Historically, it was hardly unusual for an independent manufacturers’ rep to work a territory for commission only. As time has passed, however, a struggling economy and changing market trends have combined to call into question the viability of the commission-only relationship. Those joint pressures have resulted in an increased cost that can be affixed to the average sales call. At the same time, reps have done a poor job of communicating to manufacturers what it cost them to make a sales call.

Those are just a couple of the immediate views forthcoming from a growing number of reps when the question of the cost of a sales call is raised.

The basic questions that serve as a good conversational starting point on this subject with reps are:

• How much does it cost a sales rep (independent or direct) to make a sales call?
• Assuming a figure can be arrived at, who is best suited to absorb that cost: rep or manufacturer?
• Whose responsibility is it to be knowledgeable about that cost? Should the rep take pains to communicate to his principals what investment is needed for the average call? Or, should the manufacturer beginning his relationship with the rep take it upon himself to search out that type of information?

Among the many arguments that independent manufacturers’ reps offer in their favor when it comes to working with manufacturers are the economy, productivity and efficiency they provide in the face of the ever-rising cost of the sales call. Whatever figure industry reps/consultants/experts care to affix to the typical sales call, it’s a cost reps must incur and manufacturers who go to market with them don’t.

The Full-Court Approach

Mike Kole, president, Pinnacle Sales, LLC, Belleville, Michigan, applies a number of approaches — including persistence, education and communication — in his full-court efforts to let principals know that there’s a tangible cost attached to each and every customer contact. Not only is there a cost but someone has to pay it. And, there’s the rub.

Kole, whose business is about 80 percent automotive and 20 percent industrial, explains that while his business may not be the norm, he’s still got to come to terms with what a sales call costs him. “I don’t deal with products that are shipped off a shelf,” he says. “Basically my business is comprised of custom-built parts.

“What I’ve done is to change the business model. I tell prospective and existing principals that I work off retainers. Any bonuses or commissions I earn are smaller but I have much better long-term guarantees. The risk-reward in these types of agreements is much more to my liking.”

He continues, however, that it’s not automatic that he can arrive at these retainer agreements with principals. “Right off the bat they tell me they’re not interested. They only deal on a commission basis.”

Since this response is hardly unexpected, Kole is ready to continue. “That’s when I start building my case. The cost for me to make a sales call varies since I work locally and all over the world. It can go from $600-$700 all the way up to more than $2,000 overseas.

“As a result, from the start I let principals know that if they want in me all the advantages of a direct sales force but don’t want to pay for it, I don’t think we can do business together. A retainer or sales development fee is called for if we’re going to work together.”

And, if the principal is unwilling to enter into such an agreement, Kole maintains the rep ought to be willing to walk away. It’s no surprise to reps — including Kole — that this approach isn’t universally accepted, but “It’s critical that more people should start thinking this way.

“I just terminated my agreement with what I’d call a ‘mercenary’ principal. They were looking to change some things in our agreement. I let him know I’d need a business development fee. Basically, I fired him and he couldn’t believe I was walking away.”

Kole continues by describing another conversation with a prospective principal. “When I let him know what my requirements were (i.e., a retainer or business development fee) he said ‘I’m not paying’ and was similarly shocked when I walked away. That’s fine with me because now he’s got to take on the cost of hiring a direct salesperson and investing in him until he hopefully achieves the same relationships I already have.”

Kole makes the point that if a principal isn’t willing to invest a couple of thousand dollars each month in assisting the rep to cover his costs, then you’ve got to ask “Are they really a professional demand creator?”

“When all aspects of the business are considered,” Kole continues, “reps must understand that they’re professionals. All they really have to sell is their time, and they’ve got to be paid for their time. In order to be paid, they’ve got to educate their principals on a much higher level. Unfortunately I don’t see this happening to the extent it should. Too many people are greedy, will take any lines and they only think short-term. This paradigm has got to change.

“Sure, I’d love to make five percent commission on the amount of business that I generate, but I’ve opted for retainers and long-term cancellations. If I lose some business today, I still get paid. Perhaps some reps can afford to sell for free but I’m not one of them. Unfortunately, we’re not seeing enough people thinking this way.”

A Changing Environment

Another rep who thinks like Kole is Rick Pierce, president, Pierce Marketing LLC, Dayton, Ohio. “I’ve seen figures like $300-$350 given for a typical sales call. The most important element to consider in this discussion, however, is the fact the entire business environment has changed from what it was in the past. Now the sales cycle is much longer than it used to be and there are fewer businesses to work with.”

He continues, “While I feel I have a handle on the cost of a sales call, it’s critical that I relay cost information to my principal. I’ve got to let them know that I can’t work for nothing.

“Having communicated that message, I’ve had some luck getting retainers or sales development fees to defray the cost of such calls. That lets me know that some of my manufacturers understand what I’m talking about. On the other hand, I walk away from some manufacturers every day. When I do that, they’re generally quite surprised, but my message to them is that ‘You get what you pay for. You’re hiring me to negotiate for you. You don’t want to partner with someone who’s simply going to roll over.’”

Pierce adds that he does see some hope for the future. “I see things beginning to turn a little bit. We’re getting reps who are telling principals that they’re not taking on lines. Their message is ‘If you don’t have any business in the territory, I’ll only take on your line for a fee. I’m simply not going to talk on your behalf for six months without getting something in return.’”

Lack of Knowledge

Delivering a similar message is Bob Johnson, CPMR, The Growth Partnership Company, Green Village, New Jersey. According to Johnson, there’s much more to the discussion than just focusing on the dollar cost of a sales call. “Principals don’t often know what the rep actually has to do to support his business,” he maintains. “Either they don’t understand it, or they conveniently fail to think about it.”

In his continuing efforts to educate manufacturers, Johnson says “I let them know that the average cost of a sales call is in the range of $350-$400. That can be higher or lower depending upon where the territory is located. Also related to the cost of a sales call is the volume of business. And, if you’re able to spread the cost out over a number of customer contacts, then the amount per call could very well be less.”

An overriding concern for Johnson, however, is that “I cannot engage in a sales situation with a principal when in fact they have no business in the territory. There’s got to be some form of remuneration or cost sharing to support my effort. In the absence of that sharing, the principal is using me as a bank. They’re really getting some sort of free investment service from me.”

It’s great for reps to talk among themselves about these cost-sharing issues, but Johnson, just like Kole and Pierce, agrees the message has to be regularly communicated to principals — that is if the principal doesn’t know about it prior to entering a relationships with the rep.

“I take the stand,” says Johnson, “that if you have a principal who doesn’t know anything about the cost of a sales call or is ignorant about post-termination payment, I’ve got to be professional enough to sit down with them and not only negotiate terms, but educate them as to what’s going on. I’ve got to demonstrate to them that there are factors that come into play that they should be aware of when dealing with reps.”

As he recalls some of his conversations with manufacturers, Johnson notes that many of them aren’t that knowledgeable about what it costs to make a sale. “I’ve had some say the cost is $500-$600 a call. I let them know that that’s too high. Another might say to me that my cost of $350 is too high. They ask, ‘How do you know that?’ Well, it’s not all that difficult to come up with an estimate. Look at your annual cost for a direct salesman. Consider the number of calls they make and then do the math. You can always move the figure up or down a bit, but generally it’s not that difficult.”

But, there’s more ground to cover in this discussion. “Manufacturers have to remember that I’m in this business to make a profit. My goal isn’t just to cover costs. I’ve been trained and educated to be a professional independent manufacturers’ representative. There are specific advantages that accompany conducting business with me. While I do my absolute best to keep costs under control, there is a cost that accompanies everything I do.

“If a principal has existing business in the territory, I’m only going to charge a percent on the business (i.e., commission) that I’ve been able to generate with their support. If there is no business on the other hand, I can’t in good conscience enter into a loss situation to promote business when there is no remuneration for my efforts.”

The question remains, whose responsibility is it to communicate this message to principals that don’t buy into it?

All three reps interviewed for this article maintain that it’s a shared responsibility.

“Principals must make themselves aware of the fact there’s a cost associated with making a sales call,” explains Kole. “At the same time, the rep shoulders the responsibility of identifying those costs and explaining the reasons for them.”

This statement begs the question: How often should a rep communicate this message to principals? “As needed,” responds Johnson. “However, how about some sort of ‘boiler-plate’ presentation at least twice a year?

“I look at it this way. If your principal is astute and fair in his relationship with his reps, he’s going to be more than willing to sit down to review things. If he’s genuinely interested in the relationship, he’s going to ask how things are going. That’s when the rep can and should deliver his ‘cost-of-sale’ message.”

Rep associations have to educate their manufacturer members as to the new realities of the marketplace (MANA’s Manufacturer Seminar (see Agency Sales magazine, December 2012) in Chicago last fall serves as an example of this effort).