Success with either means fully understanding the economics and advantages
May 6, 2011
When stepping up sales initiatives, shop owners stand at a crossroads: Should they hire a direct salesperson or go with a manufacturer’s rep? There are pros and cons to each. To start, fabricators should fully understand the economics behind the relationship between company managers and sales.
Sales efforts drive commerce. Without sales, a business would cease to be a going concern. But in contract metal fabrication, a topnotch sales team can be difficult to create and manage. Many job shops start very small, with the founders wearing multiple hats. They launch a job shop often because they have relationships with other manufacturing entities, be it OEMs or upper-tier suppliers, and they leverage those relationships to get the business off the ground.
Eventually the owners decide to expand the sales effort by adding people. At this point they stand at a crossroads: Do they hire in-house direct salespeople; work with manufacturers' representatives; or, with the hybrid approach, do both?
Each has its challenges and unique economics, and no "best" approach exists for every job shop. It depends on the markets a job shop serves, order sizes, the shop's size, revenue (including revenue per order), and margin. Before anything else, though, managers may want to take a step back and ask three questions: What are the desired roles of field sales? What do I want to pay for them? And when do I want to pay for them?
The role of a salesperson depends on the company. Many may feel that some field salespeople—both direct sales and reps—lack the technical competency necessary to sell the company's value proposition. This perception may be true or false, depending on the situation.
Sometimes the real issue isn't technical competence, but a lack of vision about exactly what kind of salesperson a company needs. As a starting point, a company should pursue a salesperson with experience selling engineered, custom products. If a salesperson is accustomed to selling standard products from a catalog, that person probably wouldn't be successful selling for a job shop.
Usually a salesperson must have basic technical background and training to represent a job shop's value proposition properly. But this doesn't necessarily mean the person needs technical mastery of metal fabrication.
Is the salesperson primarily a prospector, matchmaker, and relationship-builder? Or is the salesperson defined as those things plus an applications engineer? A job shop's current or desired customer mix and value proposition determine the salesperson's role, and that role in turn determines what level of technical expertise the salesperson really needs. Highly technical job requirements tend to narrow the number of job candidates and (especially) rep firms available to the company; in some cases, it precludes rep firms entirely, even though a highly experienced rep can bring a lot to the table.
Managers should be careful not to overstate the technical competence needed to initiate and complete a sale. Many sales problems do not stem from the lack of technical expertise. Instead, the company "sort of" knows what it wants to sell and why, but these propositions are not well-articulated or clearly defined. Managers may not take the time to fully train sales personnel about the shop's technology and operations and why they are better than the competition's. Also, the sales team may get spotty, inconsistent, or ill-defined support from in-house engineers and shop managers.
Selling today is far more challenging and sophisticated than in the past. Manufacturing has changed. Profitable business is more difficult to attain and keep, and even small job shops can't rely on just one or two legacy customers.
Defining failure in sales is a matter of numbers. If the field sales effort does not achieve the sales or margin targets, or if it incurs uncompetitive selling costs, that's failure—and a call to action.
The root causes usually occur from the moment sales personnel are brought onboard. In the manufacturers' rep case, both rep and principal misunderstand what each economically can and cannot bring to the partnership. Direct sales, on the other hand, can have high fixed costs, and managers may be spending this money for long periods without realizing much in the way of profitable sales.
In the hybrid case, a company may have high selling expenses that aren't matched with high margins. Also, mixing direct sales and outside reps can be politically sensitive. People may be confused about their roles, and turnover rates among direct salespeople can be high.
Several factors determine the success of the direct, rep, or hybrid model. The quality and technical competence of the people selling plays a role, of course, as does sales training and support. But success also depends on what a company sells, the margin potential for that work, the average sales gestation time, geography, the dollar amount of each order, and how long the sales team has to meet overall goals. Above all, salespeople and management must be in absolute agreement on what constitutes success; in other words, there must be consistent "success metrics."
Understanding what drives both the company and rep can help prevent those all-too-common sour relationships. Despite common challenges, good sales reps can be highly valuable. Because reps are not employees, field selling costs are purely variable. With some exceptions, if a rep doesn't sell, he or she doesn't cost anything beyond training and investment in marketing literature. Also, expenses are capped in respect to sales; for example, the commission rate can be capped at 5 percent of what a person sells. This aligns field selling expense with revenue, which doesn't necessarily happen with a direct sales force. When revenue drops or is not attained, a direct salesperson still gets paid a salary.
Many reps are accomplished professionals, skilled in fundamental selling, relationship-building, and negotiating methods. In fact, many job shops find it difficult to reward their direct salespeople at the compensation level available to successful reps. This means companies sometimes must replace their star person who leaves to become a rep. Companies either spend a large amount of money recruiting and training, or they settle for lower-caliber salespeople.
Most reps not only have sales talent and experience, they usually have desirable relationships with the company's target prospects. They have relationships with purchasing people, of course, but they also know those on the engineering, operations, and quality staffs. These are indispensable for a job shop communicating a complex proposal that may involve design for manufacturability (DFM), delivery options (say, frequent, smaller deliveries instead of one large delivery), and total ownership costs.
Reps are not employees, so they aren't vying for promotion or favor, nor are they embroiled in company politics. Because they are not employees, they also can provide highly valuable, objective feedback about a company's need to improve its products, services, or selling support. Reps visit and talk with prospects and clients for a living, so their relatively unbiased "voice of the customer" views can be indispensable.
These advantages are classical arguments for a rep-based field sales organization. Still, they are not necessarily compelling for job shops, including sheet metal fabricators. This comes from the inherent tensions and conflicts between reps and principals as well as the nature of the typical sale.
Both direct salespeople and reps are paid based on top-line dollars—that is, a percent of sales (shipments) credited to their territory. Companies, however, benefit only from bottom-line dollars— basically margins, the difference between sales and fulfillment costs. This is often the underlying cause for tensions between sales—especially rep-based sales—and the rest of the company.
Most employees benefit when the bottom line improves, though the benefit may happen gradually with raises and promotions. Reps and many direct salespeople, however, benefit immediately when the top line improves, even if margins suffer. On the other hand, salespeople may be paid less if they bring in smaller but higher-margin orders. At the same time, smaller but more profitable orders can be better for the company and employees who fulfill those orders.
The issue becomes even more profound with reps, whose pay relies so heavily on the dollars they bring in the door. Here's something that's hard to swallow for many: A rep's realized "margin" as a percent of sales often is higher than the company's operating profit. A rep may make 5 percent of a multimillion-dollar order, even if that huge order may contribute to lowering a job shop's overall operating profit to 3 percent.
Rep economics dictate maximizing sales dollars (and, hence, commissions) in a rep's territory with minimum cost and effort. Because their pay is based on sales, reps look at potential customers differently. A prospect must have the potential to provide a minimum amount of sales dollars to justify any serious effort. This means the top revenue generators get the majority of the rep's time. From the rep's point of view, low-volume or high-maintenance accounts can be unprofitable.
The rep's primary cost drivers are time, transportation, and administration expenses—and the rep uses these drivers to calculate the minimum commission he needs to justify the work. This depends on the number of locations the rep must cover, the time and cost required to service those locations, and the frequency of physical visits required.
Reps want to keep their commission compensation directly variable with sales—and they want to keep that rate fairly constant. The fundamental driver guiding the actions of reps all day, every day, is this: The more I sell, the more I make. I have to spend my time where the dollars are.
Like reps, companies also want to maximize sales and minimize cost, but there are significant points of divergence and tension. Company managers want to leverage their sales expenses; the more revenue a company has, the less the selling expenses should be as a percent of sales. Managers would love for selling expenses to be fixed and low when sales are rising, variable and low when sales are falling.
Managers also want a number of low-volume accounts for a variety of reasons. Small orders may help a job shop establish a presence in a new niche. Such orders also usually have much higher margins than high-volume orders. In aggregate, small orders may make up only 30 percent of total sales, but they also may produce more than 50 percent of the shop's total gross margin for the year.
Also, small orders often demand little special servicing. A job shop usually bends over backward for a large customer to get a rush, high-volume order out the door. After analyzing the total costs, a shop may even lose money after the effort. Still, the effort keeps that multimillion-dollar customer happy. Meanwhile, even a rush job on small orders (10 of this, 45 of that, and so on) may not take very long to complete, and the customer usually pays a premium.
Herein lies the tension between company managers and a rep sales force: The reps often can't afford to make the necessary calls on the low-volume accounts the company needs. Instead, the reps focus on high-dollar accounts. The margins for these accounts are usually lower and under constant pressure, often involving year-over-year price reductions. This can force the company to lower the rep commission rate, causing tension and possibly mistrust.
On top of this, in-house personnel—not the outside rep—usually service the high-volume account in the mature production stage. In fact, at this stage the rep calling on the customer would be redundant, often complicating and wasteful. Further adding to the tensions, this is when the sales rep receives significant commissions.
The dollars paid to the rep, while aligned with sales, are not aligned with the perceived effort. To people at the company, the commission for such mature accounts can seem like an "annuity"—and simply not right. Of course, they often forget or discount the substantial investment in time and money the rep made (and the company was happy to avoid) to get the account to the mature level. From a business standpoint, the rep "loses money" during the initial stages as he incurs significant cost to establish the account. That effort comes with risk too. After all, he isn't paid until the sale is made—and what if the sale close never comes? But if the rep does close the deal, the reward is substantial, though its timing can be politically sensitive. The rep's reward comes when the company staff is busy servicing the large account.
All this may sound as if reps aren't worth the trouble— but managers should remember their advantages. Finding the right person, of course, is vital. Manufacturers' reps can be (though not always) the cream of the crop. They earn a good living and quite often are at the top of their careers. A small job shop probably couldn't afford to hire such a person in-house.
Tensions are there, but they can be managed. If a company wants to avoid the upfront costs and time of developing a direct sales force, or reduce the time burden on inside people (often the president or owner), then there is little choice but to find a rep sales force.
To work successfully with reps, managers should develop strategies that minimize inherent tensions and maximize the rep's advantage: experienced sales talent and established relationships. Today an individual rep must sell at least $4 million to $5 million annually to be considered successful. This implies that for a company to be one of the rep's top three principals (for whom the rep devotes 80 percent of his attention), then the company must have about $1.5 million to $2 million of sales available in the rep's territory that can be reasonably and profitably secured. Of this, one customer would account for at least half of that, and probably more.
All this plays easily into those common tensions. Managers want many small, high-margin orders; reps want a few high-dollar, long-term contracts to secure good, steady commissions. To make it work, both parties must ensure several conditions are met:
Of all these, the second (securing a flagship account) may be the most difficult, often because it's territory-dependent. Say a company wants to expand its reach into a new region where it has a significant number of prospects, but none with the potential to become a flagship account, so the territory wouldn't warrant the attention of an experienced rep in the region. Still, that rep may have very good sales skills and established relationships.
In this case, a "tagalong" strategy can help a job shop take advantage of a rep's expertise and relationships, even if the shop isn't among the rep's top clients. First, both parties know that the rep will not be able to give the shop special attention. But if the company's value propositions are highly compatible with one or more of the rep's top three lines, the relationship still may work. This allows the rep to introduce and sell a company's products and services at his other lines' flagship accounts without incurring marginal expenses.
The rep's lines shouldn't conflict, of course, but if the rep can sell complementary services, then the model can work. For instance, for his top client, a large contract fabricator, the rep may sell a fabricated assembly to a large, upper-tier manufacturer. An engineer from that upper-tier supplier then shows the rep a thick brass plate—can anyone cut this? Another small job shop on his client list may offer waterjet cutting, something the rep's larger client may not have. Knowing this, the rep can sell this complementary capability to the flagship account. This strategy helps a job shop expand into new geographic territories—and it minimizes expenses for both the rep and the principal.
Direct sales still may be the best option for certain shops. Again, it depends on the business. There are always exceptions, of course, but a direct sales team usually is expensive. So for many small job shops that can't afford to build a topnotch sales team, a manufacturers' rep is a viable option.
Manufacturers' reps know that without manufacturing services to sell, they don't have any income, so it's in their best interest to see their clients succeed, ideally with high-margin work. At the same time, they need a certain level of sales dollars to be successful. Sales dollars is an objective, simple measurement that applies in any business, so it's understandable why reps base their pay on it.
As with many things, understanding the success factors is key. As long as both manufacturer and manufacturers' rep know the economics of both parties, their relationship can become much smoother—and very profitable.