Are independent sales reps a sales solution for your small business?
When Chris Balthasar and Grace Gamboo started their candle-making business in the summer of 1998, they needed to distribute their products throughout much of the country quickly. But money was an issue: "We couldn't afford our own sales force. We could barely afford to pay ourselves," recalls Balthasar, vice president of marketing for Nirvana Candles near Santa Cruz, California.
Tim O'Connor, owner of Pacific Espresso, which makes espresso equipment and a product to clean espresso machines, also needed to get his products into stores far and wide, including overseas. He, too, could not afford a sales force and realized how difficult it is for an unknown company to break into a market.
Both Balthasar and O'Connor came to the same solution: hire independent sales reps.
Business owners who market their products or services via salespeople have two basic choices: hire their own direct sales force (typically an expensive proposition) or sign up independent salespeople to sell on their behalf. For many smaller operations, using sales reps makes the most economic sense.
Who are independent sales reps?
Independent sales reps, also called manufacturer's reps, provide in-the-field representation for small to medium-sized companies. Reps are independent contractors who are generally paid by commission only when sales are made. They may be self-employed, but frequently are employees of a sales rep marketing company. These firms have anywhere from a few reps on staff to dozens.
Whether self-employed or part of a larger organization, sales reps sell the product lines of more than one manufacturer, which they are said to "rep." Reps do not, however, buy products and then resell them - that is the job of distributors. Reps function as middlemen who promote a manufacturer's products to companies or retailers and receive a commission paid by the manufacturer. If reps don't sell, they receive no money.
Sales reps differ from in-house salespeople in that they don't work for you as employees and you are not their boss. They just represent you.
Typically those operations that utilize reps are too small or lack the financial resources to hire their own full-time sales personnel. This is especially true if the company sells its products or services over a widegeographic area. Independent sales reps allow a firm to enter and service many markets economically.
Pros and cons
Sales reps are widely used because they provide a multitude of benefits:
• They are not paid unless they produce. Reps work only on commission. With an in-house deadbeat salesperson, you pay salary until the employee quits. With an independent rep, you pay based entirely on performance.
• Reps do not contribute to overhead. They pay for their own office, computer, car and health insurance.
• Reps have contacts in the field and can often get product placement because they know the buyers and have previously worked with them. O'Connor says good reps can be a "shortcut" into a market. They know who might buy your products and, hopefully, have relationships with these buyers. Reps get you noticed in the marketplace, and you get to leverage off their existing relationships.
• Reps are professional sales people who, at least in theory, are well-trained.
• The manufacturer can get a sales force into the field more quickly and economically with sales reps than if hiring and training its own sales organization. This is especially important for a new company wanting to get off the ground. Balthasar uses 13 independent sales organizations that collectively cover enough markets to represent 90 percent of the buying power of the United States. It took slightly more than a year to attain this level of market penetration, which would have been impossible with a direct sales force.
• Sales reps have their own reputations. If your rep has a good one, that helps you in the marketplace.
• Reps are your eyes and ears in the marketplace. They will tell you about competitors' products, relate customer complaints and even provide insights into the market that might convince you to change your strategy.
• Reps provide synergy. If a rep carries other products that complement yours, the rep can "package" both products together and make a sale, versus an in-house sales person who has only your products to show a prospective customer.
Because independent sales reps are not your employees, though, you can't tell them what to do, who to visit, how much time to spend on your product line, what other products to carry or not carry, or even what sales pitch to use. Among those representing you, considerable variation may exist on how your products are sold and the image projected of your company.
Importantly, it may be hard to motivate a rep to push your product lines. Roger Wilson is president of Manufacturers Representative Profile in Roseville, California, which helps companies find sales reps. He claims that typical reps heavily promote only about 30 percent of the product lines they represent; if they have 30 lines, they will make their living primarily on around eight of them. Wilson has coined the term, "70/70 Rule": 70 percent of all sales reps won't write orders on 70 percent of the lines they represent, he claims.
The rep may carry product lines that compete with yours, and there is little you can do about this except dump the rep and find another who carries only complementary products. But besides direct competition, sales reps bring along competition in the form of other product lines fighting for their time and attention. The rep's other product lines may be complementary, but they still vie with your products for the rep's allegiance.
Finding and choosing reps
Word of mouth is the best way to find reps. Ask a rep in one territory to suggest a rep in another. Check with your customers for recommendations. "We found one of our best reps by going to a gift show and asking retailers who were buying from us which reps they'd recommend," notes Balthasar.
Your trade association should have a list of reps specializing in your industry. You can also advertise in trade publications for a rep, but that usually does not bring you the best candidates.
"Fit, fit, fit" are the three most important criteria for choosing a rep, counsels Harold J. Novick, author of Selling Through Independent Reps. Novick is referring to how well your products fit with what the rep already sells. If you sell software used by dentists and your rep focuses on software used by medical doctors, that's a poor fit. "You don't want the rep to carry competitors' products, but rather to have products that complement yours," notes O'Connor. That's the definition of a good fit.
What about commissions?
Commissions for independent sales reps vary widely. John Woolsey, executive assistant to the president at the Manufacturers' Agents National Association (MANA), a trade group in Laguna Hills, California, says commissions usually range from 5 percent to 20 percent.
Typically, commissions are paid within a range already established in a specific industry. According to MANA, the average commission paid in the appliance industry is 5 percent, while in scientific research equipment and supplies it is 14 percent.
While a commission range usually exists for any given industry, commissions are negotiable. Smaller companies that want to break into a market and don't have much marketing leverage might pay commissions that are somewhat higher than usual in order to get the reps they want.
Excerpted with permission from Small Business Success, Volume XIII, produced by Pacific Bell Directory in partnership with the U.S. Small Business Administration. For your free issue, call (800) 848-8000.