If your organization can get past the startup phase, where you’re practically running on credit cards, investor funds, or savings, you’ll reach the buildup stage. You can finally have a sigh of relief–you have a few big customers paying your bills. You aren’t in the red anymore!
Not so fast, though–don’t celebrate just yet. You’ll soon realize that those big customers who pay your bills have you over a barrel. They have the ability to dictate prices and threaten to discontinue your goods, which would put you out of business! You’re completely at their mercy. So, to mitigate your risk, you decide to expand your territory and attract new customers. This critical stage is where many businesses fail. But the cost of goods isn’t what’s killing them–it’s the cost of sales! All these new costs reveal themselves as you start servicing your new sales. One of these costs is that of outside sales reps. As your business expands, you learn that being everywhere is impossible. So you start delegating the sales and service processes to a new employee in a new territory. How did you find this person? Who are they? And most importantly–what is it that they do? Being clear about their responsibilities is important, but developing a performance-based compensation plan is crucial.
Let’s dive into these three essential questions in reverse:
What’s the “real” job?
First, let’s go over the difference between what you might think the job is, and what it must fulfill in order to be effective. And what does effective mean? It’s a combination of growth, sales, and profitability. Of course, if your reps don’t make and maintain sales in dollars or units, you lose. If you resort to selling the same thing year after year, you lose. You aren’t growing. If your new representative sells your products for too little or spends too much on promotional materials, you do not profit–you lose.
In Barefoot’s case, we learned a couple of painful lessons while expanding into new territories. Keeping sales going was much more difficult than getting them in the first place! The handholding and actual nitty-gritty work we thought were under control by the retailer and distributor–all fell on us. We just had no idea starting out. We incorrectly thought that other companies we sold to would have the financial incentive to advertise and maintain our products–we thought it was making them money. We never once thought about the actual work that made a difference in our brand’s success.
When people ask, “What’s the one thing that was responsible for your success?” (as if there were just one thing!), we give them an answer they don’t really want to hear. Our success directly resulted from hands-on merchandising at the retail level–period! But what if we had gotten a sales rep on board who presented themselves as a brand ambassador? You know the deal–talking to people, taking them out to lunch, doing some training? We made that mistake many more times than once!
We finally realized the actual work that had to be done, the job that nobody but us and our company would do. We then had a much different idea about what we needed. We finally knew what we were looking for! We needed somebody who would pick up the slack and do all the dirty work where other people had failed. We were in need of a sales rep who was eager not only to ask for the order, but to also make sure it was priced right, delivered on time, and on the shelf. In other words, more of a cop than a merchandiser!
How can you find them?
Running advertisements seemed like a no-brainer, but that only brought unemployed or unemployable folks to us. Ads may get you a gem once in a while, but you’ll need to sift through tons and tons of applications. In order to find our best people, we went right to our new territory’s prospective buyers. We asked them who their favorite sales reps were, and why. We went to the retail level and asked clerks who their favorite outside reps are, and again, why. This was quite an educational moment in itself, but it also brought us a few qualified candidates.
We discovered that there were only a few people who qualified for the real job at hand. We then had to decide how to get them on our team. They needed to see our offer as their next career stepping stone, in terms of both responsibility and income. We needed to convince them that they’d be recognized for building our brand, and would find success in their territory. Of course, our due diligence was required, along with lots of training and a trial period, but at least we were finding people that the buyers already like!
How should you pay them?
Yes, the million-dollar question–literally! Outside sales reps will want a guaranteed base salary, whether or not they get commission. So, you’re out a base salary and expenses whether or not they make a sale–even if they lose a sale! Ouch. How much will that cost you, and how much can you afford out-of-pocket? For example, can you afford to start a bunch of territories at the same time? Most companies can’t, so they trade equity or borrow to fund the expansion. And therein lies a huge risk.
We needed to start with just one territory at a time. Before we could afford another new territory, it had to pay for itself. We cash-flowed our own growth. But, because of the relatively slow growth, our mistakes were manageable and contained. They led us to improve in our following territories.
A guaranteed base salary is established by the market territory already. You have to learn more about what that is. But–be careful! Your new rep might not feel an incentive if you pay too much of a guarantee. But if it’s too low, you might not be able to get them on board in the first place.
A rep’s bonus-based income and commission must address growth, sales, and profitability–yes, all three. It’s tricky to balance them all. We recommend keeping your reps on board with one comp plan for no more than one year. During that year, you’ll learn what might be wrong with your “best laid” plans and you can work on a fix for the following year. Work with your new representative and agree on your compensation plan’s performance metrics. Profitability and sales are relatively simple to measure and agree on. But growth is a whole different animal.
We referred to growth as increasing sales year after year. What were your sales at this same time last year? Were there any anomalies last year? We took a three-month average of the same month last year, the previous month to that, and the month after the same month last year and agreed to refer to that number as the same month last year. Use that as a relative baseline to measure your growth. This worked for us. The more sales our rep made over that baseline measure, the more each sale was worth. For example, if a rep sold 10 over baseline, they received an extra $1, or $10 total. And 20 over baseline got them $2 each, or $40 total. 30 sales over, and they got $3 each, or $90.
This plan provided an incentive to grow the brand significantly over that same month the previous year. Of course, we had to add some details and tweaks into the plan as it evolved, but you get the idea.
We learned that, when you pay your reps fairly, the non-producers can’t afford to stay on the team, and the producers can’t afford to go!
The bottom line? Understand the real work and incentivize performance!
For more, read on: http://c-suitenetworkadvisors.com/advisor/michael-houlihan-and-bonnie-harvey/
