Designing Sales Contests: Does the Prize Structure Matter?

Abstract

Sales contests are short-term incentives used by managers to raise sales effort. The extant marketing theory predicts that the optimal prize structure should have two characteristics: 1) The number of prizewinners should be greater than one; and 2) prize values should be unique and rank-ordered. However, this theory has not been empirically examined.

This paper presents two empirical studies that examines if the prize structure of a sales contest affects sales performance. In each study, the authors investigate the incremental effects of introducing multiple prizewinners and unique rank-ordered prizes into a sales contest. The first study consists of two laboratory experiments in which participants make decisions that closely reflect the decision trade-offs in the theoretical model of sales contests. The second study consists of two field economic experiments where trained salespeople sell fundraising sponsorships to companies. The results across the experiments are remarkably consistent: The number of prizewinners in a sales contest should indeed be greater than one. However, introducing rank-ordered prizes into contests with multiple prizewinners does not boost sales effort and revenues.

Keywords: Sales Contests, Sales Management, Experimental Economics, Field Experiments

JEL Classification: M30