Progreso Financiero faces two critical problems. First, it is falling significantly short of its sales forecasts (Exhibit 4), causing concern for investors and employees of the company. Second, Progreso has not yet identified a clear path to profitability. There are four key drivers to underperformance at Progreso Financiero: poor sales analytics systems, improper human resource management, poor managerial decision making and ineffective compensation incentives. The collective result of these shortcomings is that Progreso’s sales employees are highly unmotivated and ill equipped to help the company realize its sales and profitability goals.
In order to be effective, sales executives need to have clear selling objectives and the ability to track their performance against key performance metrics. Much to its detriment, however, Progreso Financiero does not have any systems in place to track conversion pipeline and CPA over time. This has deleterious effects both on management’s ability to accurately forecast overall sales (likely the cause of the huge discrepancy between forecasts and actual sales – see Exhibit 6) and the account executive’s ability to track potential and existing customers throughout the sales-force funnel. Indeed, Progreso Financiero suffers from low lead-to-loan conversion (~14%) as well as low customer retention (~52%), which are key drivers of underperformance in terms of sales volume and customer lifetime value vis-à-vis the company’s acquisition costs.
Many of Progreso’s problems can also be attributed to poor HR management. It’s decision to hire its sales managers directly from the groceries in which it sells has created channel issues with its retail partners and has also left it with a sales force that is highly inexperienced. As a result, these employees require significantly more training before they can effectively sell at a level of an experienced sales executive. Progreso’s decision to promote internally to fill its DSM positions is also highly questionable, since these employees have little to no people management experience.
As such, they have a difficult time engaging and motivating their direct reports. When Gutierrez does hire outside help, he consistently makes poor decisions. Time and again he promotes individuals with little to no actual sales experience (Cortez, Caviness, Ulloa) to lead his sales team, resulting in a failure of leadership and execution. When he does hire someone with sales experience (Dudley), he choses someone that does not speak Spanish, creating a language communication barrier.
The commission-based compensation structure used at Progreso is hurting the company instead of creating incentives for AEs to progressively sell more loans. While a progressive incentive structure is appropriate for Progreso – loan sales are highly contingent on the efforts of its AEs – it has not structured the incentives properly. First, the company has set a minimum threshold of 15 loan sales per month before an AE can receive a baseline commission of $18 per loan, but in 2008 employees are averaging only 7 loans per month.
At the same time, employees appear relatively content simply earning the hourly $8 wage, creating an ecosystem in which the utility of the fixed salary outweighs the effort-to-outcome of doubling one’s loan sales output to earn incremental commission. Indeed, the goals are so far out of reach that AEs have given up on achieving them. This has created a principal-agent dilemma whereby the sales force is no longer aligned with the firm to achieve its aggressive sales forecasts. The low morale caused by a misaligned incentive structure is also a likely contributor to the high turnover at Progreso, which in turn impacts overall sales force productivity due to the sales learning curve and training required for each new AE.
Finally, Progreso’s decision to enter into the Sears/K-Mart channels was also a strategic mistake. The foot traffic of their target customer at these stores is much lower than that of their target customer in Hispanic grocery stores. Furthermore, these channels already had a product offering in place (with Citibank) and an incentive structure of their own that encouraged Sears employees to refer business to Citibank, not Progreso. Lastly, Progreso’s agreement with Sears forced it to offer its customers a form of payment (gift cards) that limited their spending flexibility and made the offering less attractive overall. While expanding to merchant accounts increased overall volume of sales, it did so at the expense of its sales employees.
As shown in Exhibit 1, Progreso’s merchant launch in September 2007 immediately precipitated a decline in its loan per employee ratio, well below the commission threshold level. Previously AEs were able, on average, to reach or surpass 15 loans per month but after the merchant launch, loans per month declined to 7 per month on average. Despite this, Progreso made no change to its commission incentive structure to accommodate for the differences in sales velocity by channel.
Progreso faces two key challenges going forward. It must satisfy investors by proving that it can meet its aggressive sales forecasts and it also must outline a clear path towards profitability. Currently Progresso is spending more to acquire a customer (~$177 CPA, Exhibit 3) than it is earning in downstream value from customers acquired (~$100 CLV, Exhibit 2). In order to improve profitability of its customers, Progreso either needs to increase the margins per loan transaction or improve its retention performance. While Progreso could raise the APR and achieve a higher margin, this would to some degree tarnish its brand positioning as a low-cost, low-barrier lending company.
Instead, Progreso should continue to build CRM systems that provide a deeper connection with its customers at each stage through the sales pipeline. If, for example, Progreso was able to convert 85% of new customers into repeat customers (instead of 65%), the CLV per customer would then surpass Progreso’s CPA. While Progreso could also aim to lower its acquisition cost, this is not recommended since it would require either shutting down some of its locations or decreasing overall compensation to an already discouraged sales force.
Progreso should also redesign its incentive structure. First, it needs to make its commission threshold more achievable in order to align its AEs with company sales goals. To accomplish this it should eliminate the threshold requirement altogether and compensate using commission at all levels of sales (starting at 2% and rising to a 10% maximum). Secondly, it should lower the hourly wage to $6 in order to encourage its employees to earn a higher share of income through commission. In 2008 AEs sold 7 loans on average, meaning that most AEs did not earn any commission.
By contrast, in the proposed compensation structure (Exhibit 5), AEs begin earning commission right away but earn a lower base salary. It is expected that this model will improve morale, even though AEs will need to double their loan count because they will have a sense of ownership right away and their incentives will be aligned with Progreso’s. Lastly, Progreso should improve the quality of its sales force by recruiting externally and hiring managers that have relevant sales experience. Every sales employee from top to bottom should be required to speak Spanish in order to improve communication. By improving the compensation structure and hiring an already knowledgeable sales force, Progreso can improve the effectiveness of each AE and actually reach the sales goals it sets for itself.