Recently, we published an article (Your Reps are Starving) concerning the impact of current imaging system market trends on the ability of a sales rep to earn a living. We received many comments, mostly positive (Thank You!). A lot of people asked for additional detail. So here are some additional facts.
The title of that article said it all. It has become increasingly difficult for the sales rep working under a box oriented compensation plan to generate enough commissions to survive. Economically frustrated reps will leave your dealership, taking their training and customers with them.
The impact on your business is clear – high turnover, open territories and, perhaps most important, inexperienced reps with little or no knowledge of how businesses operate. Selling solutions? Difficult if not impossible for this group. How can you expect a sales representative to streamline a workflow process if he or she wouldn’t recognize a workflow process if they were run over by one in the street?
So, for a considerable portion of your sales rep population, we’re back to the box. This, I’m afraid, is the heart of the sales rep compensation problem. Historically, earnings for the rep were based on one or both of these two dynamics: monthly revenue or gross margin per sale. But a moment’s thought will tell you that these measures may have lost their meaning. In the good old days (or, as we tell our children, “When I was your age…”), the rep could reasonably expect a gross margin of 45%. Apply this to average revenue of, say, $35,000 per month, pay the rep 40% of the margin, and earnings would be $6,300 per month or $75,600 per year. Not bad.
But, two dynamics combine to produce the perfect storm. First, hardware gross margins have declined to less than 28% with all indications that they are headed even lower. So, with the same monthly revenue production, compensation drops to $3,920 per month or $47,040 annually. That’s a cut of 38%! Would you stay in that job?
Some have commented that they have made up for this shortfall by implementing or increasing the sales rep’s salary in addition to commissions. In what world does that make sense? It looks as though a bad situation (for you) has gotten even worse. True, the sales rep might stay. But your cost of sales has gone through the roof because the salary does not produce one dollar of incremental revenue.
But wait, there’s more! Declining margins are only one part of the problem. Declining revenue per order is another. The cause? Increasing popularity of A4 MFP products. Your customers are realizing that they no longer need ledger-sized capabilities, at least not on every MFP device. For them, A4 systems seem to make more economic sense.
Consider a typical A3 40 PPM monochrome MFP (copy, scan, print, fax) priced at $9,765. The same, or in some cases slightly better A4 system can be had at $1,999. Dealers like you have told us that A4 products now account for 20% of MFP placements. We think that’s low, but, for now, let’s run with it. If the average sales rep sold only 40 PPM systems the weighted average price considering A3 at 80% and A4 at 20% would be $8,211. At the current margin of 28%, earnings drop by 16% to a level of $3,292 per month or $39,500 per year. Remember All in the Family when Archie and Meathead would both try to get out of the door at the same time? That’s what your facility will look like as sales reps head for the nearest exits!
Back away from the numbers for a moment and consider the message. The average rep cannot beat the combination of declining revenue per unit and reduced margins. We’ve analyzed sales rep productivity for more than thirty years and have found little change. The average rep sells less than four units per month. They always have. And, unless something drastic occurs that would change their behavior, they always will – even with the lower unit price of A4 products. True, there are possible changes that are less than drastic. For example:
They could focus their efforts on selling multiple A4 products in a single transaction. While that does little to address the gross margin problem, it does increase revenue production. Of course, the rep would now be making a recommendation that likely spans multiple departments, forcing them to sell at a higher decision maker level. But, isn’t that the goal of any account strategy?
They could specialize in specific vertical markets. This obviously works better for senior sales reps. But it has proven itself to be an effective strategy for “top to bottom” (high volume to low volume) sales. Start with the most obvious – healthcare and legal. Healthcare because the federal government has mandated changes that involve the systems you already sell. Not only have they mandated these changes, but they have funded them, and penalized facilities that do not comply. It’s a once in a career opportunity. We mention the legal market because it, too, is undergoing significant change. Federal courts have mandated (but, unfortunately, not funded) a conversion to digital discovery documents. The impact of this will no doubt filter to all levels of the law. This turns the business model of any legal practice (one of the most paper intensive businesses) on its ear. Practices have scanning problems. Coincidentally, you have scanning solutions. CAUTION: charge for those scans, or you have gained nothing. The going rate seems to be $0.002 per scan.
They could focus on increasing the page count within each account. Of course, that means they’ll have to capture incremental pages by replacing printers (ideally with A4 systems). But, and I’m getting as tired of saying this as you are of hearing it, you earn your profits from the service and supplies associated with each page. The sales rep should earn money the same way. Yes, some of the comments I received when promoting the idea of page based compensation centered on the difficulty of implementing a backroom system to track pages. But, don’t you already do this for your service billings? It’s just not that complicated.
None of this is easy. But, change is rarely easy. I’m reminded of a quote by former Chief of Staff, General Eric Shineski, “If you don’t like change, you’re going to like irrelevance even less.” Think about it.
