtained the result that you were seeking. In our example, at the end of the quarter, if a close rate of 20% is reached, the team gets to split $1,000. This is all to the up side. There is no loss to the business. Everyone is happy. If not, try again next quarter or make a change to the program.

Step #4
Add, Drop, Change, Replace

Like merchandise, like employees, like vendors, like all things, some PFP programs will work better than others. If you create one that everyone likes, performance clearly improves making it easy to manage. You’ve got a winner. Let your winners run. On the other hand, if you have a PFP program that is not producing the desired results, change it if the metric is important. However, don’t be afraid to drop and replace programs to change the focus of your goals as your organization changes. Let’s say that you get your warranty close rates up to 70% on a consistent basis and you are happy with that; the effort that it might take to get it up to 90% might not be worth the time. Instead, you may decide to discontinue that program and replace it with a PFP that focuses on increasing average sales per individual. Keep your PFP strategy dynamic.

Step #5
Set The Rules

Think of it like a game. Be creative. Keep it simple. Keep it fun. Let others keep score. Results are reported to you – pay when your goals are realized. Cheaters are penalized.

Include Everyone

One important thing to understand when creating your PFP strategy is ALL departments and business partners should be included. Don’t leave anyone out. Improving sales metrics is not the only factor that contributes to increased cash flow and profitability. Every area, from purchasing to accounting, should be considered. You should even consider giving a bonus to your vendors and customers for exceptional performance.

To stimulate your creative side, check out Chart #1 below. You can take these ideas, customize them for your business and people, and get started on producing a PFP strategy.

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David W. McMahon is an inventory management and operations expert. Questions about any aspect of retail operations management or for help implementing the 5 SMART Steps in your business contact David care of FURNITURE WORLD at davidm@furninfo.com

Get a better handle on your cash

Here is an article that I wrote that was published in the latest issue of the WHFA Retailer.

We’ve all heard the saying “Cash is King”. That is very true. The level of liquidity that an organization can maintain determines the ability of that organization to operate each day and to succeed in the future. High liquidity allows organizations to reinvest in themselves to boost efficiency and sales. This reinvestment is the catalyst for expansion which generates even greater cash flow. On the flip side, low liquidity forces companies into cut- backs, tightening of operations and an eventual downward spiral.

Recently some business leaders asked me for advice on figuring cash flow with respect to actual versus money in the bank. They also wanted some specifics on using software and spreadsheets to assist in getting a better handle on their cash flow. With this in mind, I recommend four prime actions:

• Reconcile the bank account

• Generate a Statement of Cash Flow

• Forecast future cash levels

• Track key cash and liquidity metrics

Full Article: Getting a better handle on cash

We ♥ Cartier, Version 2.0: An Updated LOVE

Tinkering with an icon is tricky business: sometimes it works (VW's rounder, cuter, enormously popular reissued Beetle, for example) and sometimes it falls flat (New Coke, anyone?). So when we heard that Cartier was launching more jewelry based on its famous 1970 LOVE bracelet (above, left), we held our breath. Now, having seen the pieces unveiled, the verdict is in–many of the new designs are charming and easy to wear (though we still prefer the original), and there seems to be something for everyone. So one, two, three...and exhale.

The reason we prefer the original has more to do with symbolism than anything else: there's something deeply romantic about fixing a bracelet on one's wrist (using a Cartier screwdriver, of course) and never removing it. We're also fans of yellow gold and think the LOVE bracelet looks its best in that metal. These days, however, many people want white metals: hence the new collection's earrings, necklaces, bracelets and rings in white or yellow gold (and black ceramic), with diamonds or colored stones. Our favorite is a white gold bracelet (above, right) with blue and pink sapphires, purple spinels, amethysts and aquamarines. It's built like the original, but brought up-to-date for 2010. If only all revamped classics could be as good.

Photograph by Vincent Wulveryck © Cartier 2010

Pyrenex & Alexis Mabille: Braving the Elements

We ♥ New York, but not its winters: they're icy, cold and just plain l-o-n-g. So although it's only October, and still relatively mild, we're already planning ahead–which is why this jacket caught our eye. It's part of a capsule collection designed by Alexis Mabille for Pyrenex, a 150-year-old French company specializing in high-quality goose down. If this coat's details are any indication, the partnership–Pyrenex x Alexis Mabille–is just about perfect. (We especially like the quilting, the removable hood, the many pockets and the two-way zipper.) Buy it online via Studio Homme and prepare to laugh at Mother Nature.

Azzedine Alaïa: Fashion's Rebel With a Cause

Fashion's faithful may all worship in different temples–but most make a pilgrimage, sooner or later, to the altar of Azzedine Alaïa. In the larger context of "designer fashion," Alaïa is an anomaly: he ignores trends, turns away retailers who rub him the wrong way and shows (and ships) collections according to his own idiosyncratic schedule. Which at least partially explains why, on Sunday, October 10–several days after most of the fashion flock had left Paris–Alaïa sent his models down his runway for the benefit of a favored few.

Women worship Azzedine Alaïa because Alaïa worships women–it's that simple. Few designers understand a woman's curves better than this nimble Tunisian, which has kept him in demand for 30 years. What did Stephanie Seymour wear to marry Peter Brant in 1995? A clingy white Alaïa gown literally sewn onto her by the designer. What did Naomi Campbell don for her recent court appearance in The Hague? A prim-yet-sexy cream Alaïa dress with a matching cardigan. And what have supermodels, socialites and other beauties been clamoring for since 1980? Alaïa, Alaïa and more Alaïa.

Sunday's show offered classics (like the slinky white column, above left), but some twists, too–namely, ballerina-like silhouettes pairing fitted tops with short, full skirts (imagine Dégas' Little Dancer as Daria and you'll have the idea). Alaïa is no stranger to full skirts, but this was a slight departure–the flare he gives to a skirt has typically sprung from the hip rather than this season's waist. It's a great look, but you've got to have the figure–and, more importantly, the legs–to carry it off. Fashion's gods are many things, but they're not forgiving.

At Versace Home, Bigger & Bolder is Better

Over the years, the Versace Home collection has been hit-or-miss: for every spectacular silk sheet set or porcelain place setting, there's been a handful of less-than-stellar offerings. Lately, however, everything from the men's and women's clothing collections to the brand's image campaigns has been wrestled back into shape. A new, higher standard seems to be the order of the day.

Case in point: Versace Home is now collaborating with the world-famous Venini, an 85-year-old Murano glass making firm, to produce limited-edition bowls and vases. Like many Versace designs, they're not for everyone, but we like them a lot. For one thing, they resonate like original notes from the '80s, playing perfectly into that decade's current revival. They're also big, bold and brash enough to sweep snobbery aside. Sometimes, good taste is just a matter of muscle.

Five SMART steps to making money with inventory – Part 2

Let’s Simplify Your Furniture Inventory - Part 2

Published in Furniture World Magazine - Sept. 22, 2010

In the June/July issue of FURNITURE WORLD Magazine we looked at the first two SMART inventory steps, “Spotting Winning Items” and “Maintaining Them in Stock a Higher Percentage of the Time”. The premise is simple. Furniture retailers need to carry more best sellers because these items make more sales. And, to do so, you must buy as much new merchandise, as often as possible, in order to find new best sellers. What is not obvious to many managers is that you cannot just keep buying new merchandise without getting rid of non-performing items (dogs) first: the dogs. This brings us to the final three SMART inventory steps which will be the topic of this article. Continuing to buy new while not getting rid of the dogs leads to over-inventory, higher expenses, reduced profits, and cash shortages. Companies with record sales have become insolvent due to this reason alone. Don’t let it happen to you.

SMART Step #3:
Auto-identify and Take Action on Dogs

Auto-identifying your dogs means using your computer system to help you find your dogs. I know what some of you are thinking, “I know my dogs. I don’t need a computer to tell me what items are not making me any money.” That thought can only be true if you either carry under $200,000 in inventory or have a team of people tracking each single SKU on a daily basis. Operations with over $500,000 in inventory can have thousands of SKUs, cover twenty merchandise categories, and have ten to twenty primary vendors. You need to query your merchandise data base to flush out non-performers to enable you to take quick action and increase turns. Here is how you can do it:

• Set up an inventory aging schedule (or markdown code) on your
  inventory items.
• Create up to six aging periods in the schedule.
• For each aging period, assign a number of days aged and a desired markdown discount. A typical markdown aging for normally inventoried home furnishing categories is every sixty days. Six periods would be 60 days, 120 days, 180 days, 240 days, 300 days, and 360 days.
  • Query your inventory data once per month for all merchandise that are not best sellers. This will allow you to auto-identify your Dogs.

Once you have the information, take action. The Dogs are not going to disappear just because they have been identified. In Example #1 you can see suggested actions to take once merchandise drifts into subsequent aging levels. Actions can be discounting, spiffing the salespeople, a marketing opportunity, or a combination of actions. As the merchandise gets older, take increasingly decisive actions. If, you had a piece of merchandise on the floor for a year, would you return it to the vendor if you could? One hundred percent of clients answer, “Yes!” So, selling a small minority of inventory at or below cost is the same thing and – a customer will be getting a fantastic deal!

The next question I get is, “How do we maximize our margins?”

SMART Step #4: Reward High Gross Margin Sales

One system of paying commissions stands above the rest - variable sliding based on gross margin percentage. This system aligns the goals of profitability for the company with the salespeople’s goals of making the most commission.

Businesses that move from another commission method to one that pays at a variable rate based on gross margin percent experience an immediate 3%-8% jump in gross margin percentage overall. That translates to a huge increase in bottom line profitability.

So if you currently pay out the same percentage of sales regardless of the margin the merchandise is sold at, this will be the fastest and easiest way you will achieve a greater return on your inventory. Your GMROI will sky rocket. This is also true of operations that supposedly don’t discount. So here is how it works:

• If a salesperson sells an item at a higher gross margin percentage, you will pay a corresponding higher commission percentage.
• If a salesperson sells an item at a lower gross margin percentage, you will pay a corresponding lower commission percentage.
• If a salesperson sells an item at an average gross margin percentage, you will pay an average commission percentage.
  

Moving to Variable Rate Commissions

1. Figure out your percentage of commission on the sale for an average margin sale. By doing this, if nothing changes, everyone gets paid the same and your expense is the same. Refer to Example #2. Note that if an item is sold at a 45% gross margin, there is a 5% commission paid. So, for a $1,000 item, $50 is paid in commission. Very average. Nothing really changes.

2. Set a high gross margin percentage and related high commission percentage. Selling an item at 55% produces a 9% commission, or $90 for a $1,000 item (Example #2). The salesperson will be pleased because they make an extra 4% commission. Your company will by very happy because it makes an extra 10% in GM and extra 6% in profits!

3. Set a low commission percentage and related low commission percentage. The range between the top commission and the bottom commission needs to be at least 5% for variable sliding to work because the incentive is not as strong with anything less than that. In the example, the low commission percentage is 3% at a 40% gross margin sale. If you have a working markdown system in place this will be a minority of items. The salesperson is less likely to discount. They will also STOP bugging the sales manager to lower the price, saving you, the salesperson, and the customer time. Instead of price selling, salespeople will start to use better customer room selling techniques.

4. Set it up right. Do your math right. Make your schedule easy to understand. This is important so everyone fully understands the schedule.

5.Roll it out. Don’t be scared. Tell your salespeople you want to make them partners in your profitability and share more of the gains with them. This is a profit sharing plan. It is a raise! And, for those of you who want to test it first, tell your salespeople that you will run the new system in conjunction with the old way of doing things. Then tell them you will pay them on whichever way makes them the most commission. That will most likely last for one month and the old way will be ancient history.

So, now you know how to spot best sellers and maintain them better. You know how to get rid of dogs faster. And you are going to make a higher gross margin overall doing it!

To gain the biggest benefit you need the highest traffic possible. If you can increase traffic, while practicing the first four SMART steps, you will maximize the impact that the SMART steps have on your overall profitability. The greatest cash flow will be achieved. The final SMART step helps you increase traffic while managing your inventory better. Smart Step #5:

Target Customers in Your Database

The SMART Steps presented so far, cannot be implemented properly without solid retail traffic. The 80/20 principle states that the high majority of your revenue is produced by a minority of your customers. This is not an assumption or guess. Analyze your sales for the past five years and rank them by customer volume. You will likely see the same thing.

That is why knowing your best customers and treating them like gold is so important to any inventory management scenario. They are, in fact, a gold mine. This step is about properly mining the great customer gold mine for repeat business.

First off, this elite group must be treated extra special. Don’t just blast advertise to them. Your best customers should be part of your “VIP club” and receive special notices, gifts, birthday cards or emails, and invitations to private functions.

Segmenting this group separately from the bulk of your database will allow for better communications practices. If you have 50,000 people in your database and you want to have a cocktail party to introduce a new product line, do you want to send out 50,000 invitations? I say no. With this type of event, it is not all about traffic numbers. It’s about the right traffic. You will be better off sending 1,000 personal emails gathered from your salespeople. When your best customers come to the private event, you will actually be able to spend some time with them and properly determine their needs. That’s better than a showroom full of discount seekers, right?

Other than hosting a private VIP sale, there are other key targeted messages that should be sent via email, text, or snail mail to your customers. The purpose is to touch your customer more often with a real reason rather than just the same old holiday weekend discount. Remember, these messages should not go out to your entire data base. You must segment for relevancy. Here are some examples:

• Thank you for visiting our store. Do you have any other
  questions?
  - This message can be sent to anyone who gives you their information, whether they bought or not. It encourages customers to think of you first while they are shopping around.
  

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• Price quote and special information attached.
  - Send a message after a quote has been written up with all the necessary information. This is a great follow-up tool. The more quotes you give, the higher your sales will be – if you follow up.

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• Thank you for your purchase – here is a copy
  of your sales receipt.
  - This message should be sent after each sale. This gives customers a contact name and number should they have any questions or need something else.
  

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• Special order update inside.
  - Every customer wants to know the status of their order. Send them a message like this and it will save them time and make you look like you are really taking care of them.
  

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• Your merchandise is ready. Open to request delivery
  or pick up.
  - Many customers now prefer to do business via email rather than telephone. People don’t like wasting time with telephone tag. Give your customer the gift of convenience.
  

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• Delivery reminder with date and time.
  - Send a reminder that goes right into your customer’s smart phone. They will see that you are an innovative business.
  

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• Take our Satisfaction Survey and get a gift card.
  - After the delivery or pick up, send them a three question survey. You will build valuable information over time. Don’t forget to ask them: “What is your next home furnishings project?”

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• Help for your next project.
  - So now that you have some information on their next project, contact them to give them some ideas. And don’t forget the telephone! It’s still one of the most underutilized direct media devices.
  

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• Mattress ideas for your new
  bedroom set.
  - You should contact people that bought bedroom sets and did not buy mattresses, for example.
  

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• Some area rugs that will make your new living room amazing.
  - You can contact those who bought living room sets without area rugs offering purchase ideas for their new living room.

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• We miss you – here is a gift!
  - Search your past purchase information by last date of purchase.
  

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• Locals night only.
  - It may be a local community that brings people together. Divide your audience by their zip codes and send special messages.
  

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• Room planning demonstration.
  - This may be one for your VIP list. Why not teach your customers how to use your online room planner. Guess what? If you do this, you will have some customers who are better at it than you! You can even host a free design webinar for your customers.
  

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• Free workshop: How to
  accessorize your home.
  - Another one for your VIP list. Offer workshops on home style and décor.
  

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• Fans of Italian Furniture – Have a glass of wine or cappuccino and view the latest introductions from Milan.
  - You may be surprised at the following that some vendors have.
  

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• Happy birthday gift!
  - Most people love to be remembered on special occasions. It’s pretty much a guarantee open.
  

One common question, I get is, “Isn’t this too many messages?” No it isn’t. If you target properly and do it professionally, it will work. Touching your customers more equals higher traffic. On the flip side, if you send these messages to everyone, they will appear to be blasts and get fewer results. Be relevant.

Bottom line: Get to know your customers. Use targeted mediums such as email, the telephone, text, and direct mail to do so. Mass media is advertising. This is relationship marketing. Targeting allows you focus on developing long term relationships on a more personal level with the right people. When a customer becomes a friend then they become a customer for life.

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David W. McMahon is an inventory management and operations expert. Questions about any aspect of retail operations management or for help implementing the 5 SMART Steps in your business contact David care of FURNITURE WORLD at davidm@furninfo.com or call him direct at 800-888-5564.