BEST PRACTICES FOR BUILDING NEW TERRITORIES, PIONEERING NEW LINES AND COMPENSATING PAGE 1

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2 Best Practices fr Building New Territries, Pineering New Lines and Cmpensating Representatives Why Manufacturers Need t Invest in Territry Develpment: Why shuld a manufacturer invest in the territry develpment? The manufacturer is cmpeting with lines that are already prviding a revenue stream fr the sales agency. The nly thing a sales agent is paid fr is time. As astute businesspeple, agents are cnstantly lking at getting the mst value per unit time with their lines. There is n such thing as an easy sale- if it were easy, there wuld be n need fr salespeple. Therefre, there is n such thing as a sale that des nt take time- they all take time. S, when the new manufacturer wants in, they will take part f the agent s time. They d better be prepared t pay fr it. Anther pertinent pint fr investing in territry develpment is respect fr the ther lines that already invested in building the territry. These mature territry lines are currently paying the bill fr the agency s time as well as cntinuing territry market develpment. A few years ag, there was an interesting dialgue in a MANA chat-rm amng manufacturers regarding territry develpment. One manufacturer was cmplaining that they did nt want t invest in the develpment f a territry they felt the agent was already earning mney in. The vice-president f anther manufacturer remarked, I see- yu want t take ur hard-earned time, effrts, and cmmissins being paid ut t ur agents and feel yu deserve a free-ride n ur marketing and custmer cat-tails? And yu re ging t expect sme f ur agents time as well??!! I dn t think s. That cmment came frm the vice-president f a small cmpany in the bearing business- $1.2 billin Timken. Why Invest: It is nt easy t intrduce a new prduct t existing accunts Sme manufacturers and even a few representatives believe that intrducing a new prduct t a well-established representative accunt is a slam-dunk deal. In tday s business climate, nbdy gets a prduct past the buyer s desk n wrd f muth: every prduct prcured ges thrugh a scrutiny prcess that may take several mnths, if nt years depending n the sales cycle. Sales Funnel Diagram Marketing Leads/ Prspects Qualified Prspects/ Quted Prjects While this is the actual start pint f the transactin with the mature territry rep, many peple mistakenly think this (the rder) is where the business transactin fr the in rep starts. The diagram shws that it still takes time fr the in representative t get t the rder part f the prcess. It just takes less time than it wuld fr the manufacturer starting the relatinship frm scratch withut the representative. PAGE 2

3 Overcming the Obstacles t Territry Develpment: While the scenaris mentined previusly prvide insights as t why representatives are apprehensive abut engaging in a business relatinship, this des nt mean starting a territry frm scratch thrugh representatives is an impssible milestne. As with any new business prpsal- especially when the manufacturer is in the unenviable psitin f creating the need in the mind f the prspect (sales agent, in this case)- it takes a little mre preparatin, effrt, and patience. Basically, the manufacturer must: 1. Establish the value the line brings t the agency. 2. Define tasks the agency needs t perfrm fr the manufacturer. By fcusing all effrts in creating the business relatinship t address these issues, the manufacturer increases their likeliness f successfully engaging in a mutually prfitable business relatinship with the sales agency in develping the territry. Let s take them ne at a time. Establish the Value the Manufacturer Brings t the Agency: What is the verall value f the line t the prspective agency? The value any line brings t an agency is hw much mre $/unit time the line prvides t the agency. That s an imprtant pint: hw much mre- nt equal- $/unit time. There are several areas where the manufacturer can help the agency imprve the agency s $/ unit time: Increase the $ part f the equatin by: Increasing cmmissins. Increasing the sales fr existing custmers f the agency. The mre custmers (thrugh synergy) that the prspective prduct can be sld t, the mre value. Increase sales f all lines thrugh pprtunities and entries the new prduct brings t ther territry prspects the agency has nt penetrated. Decrease the unit time factr thrugh: Respnsiveness n the frnt-end f sales transactins. Reduced/ cmpressed reprting requirements. After-sale custmer service care and respnsiveness. Accurate and punctual cmmissins tracking and payment. Eliminating r reducing significantly any time the agency has t spend n activities that take away frm prspecting, qualifying, quting, and clsing rders. Withut questin, ne way fr the manufacturer t get n the radar screen f the prspective agency is t have a higher cmmissin rate than is currently paid. Cmmissin rates paid t representatives are well belw the cst t hire a factry direct persn, s there is rm t mve the rate upward withut a cmpetitive cst lss fr the manufacturer. Hwever, just increasing the cmmissin rates alne d nt guarantee the manufacturer will attract many representative firms. There are tw ther key factrs that cme int play. Bth have t d with agency business grwth strategy. One is the increased sales ptential at current accunts f the representative agency. The ther is a bit mre fggy t predict, but a key factr fr the representative agency: increased sales ptential f all the agency s lines thrugh new business pprtunities fr the agency. These tw factrs give the prduct line leverage value fr the agency. The mre significant the leverage value, the higher n the prspective agency s radar screen the manufacturer climbs. PAGE 3

4 The leverage value is arrived at frm tw surces. One surce is the agency s current custmer base, frm which the agency will have t evaluate the shrt-term leverage value f the line. The secnd is a lnger-term leverage value- the unique new business pprtunities identified by the manufacturer (yu) in the agency s territry thrugh yur research resurces. Agency Task Definitin: The value a manufacturer adds t an agency line card is based strictly n sales activities- getting rders. What abut ther activities the manufacturer needs the field sales agency t d in the territry? Defining the tasks an agency is ging t perfrm in the territry has several benefits: Gives clarity t the manufacturer as t what they need the field sales agency t d. Prvides a gd, clean negtiating starting pint. Impresses prspective agencies. Gives a clear understanding f what the manufacturer expects f the agency besides sliciting rders. The fllwing chart will help the manufacturer define the territry tasks the representative is t d. Each f the underlined prtins f the chart are jb tasks that can either be dne by a full-time emplyee r an utsurced cmpany that specializes in that particular activity. Each f these jb tasks perfrmed by the sales agency increases the value f the agency, hence its cmpensatin. Pay a Retainer: With external business factrs increasing the turnver rate f principals (manufacturers), representatives are lking fr immediate financial investment t prspect a new territry in the frm f a retainer. When develping the cst justificatin fr investing in territry develpment, the manufacturer shuld ask themselves fur questins: 1. Hw much business is being missed withut territry representatin? 2. What wuld it cst- time AND mney- t cver the territry direct? 3. Hw much mre business can the independent sales agent add t the tp line? 4. What is it ging t take t attract a quality sales agency? If the ttal $ s in #4 abve are higher than 1,2, r 3, there isn t much hpe. Which means nce 1, 2, r 3 are calculated, then the nly thing that matters ging frward is figuring ut what it takes (#4) t attract a gd sales agency. Hw much retainer ver what length f time is very subjective, and varies case-by-case. The manufacturer has tw ptins t lk at appraching a sales agency: 1. A replacement strategy fr ne r mre f the agency s prer perfrming lines. The territry investment in the frm f a retainer will have t be at least equal t the current incme levels f the line(s) being replaced, with a clear ptential f territry cmmissins exceeding thse f the current line(s). 2. A grwth strategy by adding t the existing line card, which smewhere alng the gals and bjectives will include mre lines, revenues, custmers, markets, and peple fr the agency. Either case requires lking at revenues (cmmissins t the agency) gained in the near-term and lng-term. In the near term: Hw quickly can the sales f the prduct reasnably ramp up at the sales agency s current custmer base? Based n what market r cmpetitr infrmatin? Why wuld a custmer cnvert? What is their cnversin buttn? Hw ht is the cnversin buttn fr the custmer? In ther wrds, are the target custmers lking fr a change, r des the change have t be influenced ver time by the agency? PAGE 4

5 What Tasks is the Agency t D? Marketing/ Lead Generatin Lead Fllw Up Send Literature Phne call qualificatin Sales call qualificatin Custmer Service Cntact custmer regarding differences in qute and P.O. Cntact custmer regarding differences between P.O. and acknwledged rder. Sales Calls Cntact custmer when delivery date can t be met due t Wrk-in-Prcess delay. Set up call Make call Shipping / Invicing Fllw up call Ship Technical qualificatin/ applicatin Invice Qute Get rder Lst rder feedback frm custmer Cllecting Lst rder reprt Check payable t Late payment call Order Entry Late payment fllw up Receive physical P.O. Late payment enfrcement Check pricing, delivery, payment terms, prduct qty Enter rder After sale supprt Acknwledge rder and delivery date System start-up Spare parts stck/rder Service training Service supprt Warranty supprt PAGE 5

6 Lng term: What lnger term prjects/ majr target accunts/ r majr markets are high pprtunity targets the agency and the new line can fcus n thrugh mutual effrts? Hw lng is the sales cycle fr these prjects? What time and mney resurces will be required fr this prject? Time and mney equates t ne thing: Added persnnel- by the manufacturer r by the agency with funding frm the manufacturer. The key t driving territry develpment activity is t set measurable activities and milestnes. The best way t measure sales activity is t break up key elements f the sales prcess int dynamic ratis- # f actins per unit time. Measuring these ratis and meeting agreed accumulative ttals gives a gd feel that the retainer fees being paid are wrth it fr bth the manufacturer and the sales agency. An example chart fllws. Activity Ttal Target Date Target Rate Fees Paid New Leads Generated 25 Jan 31 10/week $4,000/ m 80 Feb 28 20/ week retainer 200 Mar 31 30/ week Leads Qualified 5 Jan 31 2/ week $4,000/ m 16 Feb 28 4/ week 40 Mar 31 6/ week Design/ Spec Wins 15 Mar 31 $45k/ mnth $4,000/ m Qutes/ Prpsals 15 May 31 $60k/ mnth $4,000/ m Orders Jun 30 $20-30k/ m. $4,000/ m retainer plus cmmissin (until Sep 30; then straight cmmissin) PAGE 6

7 Car expenses. Additinal travel- htel, meals, etc. Entertainment csts Phne Office expenses (wrking ut f a hme is NOT a $0 expense) Medical insurance (presuming the salespersn is the bread-winner, and typically the bread-winner is chartered with this expense smewhere- whether it is paid by the sales agency r the salespersn, it is an ut-f-pcket expense that des nt g int anyne s bank accunt) Anther thing t cnsider is that the average annual budget fr a salespersn is $150,000. This includes salary, bnus, expenses, benefits, and training. Assuming 200 days wrked per year then the cst is $750 per day per salespersn. Lking at it anther way, that is $12,500 per mnth. S, fr the manufacturer t be n anyne s radar screen the ptential in the representative s pcket shuld be at least t pay fr getting ne bdy ut the dr. $3,000 per mnth is $60,000 per year in sales at 5% cmmissin (nt suggesting this- just a number). The larger the agency, the larger the number, because they start t lk at cmmissin $ s in terms f peple- frm $3,000 t $10,000 r s per persn per mnth. Prepare t invest in territry grwth. There are several ways t d this. Factry direct territry start-up persn. This is similar t what many restaurant chains d- they send in a start-up crew fr 6 t 12 mnths. The team creates the inertia fr the restaurant t grw n its wn after they leave. A Territry Develpment persn culd: Create and qualify new leads. Train Agency emplyees. Cnduct prduct/service seminars fr prspective custmers. Make jint calls with Agency salespeple. Be a vice fr the territry at the factry. Help fund a new emplyee fr the Outsurced Sales Agency This can be dne in the $2,500- t $5,000 per mnth range, fr six t 12 mnths. The emplyee is trained by the manufacturer and sent int the territry with the primary task f being a prduct territry develpment specialist fr the manufacturer s prducts, but wrking fr the Agency. Pay a Fee-fr-Service Retainer: Field Salespeple are typically paid a cmmissin r a base plus bnus. Hwever, jb functins such as marketing and lng-term market develpment are paid as salaried psitins in the business wrld. This figure depends n: The market ptential. The gestatin perid f the market t generate business. The amunt f time (persnnel hurs) required t develp the market. Negtiate Attractive Cntract Terms Lnger pst-terminatin clause. This is an attractive ptin fr an Independent Agency, knwing that the frnt-end develpment wrk is paid ff in fairly equal terms f back-end pay. Higher cmmissins fr grwth. This nt nly rewards fr the first year, but keeps n rewarding in the future. Pay n shipment. The value here is this helps the independent sales agency s cashflw. Retainer values can range frm $1,500/ mnth t $6,000/ mnth. PAGE 7

8 Examples gleaned frm representatives and manufacturers include: $5,000 per mnth fr twelve mnths fr a ne-persn agency carrying three lines. After ne year, cmmissins were running ver $6,500 per mnth and the agency added anther salespersn. $1,500 per mnth fr three mnths fr a fur-persn agency carrying seven lines. The ramp-up tk lnger than expected, but because the agency and manufacturer cmmunicated n develpments regularly, they were able t mutually agree t keep the retainer ging fr eight mnths. At that time the agency was generating $3,500 per mnth in cmmissins and had penetrated tw new key accunts. $6,000 per mnth fr tw years. Payff was a territry generating $12,000 per mnth in cmmissins fr the sales agency by the end f the third year. $40,000 per year fr three years ($120,000 ttal) t fund a new market develpment specialist (hired by the sales agency) fr a new principal. The agency funded $50,000 per year fr the psitin. Payff: Tw years later the market was penetrated as a new market fr bth the manufacturer and the agency. This was a unique case where the manufacturer did nt have any pprtunity in the target sales agency s markets, but saw pssibilities in a target market with the agency s lines. A rfing supply manufacturer used a market develpment specialist t help develp the territry market fr the representative firm. The specialist was a vice in the field fr the factry, helped with lcal seminars, and primed the sales pump by setting up a distributin netwrk. After three mnths, the territry was generating enugh cmmissins fr the lcal sales agency t take ver. The market develpment specialist mved n t the next territry and repeated the prcess. Summary: Hiring a Manufacturers Representative fr territry develpment has significant advantages t the manufacturer. They include: Quicker market access thrugh established custmer cntacts. Cat-tail utilizatin f the agency s ther lines marketing effrts. A territry/ accunt/ gegraphy experienced prfessinal. After investing in the frnt-end retainer, the manufacturer gets a highly mtivated (perfrmance-based pay via cmmissin) sales partner. Manufacturers with zer territry incme, but significant territry ptential, shuld lk at the task f engaging a quality independent sales agency as an pprtunity. By ding sme frnt-end hmewrk n the ptential business in the territry and negtiating a cst effective, yet representative-friendly cntract, the manufacturer can actively cmpete with existing lines at quality agencies. PAGE 8