There’s been “scuttle butt” conversation in the industry over the past few weeks regarding some manufacturers cutting rep commissions. Their premise is that they need to do this due to their price increases. While some of the conversations are what manufacturers are thinking (so, “water cooler conversation”), some have reduced commissions which has dismayed many and demotivated the affected agents.
It then starts begging a number of thoughts / questions such as:
- Price increases have been going on for a while, so why now?
- A nominal commission cut is the difference between a manufacturer being profitable vs unprofitable?
- If the objective is to drive sales, shouldn’t companies seek to motivate their salesforce rather than demotivate them?
- If a company is in such a precarious financial position, are others taking compensation cuts? (sales management salaries? Sales management bonuses? Senior management? Other roles?)
- If the manufacturer had a direct salesforce and sales and gross margin dollars were increasing, would the manufacturer institute a compensation cut, or a cap, on the salesforce? (Nope, unless they wanted turnover.)
- Do manufacturers not value their agency network and feel that they can leverage them for these “savings” because they cannot ?
And this is occurring while factories are asking reps to:
- Increase their investments in technology
- Spend more time with end-users / contractors to generate demand and create brand preference
- Provide more sales reporting (CRM and pipeline management activities)
- Do more marketing to generate demand
- Handle more customer service interactions with distributors
- Generate attendees for training activities
At the same time
- Many reps are hiring more salespeople which, in today’s environment, are more expensive
- Those that have warehouses are paying more for warehouse staff, and having to hire more due to staffing issues
- The cost of employing people (insurance, taxes, other benefits) is higher than ever before.
Oh, and the cost of running a business has increased over the past year and a half (many COVID influenced) and many of these costs will become long-term embedded costs into a business. These relate to higher salaries, higher taxes that are coming, higher healthcare costs are coming, more employee benefits, higher technology maintenance costs, higher fuel / transportation costs, more regulations, etc. These issues are affecting every business. This isn’t a reason for manufacturers to increase commissions unless they are receiving additional services (which is why a “one-size fits all commission model doesn’t make much sense.)
A rep organization is a variable cost sales organization that also enables a manufacturer, via a variable, performance-based model, to outsource:
- Daily management of sales personnel
- Front-line customer service and customer service personnel
- In some instances, quotation and subject matter expert personnel
- HR and employment-related legal issues related to sales and customer service personnel (and some warehouse personnel)
- Benefits (especially health insurance) costs and administration
- Some local marketing staffing
- Localized technical support as well as technology infrastructure (reps pay for laptops, phones, etc. rather than “the factory”)
While gaining more “feet on the street”, a large customer service group, local relationships, and access to local market insights / intelligence.
And if a manufacturer’s profitability is based upon a nominal change in sales compensation, it makes one wonder about other financial aspects of the business as well as “do they value their sales organization and the services that the sales organization performs?”
Reps, due to their commitment to distributors and end-users / contractors in their market won’t cut back on their customer service because they value the customer. But what would happen if they said “Sorry, XYZ manufacturer only pays us for sales. They don’t pay us for providing customer service. I suggest you either call them at 1-800-CAL-LMFG or go to www.manufacturerportal.com/distributorsupport (this is a fake url).” or “Sorry, that manufacturer only pays us for X number of customer service hours (or calls) a month. Please contact them or use their website, unless we can help you with an order.” or “Sorry, they only pay for us to service certain accounts. Unfortunately, all others must go to their website.” Yes, being facetious, but theoretically could happen.
While some manufacturers may think that the rep will “suck it up” and has no leverage, perhaps the leverage is in the amount of effort / resources that they expend on behalf of the manufacturer? More effort comes from a sales organization when it has incremental opportunities, not punitive actions. And if companies cannot be profitable in supporting a line to generate adequate returns to support the livelihood of their people, then they will spend more time with other lines that are more profitable and leave the less profitable lines to be “transactional” lines (similar in thought process to our article on transactional versus active sellers. Active sellers are more profitable.)
While some reps comment that “the manufacturer could cut distributor rebates”, the reality is that this is naïve as manufacturers, especially those who subconsciously agree that their product is a commodity, are typically concerned that distributors will “punish” them and move their business elsewhere. In other words, distributors perceptually have leverage because “they control the gold.”
If a manufacturer wants to increase sales, market share, profitability and similar, typically the best approach is to identify how to support your sales organization. Solicit their input. Value them. Resource them.
Many things to ponder and much to “unpack” as the industry continues to go through change.
Consider this … are manufacturer representative networks really a “customer engagement resource”? After all, they engage with multiple types of customers on a variety of issues and are the “representatives” of the manufacturer?
What do you value about your reps?
So, some questions to ponder, or discuss internally, …
- Distributors – what do you value about your reps?
- Manufacturers – what do you value about your reps?
- Reps – which manufacturers do you feel value you the most? (only company names and all input are anonymous)
9 Comments
For the most part, Rep Agents are more attentive and can cover our customer and branch needs in a more expeditious fashion. Manufacturers don’t have the “feet on the street” to service us as thoroughly. That said, there are some Manufacturers who excel at coverage and communication and they thrive without Rep Agents. In general, it is easier to have our sales team visit customers with a Rep Agent because multiple represented lines can be discussed with our customer vs. taking a manufacturer (if you can even get one to travel with you!) to a customer to discuss one product line. Sometimes, the single point visit is appropriate however. Overall, we are big believers in Rep Agents.
Dave you Nailed this one!
Since a rep is just a “commissioned sales team” (exactly equivalent to a commissioned salesperson) when a manufacturer sees a “large” check written to their agent their thought should be: “Excellent, as that only means we got a bigger check!”. This gets lost when the decision to cut their reps commissions comes from a executive that may have never travelled a day with their agent. A rep has significant value, which you pointed out in this article. If the reward of selling is a “fair and good” commission it will only motivate the team to sell more and that is in everyone’s best interest.
MGM Transformer Company values their reps.
Ericson Manufacturing (Safety Products) in Willoughby, OH values reps.
In addition to the Rep being a variable expense rather than fixed overhead, Reps benefit their manufacturers in their ability to turn a sales opportunity for one manufacturer into one for multiple manufacturers.
This greatly benefits smaller manufacturers who compete with Eaton, ABB, Hubbell, etc.. at distributor level as well as in the marketplace. Our focus is on how to maximize each opportunity, create value and we’re paid on results.
I cannot think of one example where cutting employee income was an effective road to success.
Mr. Gordon, you raised some great questions.
For those manufacturers thinking of cutting commissions to reps a couple of why/not suggestions:
1) why not tie holding commissions at the current level to providing customer contacts back to the manufacturer. My experience is there are a number of rep firms who refuse to share contacts with their manufacturers. This inhibits the manufacturer’s ability to market to real live customers.
2) why not tie commissions to activities like – lunch and learns, customer calls, new product introductions and other activities of value to the manufacturer.
3) why not tie commissions to the sale of new products. Selling new stuff is one of the critical roles of customer interaction.
4) why not tie commission to the reps ability to provide more profitable sales (higher margin) to the mix.
1) Please keep in mind that contracts are written on a 30-day basis, and if all contacts were given to the mfg and they cancel the contract, that puts the rep firm in a situation since they built and continue to maintain the relationships. One other thing, mfg don’t normally consider other lines that complement theirs and by reaching out to an end-user/customer they could really mess up the agency altogether, even if it is unintentional.
[…] the margin, or commission, you earn is a function of the value that your customer places on […]
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