You Get What You Pay for: Profitable Commissions For Reps and Manufacturersb

Edition: April 2003 - Vol 11 Number 04
Article#: 1510
Author: Jack Evans

There is no longer a “one-size-fits-all” formula to determine what commission percentage manufacturers pay to inde- pendent manufacturers’ sales representatives (MSRs). Too many variables are now involved beyond any given product and market.

More manufacturers are switching from direct sales forces to MSRs. This trend has been recently documented in several reports by Agency Sales magazine from the Manufacturers’ Agents National Association (MANA). MANA is receiving a greater number of inquiries from manufacturers for MSRs because of their “variable cost,” in that they only get paid when they sell.

Commissions Beyond Sales

The direct salesperson now costs manufacturers $150,000 annually according to MANA. This cost includes direct pay, benefits, bonus, expenses, training and management. Plus there’s a steep “learning curve” in which these salespeople must get to know their new territories and accounts.

In contrast, MSRs are only paid on results, which have traditionally been defined as sales. They already know their local market, enjoy existing long-term relationships with key customers and are often selling complementary product lines to a new manufacturer’s prospective customers. Overall, MSRs offer manufacturers low risk with high returns.

Some Fortune 500 corporations are even rewarding independent reps for cost efficiencies, best practices and customer relations. A few are creating commission structures that are based upon profit margins instead of gross sales. Others are using a sliding scale to pay higher commissions based upon annual gross sales, such as from 7 percent to 12 percent, while adding another 1 percent to cover marketing expenses.

One issue when negotiating commissions is for both manufacturers and MSRs to initially identify and define what functions, in addition to sales, are to be included:

• Cold calling

• Pioneering

• Regional/local market information

• Telemarketing

• Prospective customer presentations

• Customer product inservices

• End-user product training

• Social time with customers

• Duration of commission after termination

The bottom line is that manufacturers who pay commissions on all of the activities necessary for sales and customer retention –instead of sales only - are enjoying higher sales and profitability from their independent sales reps.

The Value of Field Sales

Independent reps act as the manufacturer’s local sales and marketing directors. They know their customers, local markets and territories. National – and international – manufacturers are now utilizing local independent reps for:

• Product in-services both for customers and end-users;

• Order processing via laptops or hand-held technology;

• Local promotions involving their respective customer base;

• Local market trends and competition;

• Local customer service to field and resolve issues; and

• Regional warehousing and fulfillment.

But if MSRs are to maintain their value, they must document their contribution of the above activities for manufacturers. The traditional handshake between MSR and manufacturer no longer guarantees protection of standard commissions for sales. Recent credentialing of MSRs has added professionalism to the field, but this alone is not enough. Following are a few activities often done by MSRs that now must be documented in order to become “value-added:”

Sales & Marketing Strategic Planning: Each MSR presents a brief, one-page overview (after signing the contract, of course) of how their company would sell and market the manufacturer’s product lines within their own territory. Every territory is different due to population size, distances between population centers, distribution (or lack of) and local characteristics. This plan would identify key accounts and how to increase their purchases, as well as demonstrate how the MSRs intimate knowledge of their territory and accounts will help increase the manufacturer’s sales within that territory. Note: This strategic plan – and its presentation to the manufacturer along with a sales and marketing brainstorming session – should be an annual event between MSRs and manufacturers.

Key Contacts & Accounts: MSRs need to let manufacturers know what relationships they maintain in order to maximize their own value. List key accounts and buyers by area and market, the individual rep that maintains each respective relationship and the number of years they have worked together. Possibly include key corporate players for each major account. This list is confidential and only disclosed after a contract is in place.

Local Trade Shows: Often manufacturers are unaware of regional or local trade shows, conferences and/or seminars that are major events for an MSR’s customer base. Develop an annual calendar with a listing of these events, attendee breakdown by market and profession, and highlights of the events which MSRs believe they should attend on the manufacturer’s behalf.

Company Referrals: When customers call a manufacturer’s toll-free number with questions about purchasing a product, what happens to this lead? The national statistics are grim, because most of these leads are ice cold (by 45 to 60 days!) by the time they reach their respective MSR in the field. Take an active part in working with a manufacturer’s customer service representatives to ensure that leads are processed and forwarded to MSRs within a specific time period, such as 24 or 48 hours. Explain how the value of a lead diminishes with time from the initial inquiry, and work to speed up your manufacturer’s lead generation process.

Quality Time: Even the best MSRs can’t sell without having current product information. Manufacturers report the highest average increases in sales when they meet with their MSRs at least once annually, and send a sales manager to work with them in the field once or twice a year. Product inservices help to refresh MSRs sales presentations, as well as keep them abreast of new product developments. Also, presentations to key accounts are usually better received – and attended by more senior personnel – when a corporate representative is also present.

Work Proactively

One crucial management issue for corporations is to act proactively and include MSRs in the development or revision of their product, pricing and marketing programs. Independent reps that hear this news from their customers first do not feel secure or supported by their respective manufacturer.

Manufacturers can include MSRs in their sales and marketing efforts through several basic actions:

1) Present periodic educational training programs that make MSRs knowledgeable about newly introduced products, programs and promotions.

2) Disseminate new product literature to reps before their customers learn about the products from other sources such as trade ads or invoice stuffers.

3) Use email, faxes or newsletters to announce new product roll-outs before they take place.

4) Sample MSRs on the new products and enable them to sell more effectively.

5) Connect MSRs electronically with in-house customer service, fulfillment and credit departments so that they can inform their customers about order status at each step in the sales process.

Jack Evans, president of Global Media Marketing

in Malibu, Calif., ( is the editor

of HIRA’s Communicator newsletter as well as a home health care marketing specialist.