to help grow your business the right way.
by Randy Conley, Vice President of New Business Development
We provide business growth is more than a Facilisgroup tagline – it’s a mantra we live every day. I spent many years as a distributor in the promotional products industry and the last 12 years helping our Facilis distributor partners grow, so I’ve been in your shoes and learned a lot along the way. I’ve seen what works well, what doesn’t work and everything in between. One of our three pillars at Facilis is the sharing of knowledge. So, in that spirit, here are some thoughts on how to grow your business the right way - that grows your profit and builds your equity.
It’s not just about top-line sales, it’s about bottom-line profits.
Increasing sales is often the main focus for any sales-driven business. However, don’t forget about margins, sales rep. compensation formulas, overhead costs, vendor rebates, etc. Keep an eye on these factors to grow not only top-line sales, but also bottom-line profits. Often, if you look at your book of business strategically, fewer sales can result in higher profits.
This is not a complicated industry and my profitability calculator is simple so email me and I’ll send you a copy of it. You know how to make money in this industry, but if you are like most owners, you have a lot of balls to juggle and it’s easy to get caught up in the minutia of the day and fail to step back and think strategically about how to increase your profits without growing sales.
Three things you can focus on to grow profits:
Increase gross profit margins – this one is relatively easy as margins are typically just a state of mind so open your mind, try a couple of points more margin on that next quote and make more money.
Reduce your sales compensation – tough mentally but doable if done properly. This is not about reducing sales reps' income but rather helping them grow sales while making an adjustment to the commission split along the way so both parties make more money.
Reduce your fixed overhead costs – as your business has grown, it might have gotten fat, so go through your P&L line by line and see where you can trim costs. Can an investment in technology help you increase the productivity of your admin staff and decrease your average cost to produce an order?
Working with a smaller list of preferred vendors can add an extra point and a half to your bottom line. If your business is selling at least $2-$3 million of promotional products per year, you have the opportunity to reap many vendor benefits. To do this you will need to join a group and there are several out there including Facilisgroup.
I often speak with distributor owners who tell me about their reset year. They stopped focusing on NBD and top-line sales growth and took stock of their business and made some adjustments. Almost always, the process includes firing some underperforming sales reps and some high-maintenance clients. The results are always the same and I can see the owner’s eyes light up as they proudly exclaim that sales went down but PROFITS WENT UP!
It happens every time and is not a coincidence but rather a conscious effort to think strategically and make the hard decisions even if they seem counterintuitive at times. Want to speak with distributor owners who have experienced this? Knowledge sharing is an important element of being a Facilisgroup partner and owners are willing to chat and share their success stories.
Make sure your Gross Profit Margin (GPM) percentage to Average Order Size (AOS) ratio provides profit as you grow.
Do you know what your GPM percentage is?
Are you monitoring it? Are you growing it?
How does yours compare to the industry average?
I don’t think GPM by itself is a valuable metric for a business. GPM is a number that needs context, and what works for one business might not work for another. One Facilisgroup distributor shared with me they only sell to large clients with large orders and his GPM of 23% provides them with a fantastic bottom line. Another distributor in our group is in a small town and has a high volume of smaller orders so he needs his 45% GPM to make a reasonable profit. For GPM to be an effective metric, you need to associate it to your average order size.
What about your average order size? How does it compare to the industry average? Is your client base delivering the right sized orders for your business model? Now that you understand the importance of the GPM to AOS ratio, how does yours compare to the industry and other distributors that are very successful?
The industry typically promotes an average order size of approximately $1,000 and an average gross profit margin between 33% - 34%.
It’s important to monitor both the GPM and AOS to ensure the ratio can deliver the profits you want. Your cost to produce an order is likely fixed, so you’ll need more GPM on smaller orders if you want to make a profit. While it’s common for some reps to quote large orders with a lower GPM, the real key to profitability is larger orders with higher margins!
Sales reps need to grow to about $500,000 in annual sales to contribute significantly to your profit.
Far too many times a business owner falls into the trap of thinking that simply hiring more salespeople will increase sales. A part-time or under-performing sales rep selling only $150,000 will likely not deliver profit growth. If you want to see real growth, invest in full-time reps that sell at least $500,000 per year to grow sales and profits.
A Facilisgroup partner gave our group a presentation on an analysis he had done regarding the profitability of each of his sales reps. He was an accounting guy, so he ran the numbers and shared the results – it’s the Facilisgroup way. He concluded that their business lost money until a sales rep was selling at least $250,000 per year. They considered this the investment phase of developing a rep.
As the rep grew annual sales to about $500,000, the company started making money on their investment but a reasonable ROI on that investment wasn’t achieved until the rep hit the $500,000 mark. ROI peaked at about $750,000 in sales and declined significantly for reps selling over $1 million per year. It seems the sweet spot for ROI is around $750,000 and I would add that it's also a great spot to reduce risk and build equity.
Get your reps to $500,000 as fast as possible and encourage them to continue to grow to $750,000. If I wanted to maximize profits, reduce risk and build the value of my business I would rather have ten $750,000 reps than five $1.5 million reps.
Growing sales via existing clients = the low hanging fruit.
Think you are getting all the business available from your existing clients? Think again.
If you focused more energy on serving those existing clients, it would improve your relationships and lead to opportunities to grow sales. Take the time to really understand these clients’ needs and pro-actively suggest creative solutions. Become invaluable to them and you will increase sales not only with them, but you also will open the door for introductions to new prospects inside and outside of their organization.
One distributor spent much of 2017 running an introduction program with his sales team. We hosted an initial discussion webinar and training session, then every week, each rep asked for some introductions and reported back on the results. After eight months, their eight sales reps had asked 256 clients for an introduction. 99 of them helped and introduced the reps to 140 prospects. 53 placed orders resulting in $309,300 of new sales.
In typical Facilis community fashion, word of this program’s success has spread, and many other distributors are now running similar programs!
Would your sales reps rather cold call prospects or ask existing clients for introductions?
You can choose your clients and not all are profitable, so be strategic when prospecting.
We all know that it takes essentially the same effort to write a $500 order as a $5,000 order. Be smart about the orders and clients you chase. Putting resources into lots of small orders doesn’t always make business sense, in fact, most distributors make a lot of profit from their largest orders and then give half their profit back by accepting too many small orders.
If your market and business model mean you must process a lot of small orders, then you better have extremely efficient systems that reduce your average cost to produce an order, and high margins if you want to make a reasonable profit. Technology can help with productivity and lower costs. And look at your sales commission structure as you’ll need that within the right ratio for your business to make a profit.
Most Facilisgroup partners have commission structures that encourage their reps to target certain types of clients, and orders that allow the company and the sales reps to make a reasonable profit. Most larger distributors cannot make a profit on a $200 order, so stop paying commissions on these small orders and reps will naturally focus on obtaining better clients that provide them with larger orders.
In addition to minimum order size to qualify for commission, many distributors also incorporate a minimum gross profit margin into their commission structure. Remember, the key to profitability is larger orders with larger margins and everyone wins when reps make higher commissions and your company makes more profit! Think strategically, adjust your commission structures and encourage your sales reps to focus on profitable clients and orders more often. Replace money-losing clients by prospecting for profitable clients – it’s ok to fire a client!
Sell more, manage fewer clients and write fewer orders.
Every time I see a sales rep think strategically and cut their client list; two things always happen. They write fewer orders and their sales increase.
Most reps start their career as hunters, grow their client list until they are busy full-time and then turn into order takers. They continue to acquire more clients, mostly through referrals, and spend most of their time answering the phone and responding to inbound emails from clients that need products. They work hard, and sales are great at around $750,000 - $1 million. All is good, right? WRONG!
They have 500 clients “on their list” but only 150 of them have purchased in the last year. This rep and the distributor are losing clients because he has no time to call on them proactively. The rep just deals with inbound requests for products, regardless of the order size, and is not thinking strategically about their book of business and the value of their time. Also, your company now has hundreds of under-serviced clients that used to buy from you and who now don't.
SOLUTION: Review each rep’s client list annually. Let them choose 150 clients to keep in their book of business – they will naturally keep the best clients with the largest orders or best potential. The opportunity to focus on their “A” clients reaps significant rewards via more large orders.
And those smaller clients that the rep let go of – give them to a junior rep that has the time to call on them and watch the sales to those clients increase as well.
This is the ultimate win-win strategy!
At some point, owners need to stop selling products and start working on their business to make that leap to the next level.
Are you the primary salesperson for your business? If you want to grow to the next level, you need hire and develop sales reps to scale your growth. Once business owners start giving up primary product sales responsibility, they realize how much faster they can grow. Put the right sales staff in place and start thinking strategically about your business. What is the best way to spend your time - working on that quote for $500 worth of pens?
When does this transition make sense? Many distributors plateau when they hit around $3 million in sales. The technology and workflow systems that you started out with have maxed out their growth abilities and are not scalable going forward. If you want to grow from $3 million to $5 million and beyond, you’re going to have to do things differently. If you make the necessary strategic changes and implement better technology, you should be able to reduce your product sales role as you grow from $3 - $5 million. Now, your personal sales are less than 10% of company sales and the value of your business has increased dramatically!
Gradual transitions seem to work best for most distributors that head down this path. If you sell $1 million yourself, perhaps set a three-year plan to reduce your annual sales to $750,000, then $500,000 and then settle in around $250,000. Keep a few clients perhaps so you can continue to lead by example. Choose a few low-maintenance clients with relatively large orders so you spend no more than 20% of your time selling products.
Who do you give your clients to? I often talk about the client sale vs the product sale. This might be an opportunity to reduce your overall sales compensation and develop a training program for future sales reps. You can manage the client relationships for your handful of “A” accounts while hiring an Account Manager to handle the product sales to those accounts. Just let your Account Manager deal directly with your clients when they are ready to discuss their product requirements and you keep in-touch to make sure your team is keeping the client happy. This is scalable and is a model that is common for many multi-million-dollar producers.
Now what do you do with the extra time you have? Invest in high ROI activities that can deliver rapid growth. Small acquisitions, prospecting “A” accounts or hiring and developing that next Account Manager or Outside Sales Rep are all good examples.
Are your staff, clients and prospects clear about what makes your company different than everybody else?
Spend time thinking about your company’s identity. Clearly define what makes you special. What are your competitors doing? Is there a service gap that you can fill? Is there a niche market that you specialize in and are viewed as the expert in? Figure out what makes sense for your business, establish strong branding to support it, and make sure your entire team and your clients understand and appreciate it.
Trying to be everything to everyone is a recipe for failure. Diversification makes sense to reduce risk, but only up to a point. A $2 million distributor trying to compete against 4imprint will struggle, so why even go there. If your clients are finding products elsewhere and then just asking you for a quote, you haven’t added any value and will be in that race to the bottom with a low price. Find clients that appreciate the value you deliver and make sure you charge for it!
A $1 million sales rep doesn’t need 1,000 clients, so be choosy and make sure they fit your model. Develop 100 active clients that average $10,000 in purchases from you and suddenly you have a million-dollar sales rep with a well-diversified book of business. Acquiring these clients will require a clear picture of what you deliver and a bit of work to make sure your clients need that and value it.
If you want consistent growth of sales and profits you’ll need strategic help in areas like technology, vendor relations and knowledge.
You can make strategic improvements that will help you grow. Implementing integrated technology solutions can bring efficiency improvements by simplifying processes and reducing time spent on administrative functions. Developing relationships or entering into group buying scenarios can offer significant financial benefits for business owners. And peer groups provide a forum to learn from industry leaders who have been in your shoes. And you don’t have to give up control of your business to acquire these benefits!
Once you grow to $2 - $3 million in annual sales, you’ll likely need different technology to grow to that next level of success. You survived the lack of integrated systems when you were smaller by having more staff who worked more hours to make up for this inherent inefficiency. You survived it, but that won’t allow you to scale profits as you continue to grow.
Several options are available, but you’ll find most technology in our industry is geared to the masses - smaller distributors selling under $1 million per year. Look for options that suit your needs today and down the road. Check references! Speak to distributors larger than you and ask the tough questions. Changing technology is hard, so be sure to make the right choice the first time.
Larger firms need advanced features such as:
Ecommerce enabled product website
CRM for their growing sales team
NBD (New Business Development) systems so you can proactively manage new sales reps
Advanced marketing platforms with tracking technology
Integrated product search and presentation tools
Art department management systems
Decorating department management systems
Multi-vendor order management systems specifically designed for our industry
Live integration with vendors for inventory, order status and shipping information
Inventory management that integrates with popular ecommerce solutions for client programs
As you continue to grow your sales and sales force, the best vendors in our industry will increasingly take notice and want to work closer with you. Several industry groups connect top distributors with top vendors, increasing collaboration and providing strategic initiatives that help everyone in the supply chain grow faster than the industry average. It’s that old 80/20 rule that suggests focusing 80% of your efforts on the 20% of your business that drives growth is a good idea. Once you exceed four to five full-time sales reps and $2-$3 million in annual promo sales, you’ll qualify to receive vendor benefits that far exceed EQP. To get these benefits, you’ll have to be ready to work more with less vendors, choosing quality over quantity and focus your team on strategies that will grow your sales and those of your preferred vendors. It must be a win-win relationship to withstand the test of time.
One of the biggest challenges for distributors as they grow from $2 million to $5 million to $10 million is, "they don’t know what they don’t know". Your business is evolving and that means change but you’ve never been there, so it can be scary. Lots of options and ideas are going through your head, and what if you choose the wrong path? Winging it can be costly and it can be lonely at the top. If you want to make better decisions, make sure you join a peer group that is in your industry, and understands what you are going through. They have been there and are willing to share their knowledge and experiences. Several groups like this exist in our industry. Each has a different focus, culture and goal, so do your research and find the right fit for you.
When it comes to technology, vendor relations and knowledge... who will be your partner for the next 5-10 years?