Independent manufacturers’ representatives and their principals might be in for a bit of a surprise if they would take the time to closely examine the time, money and effort it takes to represent a given line.

That point was best made at a meeting of manufacturers and agents — both sides being members of a national representative association — a few years ago when during a break, one of the agents present mentioned the existence of the process known as line profitability analysis. At the very mention of the term, the manufacturers raised their eyebrows in interest and asked, “What’s that?”

The fact that they knew very little about the exercise and the implications of the process caught the agents by surprise.

The implications of the anecdote cited above were emphasized by former independent representative, manufacturer and consultant Scott Lindberg when he was asked about the importance of analyzing line profitability. Lindberg is the director of sales and marketing for Quell Corporation, Albuquerque, New Mexico, a manufacturer of EMI/RFI filter inserts for connectors (www.quell.us). He also has worked with manufacturers and representatives as a consultant in various industries surrounding their sales process with the end goal of driving revenues. In addition, he specifically has worked with independent representatives on all aspects of their business including line analysis, compensation programs, succession planning, etc.

According to Lindberg, who over the years has become somewhat of the go-to guy when it comes to this subject, “Both manufacturers and their reps would be surprised if they examined all that it takes to sell a line. Manufacturers first would be surprised because most of them look at the rep business and assume that commissions are all profit. Reps would be surprised because the more lines they represent, the more opportunities there are for investing the resources in places that don’t bring value to their rep company.”

Fault is Shared

If it’s fair to attribute any fault when it comes to ignorance of the concept of line profitability, Lindberg maintains it’s a shared issue. “Most manufacturers simply don’t understand what makes a rep tick. They don’t know how to motivate them, how to manage them or arrive at and communicate joint expectations. Many of them use reps because it’s what they’ve always done and they can’t articulate why they use reps.

“From the representative side, there are similar issues. Many reps don’t completely understand why manufacturers use them. Historically, they think it’s because the rep is the lowest-cost alternative to having a direct sales force. Over the years, I’ve worked to change that view to one where the rep should be seen as the lowest cost alternative to drive revenue.”

Lindberg explains that he arrived where he is today as an educator and consultant on the subject of line profitability because, “I’ve been around the rep business for most of my life. I’m a second-generation rep, completed my CPMR training in 1993 and have had the opportunity to attend rep management and marketing conferences and learn from seasoned reps for many years. There are so many professional reps that I’ve been able to learn from and honestly borrow some ideas that I’ve been able to put together many thoughts on the issue.”

To properly understand the concept of line profitability, it’s necessary to come up with a definition. That definition is just what Lindberg offered when he co-authored an article on the subject for MRERF’s Operations Manual for Manufacturers’ Representative Firms more than a decade ago. That definition holds true today: “Profitability can be measured in many ways, to one degree of accuracy or another. In the final analysis, however, you can relate a line’s profitability to how much time the line demands per dollar earned and how well it fits with the rest of your line list, line synergy.”

Profitable vs. Unprofitable

Certainly a simple way to look at lines is to categorize them as either profitable or unprofitable. At the time he worked on that article, however, Lindberg went into a little more detail and divided lines accordingly: Fillers, Rock-Solid Regulars and Majors. “Since then, I’ve re-categorized them as Green, Blue and Gold — but the basic premise of each remains the same.”

Gold — formerly Fillers. These should be the “gold nuggets” on a rep’s line card which are new products that a rep has taken on where they believe they can grow a product into a Blue or Green line. It’s common for an agency to have two or three of these lines, and they don’t think a great deal about them. Lindberg warned, however, that “There can be some danger in carrying these lines. They can cost a rep access to larger, better-established principals who sell the same or similar products. In addition, a competitor to one of these fillers does not know the line’s true value to the rep firm and may make the assumption that the rep would not consider giving up an established line.”

These lines often fall into the unprofitable category due to low commissions and a disproportionate amount of time being spent on them.

Blue — or Rock-Solid Regulars can be ranked third or fourth on an agent’s line card. “In general, they’re easy to work with and their demands are as reasonable as their people.” As with the green category, these lines come with a warning from Lindberg: “If these lines aren’t aggressively represented, they can become former lines in a hurry.”

Green — Applying the 80/20 rule to these lines, a few of them can represent the greater portion of the rep’s income. “The danger, however, is that because they provide that amount of income, they are just presumed to be profitable; hence, the need to analyze the entire line portfolio.”

Decide on the Analysis

There are formal and informal methods with which to approach line profitability analysis. The sidebar which accompanies this article will refer MANA members to articles that appeared in the MRERF Operations Manual as well as a MANA-sponsored teleforum that describe a variety of methods. Regardless of which method is employed, Lindberg stresses the importance of the exercise actually being performed: “I think that, in general, reps are reactive creatures. But in this case they should be proactive. It’s important that they approach this process seriously and in an organized manner. If they think they can go about it by just employing their ‘gut feeling,’ then they’re making a mistake. If they choose the latter course, they’ll probably never get around to making a decision.”

For those representatives who have actually performed a line analysis, then it’s decision time. According to Lindberg, “I’ve had some reps conduct an analysis and determine that one or two of what they thought were their top lines are actually unprofitable. They’re surprised at the amount of time they have to devote to them or the number of resources they have to call upon to serve them. Then, they ask themselves, do we re-allocate our time to other lines that we represent or is there an issue great enough to consider termination?

“It’s not unheard of when the rep reaches that point that they go back to the factory and ask for help to make the line more profitable. If they do take that approach with a manufacturer that understands how to work with reps, chances are they’ll get the help they need. With others, it may simply be time to part ways. Many times when the decision is made to terminate the relationship, the rep looks back a year later and determines he’s more profitable than he was before.”

Carry an Unprofitable Line?

In a discussion of line profitability, there remains the question: Should an independent representative ever continue to represent an unprofitable line? A partial answer to that question was offered in a second article in that same Operations Manual years ago. “A representative firm may elect to continue to carry an unprofitable line because it is highly synergistic with other lines; it fills a void in the firm’s product offerings; it keeps a firm in a product area until a premier competitor becomes available; or, it is an emerging growth line with a good future.”

Adding to that reasoning, Lindberg notes, “Even with the aid of a well-conducted analysis, things aren’t always black-and-white. Sure, you may devote a great deal of time promoting a product line and never sell anything. But because of your efforts, you may have sold three other lines to the same customer. Then there are the cases of taking on a new line that won’t prove profitable for a while (but will in the long term), or representing a line simply for the reason that you’re trying to learn something new or make inroads into a new industry or territory.”

In closing Lindberg offers a simple approach when it comes to evaluating a product line. He calls it PDQST. “Those letters stand for profitability, delivery, quality, service and technology. It’s fairly easy to go down your line card and grade any principal on those five points. If you’re lucky, you’ll have lines that rank high in each of those categories and those are the principals you want to work with.”

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MANA’s “Steps to Manufacturers’ Agent Professionalism” Program

MANA defines itself as the association for professional manufacturers’ representatives and those who aspire to be professional. We believe the more professionally you operate your business, the more successful you become. The greater your professionalism level, the higher the quality of principals you sign up. The higher their quality, the greater your sales and commissions.

This issue of Agency Sales magazine examines the importance to the independent manufacturers’ representative to not only be aware of the practice of conducting a line profitability analysis, but also to communicate the existence of that procedure to the agency’s principals. Manufacturers’ agents go into business to succeed. Success requires profitability. Being able to calculate line profitability is essential to growth and long-term success. Taking action on unprofitable lines is step two of this process. Professional manufacturers’ agents calculate line profitability and terminate agreements with unprofitable principals.

Educational Resources

Teleforums: MANA staff and industry consultant Nicki Weiss instruct participants on the various strategies needed for representatives to conduct and calculate line profitability analysis. Among the goals agents should have for this process is to be able to identify those lines that demand more time and effort to represent vs. the return the agent receives in commission payments.

Operations Manual: Two articles (“Line Profitability Analysis” and “An Alternate Approach to Line Profitability Analysis”) are provided. These articles provide different — though related — approaches to the process of analyzing a representative’s line. Accompanying the articles are a number of worksheets and charts to use in the exercise.