Wednesday, February 24, 2016

Commission Policies in the Automation and High Tech Electrical Industry

We are gathering information and building a list of frequently asked questions.  

I am often asked about commission structures within the Automation, Electrical Distribution Industry and other knowledge-based distributor operations (Power Transmission Distributors PTDA, Fluid Power Distributors FPDA and Industrial Distributors). Considering the frequency of the question (from potential salespeople, experienced seller, managers and others,) I feel it appropriate to post some thoughts on the practice. While this is not our typical kind of post, I wanted to create a forum for discussion.

Commissions based on Gross Margin are one of the most commonly used incentive practices on the channel side of the business. On the manufacturing side, many people are still paid based on their gross sales numbers. Often you will hear distributors refer to this practice as paying on “tonnage” because sales professionals compensated in this matter really aren’t required to worry about whether their company makes a profit or not. Distributors must produce gross margin to survive. Further, the gross margin does not flow straight to the bottom line. Instead, gross margin dollars pay for everything from the light bill, insurance and rent on to the cost of the distributor’s employees (which typically account for 60 percent of the total gross margin).

In nearly four decades of involvement in the industry (which includes service as a sales manager at a major manufacturer, C-Level executive in a regionally based distributor, President of the North American trade association dedicated to the automation channel (The Association for High Tech Distribution) and, over a decade, as a consultant to the industry,) I have seen literally hundreds of commission models. These range all the way from commissions accounting for only 10 percent of the salesman’s total compensation to structures which comprise 100 percent of the salesperson’s monetary package.

I typically recommend a compensation plan which is comprised of a base-salary and a commission. For the record, I find deep fault with both straight commission and straight base salary plans. The exact percentage must be fine-tuned based on the company and conditions in the seller’s territory.

The most common industry practices on payment of commission are:
• Monthly draws on commission which are settled at the end of each year.
These packages are designed to “smooth out” the monthly variations in commission amounts. Draws give the seller some consistency over the year, but often lead to conflict when the total commission for the year is not met and the seller ends up owing money from surplus commission draw.

• Commissions which are paid quarterly, semi-annually (every six months) or annually.
Most companies have discovered the accounting required to provide accurate monthly commission payments are too time consuming to justify payment on a monthly basis; hence the quarterly, semi-annual or annual payments.

As stated before, well over 90 percent of commission plans are paid based on Gross Margin generated by the sale.
Gross Margin is defined using the formula (Sell Price) – (Cost of Goods Sold)

This number does not include incentives to the distributor from manufacturers, buying group rebates, special buys, mark-ups on freight, special handling fees or other income generated by the sale.

Further, distributors do not typically pay commissions on the following:
• Sales made which are not paid in full by the customer due to disputes or other issue.
• Sales made which remain unpaid because of credit/collection issues by the distributor
• Sales made which are turned over to collection agencies.
• Sales which are paid well outside of the distributor’s terms (i.e. paid 60, 90 or more days after the normally extended terms.

Sales are not one time events
It is important to note, sales generated in this industry are not one time events. Instead, the distributor/customer sales cycle is a long continuing relationship where no sale is ever considered final. Distributors are called on to provide after-the-sale service for many years after payment is made and money has changed hands. The unwritten agreement with the customer can be summarized in this manner: If the distributor customer continues to grow the business relationship with the distributor, the distributor will extend follow-up services in perpetuity.

In Knowledge-based distribution commissions serve as a plan to compensate the salesperson for more than just “closing the order,” they also serve as payment for continued support. With this in mind, it is considered an industry norm to not pay commissions for salespeople who leave the company. For instance, when commissions are issued on February 15th for the quarter ending December 31st, and a salesperson resigns on February 1st, commissions are forfeited.

Conversely, it is not uncommon for distributor salespeople to benefit from the work done by their predecessor at the account. Most customers come with a level of “flow business” which once started continues on for many years. The new seller assumes the role of service champion and is rewarded with commissions on sales they had nothing to do with initially generating.

In the world of knowledge-based distribution, sellers are judged on their ability to not only close the sale but to provide the kind of service which causes the customer to buy more from their employer. Distributor salespeople are judged on their ability to grow the relationship as opposed to garnering one time orders.

As stated earlier, this post is in response to the dozen phone calls or emails we get from all levels of the distribution world each month and is by no means a full report on the state of commission (or commission rates) in our industry. Instead, we thought it appropriate to answer many of the common questions asked.

Here are a few random comments:

On Commission starting and end dates
• Typically distributor salespeople in our industry benefit from the past work of others at their accounts. This comes by way of business flow which was developed prior to their assignment to the accounts under their charge. Typically, new salespeople start with some commission based on the work of others.

• When salespeople leave other resources must be assigned to their accounts to maintain the service level at the accounts developed. These resources must be continued whether they are provided by a new salesperson or through resources such as inside sales, customer service, product specialists or others. It should be noted this practice extends not only through the ranks of distributors, but also applies to many other members of the supply chain: supply-partner manufacturers, manufacturer’s rep agencies and others.

• Policies on being currently employed in order to receive commissions have remained unchanged for many years. Recently, we spoke with a gentleman who resigned his post in the late 1960s. He indicated his commission plan was very similar to those of today. When thinking about leaving his (then) current employer, he waited until the week following the issuance of commission checks. He went on to form a company of his own and has no hard feelings on the potential commission left behind.

• Do policies like this favor the person who stays in position for a long time? I believe long duration salespeople do better in the distributor world because they learn more about their accounts and build layer after layer of flow business. This is typically good for seller and employer alike.

Why don’t distributors pay commission on sales volume?
• Typically, manufacturers pay a commission based on total sales volume. Some distributors call this being paid on tonnage. The average manufacturer salesperson is not privy to the internal cost of the product. Sell prices are very likely to be set by others. In addition, the margins for manufacturers is higher than distributors. Distributor salespeople often know their company’s cost of the product and are paid to capture as much gross margin as possible. For the sake of those outside the industry who may be reading this article, the typical distributor ends up with a profit before taxes and interest of between 2-4 percent. They are not working on a gigantic margin.

Different commission rates?
• Is it reasonable to have a different commission rate for various products sold within the distributor organization? Yes. Here is why: The cost associated with doing business with many supply-partners (some distributors have as many as 500) varies. Some provide incoming freight, some are easy to business with and others have mounds of paperwork associated with each order. Fluctuating the commission rate based on the type of product sold is common.

• Can a distributor have different commission rates based on the sales territory? Again, the answer is yes. Size and type of customer play a role in how easy or difficult it might be to create a relationship. Geography plays a part as well. The salesperson responsible for a large urban territory might may discover the sheer number of potential customers to be larger than the more rural based territory.

Commission rate changes?
• How often can commission rates be changed? Business is a fluid thing. Conditions ebb and flow. Product lines become obsolete. Economies rise then fall into recession. The one mistake either seller or employer make is to assume what works today will always work. While I am definitely not in favor of change for change sake, I do believe business conditions warrant changes in commission rates. As a rule of thumb, any commission plan which has not been tweaked for over five years is probably in need of some examination.

I am building a repository of questions, comments and background information around commission plans. I would invite your comments be they anonymous or sent via email and posted at this end.

Monday, February 22, 2016

Inside Sales in Tough Times

If restaurants can upsell, why can’t we?

After a whirlwind trip around the country and a couple dozen meals in places ranging from pizza to posh, I want to share an observation:  Restaurants know how to upsell.

From the lowly “do you want fries with that?” to the more sophisticated and expensive, “at least let me show you our dessert tray,” food service folks have created a culture of upselling.

Aside from the pounds I’ve managed to pack on, I wanted to gain something from the experience.  How can restauranteers train surly teenagers making minimum wage to automatically upsell when we struggle to convince professional, commissioned inside salespeople to do much more than say “thank you” and push forward?

Thinking back, I don’t recall a single moment of agitation caused by this constant upsell campaign.  When poorly done, I simply smiled and said “no, thank you.”  But, getting back to the dessert tray, I was actually glad I was re-sold.

Distributors encouraging their inside sales or customer service teams to upsell, add-on sell, or otherwise pro-actively impact business, always get pushback.  Typically, complaints fall in to five major categories:

  1. My customers don’t want to be sold.
  2. Our products don’t lend themselves to upselling because they are too technical, too expensive, too bulky, etc.
  3. Our people don’t know what to recommend as an add-on.
  4. Our inside/customers service people don’t know how to sell.
  5. Our customer service/inside people revolt whenever we ask them to sell.
Our attempt at an upsell...

A few weeks ago we wrote “Tough Times Call for Tough Love.”  I believe now is the time to determine why your team isn’t upselling.  If your company falls into category five, something needs to change.

Some Thoughts on Starting
Start simple.  Instead of asking for a product sale, ask if the customer is aware of some new program, training event or if they receive the company newsletter.

Develop a list of add-on, lower cost commodities.  For example, electrical distributors might want to consider asking for wire markers or the multi-color tape used for identifying cables.

If your computer system allows for “suggested other products,” invest in populating the data fields for your top 200 items sold.  

Hold a weekly “Inside Sales Huddle” to reinforce the need for add-on sales.  Ask each rep to share their successes.  Talk about the customer value of properly done suggested sales. 
Here are a couple of topics to discuss with your team:

  1. The phrase “Would you like to supersize that order?” has been estimated as generating over $1.3 Billion in added sales.
  2. Amazon recommends additional products (add-on sales) by saying “customers who bought this item also bought…” and lists other products.
  3. The young lady in Chicago who suggested that I “just look at the dessert tray” ended up adding $14 to my bill.
    You'll notice these are all examples of painless ways to upsell.  They are not forced, but rather have a natural flow.

We need to begin the journey now…
Times are getting tough.  I just read a great report on the Electrical Trends Blog indicating the electrical market is trending downward for the first time in seven years.  For years, distributors have talked about getting started in with upselling.  A few have been successful.  Most have simply allowed the topic to wither on the vine.  Now is the time to make it happen.

Wednesday, February 10, 2016

12 Purchasing Comments that Cost Distributors Millions

Last week we wrote about the right activities for tough economic times.  One of our points was the need for improved negotiations training with our salespeople.  At the risk of repeating myself, I

“….major industrial firms have gone public with their plans to squeeze their supply chain.  Some have noticed, they can get additional discounts just by “asking” for them.  Customer purchasing types are going to negotiate with our sellers and we need to be prepared.  Based on my observations, most distributor salespeople have not received proper negotiations training in recent history.”

Last week I attended one of SPASigma’s inaugural events called, The Battle for Margin, a two-day seminar developed to assist distributors in growing their gross margins.  Much of the seminar revolved around negotiating with buyers. 

During one of the breaks, I had the opportunity to speak to several distributor salespeople who candidly shared their experiences with buyers.  In a short discussion over a cup of coffee, we came up with the twelve most common comments heard from professional purchasing types.  All agreed they had caved into these comments in the past, and swore next time would be different.


Sitting here thinking, most distributor sellers are programmed to please.  It’s in their DNA.  Almost all feel that getting an order is more important than driving gross margin.  Yet, gross margin is the life’s blood of their companies. 

In my thousands of sales calls with distributor people, I have only seen a few who stood their ground when they heard one of these comments.  The truth is, most stutter and stumble around on price objections like they were hearing them for the first time.

Purchasing professionals are trained to ask for lower prices.  Even the smallest concession is a win.  What are you doing to train your guys on the answer to these comments?

Here are a few suggestions:
Potential Answer
Last time it cost less than that…
How long has it been since you purchased this?  There have been a lot of cost changes over the past several months/years/decades.
You’re close, but this is competitive…
I think this is a pretty fair price.  Does our competitor offer all the same features and services?
You’re just a little out of the ballpark this time.
We might not actually be the cheapest on every order but our services and quality of product have to be worth something to you.
Can you do any better on this order?
I might be able to do better if you were to place a blanket order for 100 units over the next few months.
Sharpen your pencil a bit and it’s yours.
I can’t do anything about the price but I could save you money if you were to package in some of the other products you buy.
You’re going to need to better than that…
Is there something else I need to know about this particular order?  Based on what we have discussed so far, I think we are pretty much at a fair market price.
That’s more than I expected to pay…
On what did you base your expectation?  Maybe I could find you a lower cost solution by moving you away from the premium product.
That seems expensive.
Gee, that is the competitive price in the market.  Am I missing something in your specification? 
Your price is too darned high.
What are we high against?  Are we making the right comparisons?  Should we look at value-engineering some of the features out of the solution?
You’re kidding me!
No, this is a good price.  Should we talk to your engineering team about a less feature-rich offering?
Do you want to keep our business?
Yes, your business is very important.  But I can’t sell at a level that costs our company money.  Tell me why you feel I seem like I am not serious about your business.
Come back when you get your costs in line.
We benchmark our business against the best in the industry.  We provide top-quality service at competitive prices.  I want your business so please help me understand why you feel we are out of line cost wise.

Will you occasionally need to adjust your prices downward?  Nearly everybody discovers a situation where selling for a lower margin makes sense strategically.  But, not every time and not when you are providing the best overall value. 

The point of all of this is simple: 
We don’t need to give away margin just because the customer asked – not in tough times, great times or anywhere in-between.

BTW – the SPASigma Seminar rocked.

Tuesday, February 2, 2016

Tough Economy May Call for Tough Love

For those of us selling into the industrial sector, the economy has turned tough.  One of the gauges of business levels comes from large manufacturers of industrial products.  Numerous end of quarter reports point to slumping sales.  We’ve seen everything from no growth to decreases from three to six percent being typical. 

At the same time, a few large industrial corporations have announced plans to “revisit, reevaluate and rethink” their supply chains.  Their strategy is simple:  The economy is slowing and they plan to squeeze a few points out of their suppliers to offset other slides in profitability.  In the past 45 days or so, distributors have shared feedback on margin squeezing moves by key customers.  Longer payment terms (How does 105 day payment sound?) and requests for across the board price reductions are common.  In the past month alone, at least a half dozen distributors report moves to “eliminate the middleman” with customers asking key vendors for a direct relationship.  We wrote about this phenomenon last year.  The future is uncertain, distributors are under pressure and now is the time to take action. 

Why now?  
First, we still have maneuvering room.  Business levels are nowhere near the doom and gloom days of the Great Recession of 2008-2009.  Our sellers have not fully bought into the theory of a down economy.  They are still open to direction and see the opportunity to grow their territories.  Secondly, we have some advanced notice.  We have time to position ourselves to grow business and take market share from the competition.

What should we be doing?
Target and focus our efforts  
Now is not the time to waste resources on customers who lack the potential to provide us with growth.  Most distributor salespeople have 150-200 accounts on their list, but the real potential lies with their top 25-30 accounts.  Quit wasting time servicing people who can only buy $1,000 bucks a year, even if they are nice guys, loyal and all that good stuff.

Broaden your contact list at targeted (Top 25) accounts  
If your business is dependent on a single point of contact, you are vulnerable.  During times of turmoil, companies often reassign, transfer or downsize people.  If a favorite customer contact goes, so goes your business. 

Take time to know the management team of your accounts  
When our customers feel the pinch, they often take measures to reduce costs.  National chains and integrated supply groups skip over our traditional contacts to deliver a financial message to customer management teams.  Most knowledge-based distributor teams don’t really understand the business objectives of their customers.  Understanding the customer’s real plans allows for better solutions and better customer service.
Understand the value of your solutions  
During times like this, many companies become more frugal with their investments.  Projects require better ROI to go forward.  Organizations move from a one year payback goal to something better.  Understanding the financial benefit delivered through your solutions improves your competitive position.  Further, we cannot assume our allies within the customer have a clear picture of the monetized value of our work.  Helping them understand enhances the relationship.

Sell backward to your suppliers 
Do your suppliers understand your strategy in the market?  More importantly, do they have firsthand knowledge of your efforts on their behalf?  Has this information been communicated to the upper management of your suppliers?  If the answer to these questions is not crystal clear and an astounding yes, you may be vulnerable to customer efforts to create a direct relationship (and eliminating the middleman.)  Our suppliers are under pressure to maintain profitability too.  If you don’t educate them, they may do something detrimental to your growth.

Improve communications within your organization  
Most distributors make use of product specialists, support desks, inside sales teams and other customer-facing groups.  Many times important information is not passed from department to department.  Yet, each of these groups has access to critical customer information.  If you use a CRM system, now is the time to review how you use this information and how the various groups can all access key data.

Follow-up and measure customer quotations and proposals  
Do you develop customer quotations then simply toss them over the wall without following up on their reception?  Research indicates that customers appreciate the effort and, what’s more important, the same research shows distributors who inquire about quotations are often rewarded with additional business.

Develop negotiation skills
Going back to one of the points we made earlier, major industrial firms have gone public with their plans to squeeze their supply chain.  Some have noticed, they can get additional discounts just by “asking” for them.  Customer purchasing types are going to negotiate with our sellers and we need to be prepared.  Based on my observations, most distributor salespeople have not received proper negotiations training in recent history.  And, if they attended any at all, the class was generic rather than distributor focused.  If you haven’t seen the cool videos provided by SPASigma, I recommend you click here.  The message is both entertaining and to the point.

Now for the Tough Love…

A lot of the points made will run into resistance from within the organization.  There will be pushback and foot dragging unless management insists they be done (and hopefully done quickly.)  Now is the time to improve your sales process.  Now is the time to add structure to your organization.  Waiting for the economy to improve is a poor decision.