A conversation between an independent manufacturers’ representative and a prospective principal resulted in an e-mail trail that eventually wound up in front of Agency Sales magazine.

The conversation is interesting in terms of how each side views the subject of retainers or shared territorial development fees. In an edited form, here’s how the conversation evolved.

After an initial contact from the principal (who had terminated an agency in the territory) to the agent during which the principal voiced interest in establishing a relationship, the agent responded:

“At first glance it seems that your technology, the synergy with our existing lines and sales potential exist in our territory. The one issue is the existing level of business. When we take on a new principal we are in it for the long haul and have extensive startup costs. We typically don’t take on a new line unless there is some immediate compensation. In some cases there is existing business where we can start receiving commission or in other cases the principal pays a monthly shared territory development fee (or also referred to as a retainer) to help offset costs until commissions start.

“We can discuss the compensation issue when the time comes, meanwhile we will continue our due diligence. Also it would be helpful to know what specific marketing you have done. For example, you sent me historical info on customers and sales levels, but who are the target customers? Who are the competitors? Trends? How big is the market and how much business can we win and why will the customers buy from us vs. the competition? (What are the differentiators?)”

In edited form, here’s the principal’s response:

“For the past six months the territory we are interested in having you represent for us has been without a manufacturers’ representative. Many of the customers in the region continued to order without representation because we are a known vendor to them. Servicing our accounts would be no different than supporting your current customers. Commission starts day one of the contract on all new sales, but not existing business. I believe that there is a good fit between our two companies and am impressed with your professionalism, experience, capability and consultative selling approach. We would like to continue moving forward with your agency, but will have to decline payment of any kind of monthly ‘Marketing Fee’ — or commission on existing business. Please let me know your thoughts on this.”

Taking up the manufacturer’s offer to share his thoughts on the matter, the agent responded as follows:

“By not paying commission on existing business and not paying a retainer you are asking for a rep firm to work nine to 18 months without revenue. As you know the gestation period for new business wins is that long at a minimum. You will find rep firms that will work for nothing but they are not the good ones.

“I have been a member of MANA for 10 years and have my CPMR certification. We have had extensive discussion on this matter in both of these forums. It is the misunderstanding of the manufacturers’ representation model with both manufacturers (who want reps to work for nothing) and rep firms (who start out working for nothing) that gives the profession a bad name. The basic issue has to do with expectations. A rep firm takes on a line working for nothing and comes to realize that he or she cannot afford to spend much time, so they do not put the effort into the sales process that is required. The manufacturer gets discouraged because the lack of mind-share starts to become apparent. What results is the manufacturer feels the rep model doesn’t work.

“We have never taken on a line for nothing, just like you would not start a new job without a salary. I hope you understand my position and why in good faith I could not even give a referral.

“It was a pleasure speaking with you and I know you and your company will be successful — just be careful with how you use representatives — maybe a direct sales force would be best.”

Adding an explanation to what transpired in the e-mail discussion, John Knott, CPMR, the agent in the above e-mails, says that he’s well aware of the historical business model that states independent manufacturers’ representatives only get paid when they sell something. But, he adds, “Times have changed and relationships between agents and their principals have had to change with them.”

Knott, president, JD Technologies, LLC, Middleton, Massachusetts, explains that “I’ve been a rep for more than 10 years and the historical business model has worked out well for us in general.” JD Technologies provides sales and marketing services to a group of complementary manufacturers of engineered services and products serving the aerospace, military and defense, medical and industrial markets.

Knott continues, “In line with changing times, we now start our relationship with a retainer and transition into commission only. While doing that we make sure manufacturers are made aware of the long gestation period it takes for a rep in our industries (aerospace, military & defense and medical) to get that first order. As a result, while working with a retainer, and in lieu of not receiving that first order, we provide the manufacturer with added value in the form of various services including these:

• Establishing and executing weekly goals that are communicated to the principal.
• Providing call reports — “When we visit a customer, we take our notes on a tablet and go digital right away. Then when we’re back in the office those notes are entered into our CRM. At that point, since all the sales call information is available, I’d ask the question why not share that information with our principals? Isn’t that the purpose of what we do for our principals — gathering and sharing information? I know, I’ve heard all the complaints from reps concerning call reports. Do you want me to do reports or do you want me to be in front of the customer? That’s what’s always said. But the fact is you’re going to the customer, taking notes and putting them into some form you can refer to. Why not proactively forward that information to the principal?”
• Communicating progress to the manufacturer — Knott stresses the importance of regular proactive communication when he says, “If the manufacturer is unaware progress is being made, then the value of the relationship comes into question. By providing services and communicating what we’re doing on their behalf, they come to appreciate the fact that while they’ve invested x-amount of dollars over the first year of the relationship, they’re receiving information that allows them to make decisions about going ahead in that marketplace. They might even decide the marketplace isn’t for them.”

He continues, “We, just as other rep firms, get approached by a number of prospective principals. I always give them the benefit of the doubt. I listen to them and learn what they’ve done in the past. It’s only at the end of our discussion that we introduce the retainer or shared territorial development fee.”

When to Talk About Retainers

Knott goes on to offer his opinion on when and how to bring up the subject of retainers with prospective principals. “I’m certainly aware of the fact that many agencies are uncomfortable even bringing up the subject. I’ve found that timing is very important. The last thing you want to do is to bring it up in the very beginning of your conversation with a manufacturer. Well before that you’ve got to determine if there is a good match between yourself and the principal. If there isn’t, why bring that subject up at all? When you do bring it up, however, keep in mind that the practice of every industry is going to be different. You may find, as we have, that there are some companies that simply don’t pay commissions on existing business in a territory. If that’s the case, it might be wise to take that as a warning sign that the manufacturer doesn’t fully understand or accept the rep model.”

But before even introducing the subject of retainers, “I want them to understand and engage in a discussion of our value proposition. We emphasize that if there’s no existing business in the territory, the only alternative is a retainer because we simply won’t work without being paid. Some manufacturers understand and embrace our position. They’ll say ‘You’re right, but we have to go to management, the owner, or the board, before a decision can be made.’

“It’s not unusual that management will say reps are great. ‘All we have to do is hire them and they work for nothing.’ But when they enter the agreement with that kind of thinking and it doesn’t work, it sours them on the whole rep way of going to market. To counter that the rep has to bring a value proposition and that’s what we do.”

In addition to the value proposition already articulated in this article, Knott explains that “We have a detailed business proposal that we put together. An integral part of what we propose is consultative selling. If you’re engaged in commodity selling (e.g., off-the-shelf products, catalog items, etc.), therefore, the sales cycle is going to be a lot shorter. At the same time, you don’t have to practice consultative selling. When you consider the products we sell and the industries we sell into, we’re dealing with multiple decision makers including lead engineers, design engineers, product development specialists, buyers, quality management and program managers. Our job is to put together the case for the product or service and the value for that particular product or service. In the course of consultative selling we do all that. We describe what the customer will receive as a deliverable. We also make sure the principal knows where we’re going, how we are going to get there and the specific role they will play in the sales cycle. The latter usually is the ability to deliver high-quality products on time for a competitive price. Now, if what you’re selling are catalog items, trip reports or additional information are usually not needed. Because of the relatively short sales cycle the purchase order itself is all the reporting that you need. But because of long gestation periods with our industries, that communication is absolutely necessary. With us the sale is always complicated and we let our principals know that we’re keeping them informed.”

Knott notes that when he explains his and his agency’s thinking on compensation while working on orders, the reactions he receives from manufacturers can run the gamut from acceptance to a parting of the ways even before a relationship is established. “From my experience in approaching manufacturers this way, I’d say their reaction provides an excellent indication as to whether they fully understand the rep model of going to market. For instance, if they immediately say ‘No, we won’t even give you commission on the existing business,’ then we know that they just don’t get it.”

He adds that in his view it’s not too much of a stretch to say it’s “a little bit like sushi. Think about it for a moment. When someone asks you if you like sushi, your answer is you either love it, or it’s bait. There’s really nothing in between. That’s like retainers — you either love them or you hate them.”

When asked if his approach has resulted in potential principals losing interest in his agency, Knott replies, “Sure, that’s happened because there are still manufacturers out there who think we’re going to work for nothing. On the other hand, there are still some reps out there who will take on these lines, but thankfully their numbers are becoming fewer all the time. The fact that so many other reps are picking up on this way of thinking is why I feel so strongly about this issue — I know I’m not alone.

“In our conversation with principals, we make clear that if in a year, what we’re doing for them doesn’t work, here’s what you’ll walk away with:

• Market research (customers, size, trends).
• Competitive analysis.
• Voice of customer.
• Lead generation.
• Lead nurturing.
• Introductions to key decision makers, build rapport and demonstrate to focused prospect base.
• Public relations/trade shows.
• Web-based selling with search engine optimization.

“So sure, they’re paying us a retainer or shared territory development fee, but they’re getting something in return. If they hired a marketing consultant or put a direct salesperson in the territory, it would cost them significantly more.”

MANA welcomes your comments on this article. Write to us at [email protected].