Reducing your sales compensation expense as a percentage of sales is one way to improve profitability and increase the value of your business.
Many distributor owners know that they are paying their sales reps too much and that it is a big reason their profits are too low. So why not just change your commission structure? FEAR.
Real or perceived, the fear of losing your sales reps to a competitor and/or having to deal with upset salespeople is the number one reason owners rarely make this change. Low profit is better than no profit or no business, right?
Your commission rates have likely been the same since you started the business, and they seemed like a good formula at the time. But your business has changed and evolved. It's much larger than it used to be, with more overhead and more benefits available to your sales team. Better technology, trade shows to attend, golf with reps' larger clients, incentive programs, health care, 401k matching, etc.
These changes are normal, and change is a good thing, so why not change your commission structure? FEAR.
What’s Typical in Today’s Industry?
For most larger, independent distributors, the days of hiring a rep on 50/50 commission and hoping they succeed are long gone. High-growth distributors are investing in young sales reps’ careers and spending time and money to develop them. And they are protecting their bottom line profits at the same time. For the long-term success of both the distributor and the company, the commission formula must be win-win.
I estimate that the average outside sales rep working for one of the 125+ Facilisgroup distributor members is making 40% of the gross profit. And this percentage has been gradually decreasing over the years as more distributors hire sales reps as employees and provide benefits, training, incentive programs, etc. Some distributors are even changing to salary plus bonus type structures as millennials seem to have different needs and goals, but that’s a topic for another blog.
The most common commission formula I see for new sales reps matches the rep's commission percentage to the gross profit margin on each order. If a rep wants to make 40% commission, they need to sell an order at 40% margin. This formula really helps drive margin growth, and with a floor of 30% margin to earn commission, it protects the distributor's bottom line profit (the ceiling should be 50%). Reps can make between 30% and 50% commission based on their ability to get a decent margin – they decide!
How to Change Commission and Flourish
First, come to grips with the fact that it will be emotional for you and the sales reps. No matter how you spin it, reps' initial reaction will be that you are taking money away from them and, understandably, they won’t like that. You will have to overcome your fears and push forward knowing that this will work and be good for your business.
The key to success is to NOT take money away from your reps, but rather help them make more money.
You need to present a long-term strategy to grow their sales and commissions while also changing the commission formula, so your company can do better as well as the rep. Make it a win-win situation and you can succeed.
Having a proven new business development plan that reps use regularly to turn high-quality prospects into new clients is a must.
Investing in new marketing material and technology that includes sales CRM tools will show your reps that you are serious about helping them grow their sales and income. How about providing each rep with their own personal websites so they can connect with their clients via live chat and allow clients to order from reps online?
Spend 6-12 months investing in your reps' success, make sure they see and acknowledge your investment and then you are poised to introduce your new commission structure. You’ll have sales growth data from the last year to present to the reps. Discuss this positive history and how you plan to continue this growth. Show sales forecast numbers that they will believe in.
Explain that growth costs money and that you need a commission formula that will survive the long run. Have a spreadsheet ready that shows the rep's income based on your reasonable sales forecast and your new commission structure. A three-year forecast should show nice income growth for the sales rep.
Again, this will be a difficult conversation and reps won’t be happy. But they will get over it and get back to making sales and money within a week or two. When sales reps calm down and weigh the risk of leaving against the benefits of staying, 98% will stay. I’ve witnessed this result many times over the years and all owners will say that the process was difficult but absolutely worth it.