MINICASE: Francesco’s Bike World
Francesco Rizzo established Forrest’s Bike World, a
retailer of bicycles and related parts and gear, in 2003 in Milan, Italy. The
company saw steady growth in its first few years and had opened eight stores
throughout Portland by the beginning of 2013. Francesco is the owner and acts
as the general manager for all stores. Each store has one manager and four to six
salespeople, with two to three working on the sales floor at any given time.
Francesco himself is a bike enthusiast and rides more than 200 kilometers per
week. He encourages his sales staff to do the same and looks for fellow bike
enthusiasts when hiring. As a result, the sales staff generally loves to buy
equipment from the store, especially since Forrest gives an employee discount
of 10 percent.
Francesco’s sales revenues increased by almost 15 percent
each year for the first five years of the company’s existence. But since that
time, sales revenues and profits have declined at approximately the same rate.
According to Francesco’s analysis, the decline did not seem to have a single
cause: a down economy, opening too many stores too quickly, rise of price from
suppliers. He has tried to reduce costs to maintain consistent profits but has
cut them to the point where the only remaining reductions would be to begin
closing stores, which he does not want to do.
Francesco has always prided himself on having a top-notch
sales staff. Although the staff shares a common bond of love for cycling, they
are a heterogeneous group in other ways. About one-half are in their 20s,
one-quarter in their 30s, and one-quarter in their 40s. Some have families,
some do not. Some are married, some are single. Some rely solely on the job
income to live, some do not. For the first six years, Forrest paid his staff a
straight salary in the range of €22,000 to €34,000, depending on sales
experience, with an annual bonus of €500 if the salesperson met the standard
sales quota for the year. Forrest liked the stability the salary provided his
staff, especially those with families. However, after the sales began to drop
with the onset of the recession in 2008. Francesco decided that the staff would
sell more if they were better motivated. So he instituted a new compensation plan
that paid the sales staff on 100 percent commission. To allow for some
stability, there was a system of a “draw” where employees could borrow against
future commissions. This plan has now been in place for almost four years, but
sales are still declining. Forrest recently sat down with his best store
manager, Luca Moretti, to assess the commission based compensation plan.
They started with Francesco’s business goals in order of
importance: (1) increase sales revenues relative to quota, (2) increase
customer satisfaction and customer loyalty, (3) increase sales for certain
product lines, (4) take advantage of bike knowledge of the sales staff, and (5)
encourage bicycle riding in local events.
Then they examined the staff. Luca’s first observation
was that the sales skills of his staff vary greatly. For example, top performer
Leonora Rossi has no trouble meeting her monthly quota; she even makes it so
early in the month that she can relax for the remaining time. However, other
salespeople like Ruggiero Giordano do not sell as easily and feel pressure because
they support big families. Moreover, Ruggiero and others have taken money from the
draw but then felt even more pressure for being far behind. Several have even
quit to eliminate their debt, leaving Francesco with a loss and having to incur
the added expense of training new hires. In addition, the sales approach has
evolved into one of pressuring the customer to buy rather than building a
relationship and taking the true needs of the customer into account. Also,
there has been little effort to follow up with customers after a sale, assist
with bike maintenance, or even clean up the store. As a result, customer
loyalty and retention have been down. Furthermore, the old team environment,
where a salesperson with a customer would call over a more knowledgeable salesperson
to answer a customer question, has been replaced with an “every person for her-
or himself” mentality. Francesco and Luca decided that things must change, and
the compensation plan was the place to start (Johnston & Marshall, 2013).
Did Francesco and Luca do a good job of
assessing the situation with respect to the compensation plan? What other
information would you like to have that is not given?
(Johnston & Marshall,
What were the advantages and disadvantages
of Francesco’s straight salary compensation plan? What were the advantages and
disadvantages of his straight commission plan?
Given the preceding facts, recommend to
Francesco a combination compensation plan that would best suit his situation.
What other compensation devices might you use in addition to bonus, salary, and
commission? Explain your recommendation.