Situation: A company is considering purchasing a line from another company to complement its existing product line. They would split commissions with the current owner, and gain an additional employee with knowledge of the products to be acquired. The purchase would add to the company’s offering, as well as rights to additional products. The CEO sees this as a low risk move. How do you evaluate an acquisition opportunity?
Advice from the CEOs:
In evaluating a commission split opportunity, will the commissions that you would receive exceed the cost of both the additional employee which you will add, plus the support that it will require to maintain the new business? Do the new commissions cover the anticipated costs, plus a reasonable profit?
Have you vetted the numbers to demonstrate that this purchase provides a suitable return on investment vs. other potential investments that you could make? Is the marginal revenue that you will receive greater than the marginal cost that you will bear? Is the ROI of the new line greater than your cost of capital? If not, what can you do to improve the return?
Looking at your current operations, do you have your existing shop in order? Have you calculated the metrics that will allow you to understand, where you’ve been, where you are, and which provide a clear vision of where you want to go? If not, the question is whether you are ready to take on another line.
The bottom line question is – how do you know that this acquisition is the best use of your funds?
Situation: A small company’s business is increasing and they need to build a sales organization. To date all sales have been conducted by the founder CEO and a single employee salesperson. Should they build inside or outside sales first? Are there trigger points at which one or both should be increased? How do you develop a sales organization?
Advice from the CEOs:
Right now you have first mover advantage in your market space. You have a unique offering and no existing competition. The immediate objective is to maximize early market share. Borrow if necessary to ramp sales. There is no trigger point.
Hire an outside salesperson now. You want an individual who is knowledgeable about your market and who has a large set of contacts. Make at least 50% of this individual’s compensation variable (commissions) to start and escalate the percentage of variable compensation as sales grow. Hire at current market rates.
Supplement your existing marketing with an investment in social media marketing and SEO (search engine optimization). Don’t try to do this yourself on the cheap – hire a pro. Invest in Pay-Per-Click to push your visibility.
To sell this plan to your existing salesperson and the rest of the team, it’s time for a Come to Jesus talk.
Make a strong business case for your program.
The trade-off is either invest now to rapidly build sales or become insignificant.
Once you’ve made your pitch and received consent, let the plan work before you ask for more.
Situation: A CEO has difficulty gaining realistic projections from sales – projections for which they will be accountable. For example, the VP of Sales promises X but delivers Y – a result substantially below X. What methods have you have used to get realistic assessments and commitments from sales executives? How do you establish accountability for results?
Advice from the CEOs:
Shift the issue from their accountability to your own accountability to the company.
In order to ship to the projected sales targets, we will need to scale up production to X level, hire Y personnel, and invest in Z inventory. If we miss the target by 20% here’s the impact on our financial performance for the next period. Are we comfortable, as a company, with this exposure, or should we adjust our plan to reduce the exposure.
This makes it easier for the sales executive, for the good of the company, to reduce the projection if they are not confident that they will make it.
Do you need to examine your commission structure as well as bonuses for sales executives? Consider scaling commissions to make sure that the sales team hits their targets. Make them hungry by offering lower commissions for lower targets, but increasing total commissions for meeting and exceeding targets.
Have the sales team project their sales. If the projected level meets company objectives and they meet them they make X%. However, if they fall short they make successively smaller fractions of X% depending upon how much they fall short.
Currently, the ratio between new and repeat sales is 20% / 80%.
To focus the sales team on new sales, reduce commissions on repeat sales, and increase commissions on new or increased sales and/or accounts.
Good sales people are competitive and often respond to pride. Give them in incentive – hit the sales target and get trip to Las Vegas with your spouse or guest.
Situation: A company is rapidly ramping sales of standard products. However, the rep network that sells the company’s products has had more difficulty selling higher dollar / higher margin custom products. How do you sell both standard and custom products?
Advice from the CEOs:
Make the custom products look more like spec products with adaptability. Create a grid that allows the customer to easily spec the specific product that they need and quickly determine the price of the product. This price can be overestimated at first blush, or scaled depending on the number of units wanted. Consider using a laptop or PDA spreadsheet.
Consider the combination specialist / generalist approach that companies have used successfully for highly technical sales. Put a significantly higher commission on the higher price / margin custom product, and have your own “specialist” reps do joint calls with the distributor reps who have relationships with the customer. With the incentive of higher commissions, a percentage of the distributor reps will take the initiative to learn from your inside reps how to sell the custom product to boost their sales and commission income.
For your distributor reps, separate and optimize lead generation and deal closing from a compensation standpoint to encourage both.
Reps with consultative sales experience, for example selling intangibles such as insurance, may be the best candidates to sell your custom offering.
Offer quarterly training of your reps and distributors to encourage them to sell the custom products.
Consider telemarketing. Support your telemarketers with a well-prepared script to assist them in qualifying prospects and setting appointments for your own reps.
Situation: A software company is evaluating its distribution network. Historically they have worked with resellers who aggregate software services into packages for larger customers. Recently they were approached by a reputable distributor seeking a master distribution agreement with favorable payment terms. Is this an option that they should pursue? How do you evaluate distribution alternatives?
Advice from the CEOs:
There are at least three objectives to consider: market coverage, margin to the producer, and market risk.
For market coverage, evaluate the alternatives in terms of their ability and commitment not only to serve your current market but to expand into adjacent markets.
Regarding price and margin, there are two alternatives:
Decide what price you want, and don’t worry about the reseller or distributor’s final price to the customer, or
Establish a floor price for your product and ask for a percentage commission on sales.
Run models on each and decide which will provide the best return on sales.
Market risk is more complex. These are different approaches to the market.
In evaluating the reseller option, insist on terms in reseller agreements that the reseller disclose the terms of their sales.
Sharing of customer databases is another factor. Siemens, for example, considers their customer database as IP and only releases portions of their customer database selectively to resellers.
A master distribution agreement has different risks. It puts all of your eggs in one basket. If the distributor adjusts focus away from your software during the term of the agreement your sales and revenue will suffer.
Are there conditions where a master distribution agreement may make sense?
If the distributor is willing to sign a multi-year agreement with sales guarantees at favorable pricing this mitigates the risk.
The central issue is risk and guarantees. If you see the option as a low risk – high return proposition, it may be worth considering.
Situation: A company hired an experienced individual to sell for them as a consultant. The individual initially asked to be paid on an hourly basis. Results have come with surprising speed. Now the consultant is asking for a commission on sales. How much should you pay a salesperson?
Advice from the CEOs:
Tailor the commission structure to company objectives. For example, if the objective is to reward new business development, and to retain the individual, try something like:
Offer 10% commission on Year 1 sales.
If both the customer and the consultant are still with the company in Year 3, the consultant gets a 5% bonus on Year 2 and 3 sales.
Repeat this for successive years.
If the interest is a long-term relationship, determine the nature of the sales services where the consultant excels.
What is the individual’s focus?
Have a highly qualified sales expert do a telephone interview of the consultant and offer their assessment of the individual’s talents.
One successful sales model includes one measure to retain the job, and another to calculate commissions:
Set a dollar quota for sales performance – if the individual does not hit at least 85% of quota, they lose their job.
However, calculate commissions based on the gross profit that their sales generate.
This properly balances the focus between revenue and gross profit generation. To succeed, the individual must pay attention to both measures.
If the individual wants a substantial commission, then don’t pay a substantial base. Instead pay a draw against commissions to allow them to support themselves between sales.
Pay on receipt of payment, not on receipt of orders.
Situation: A company hired a sales person who looked during the interview process like a hunter, but turned out to be a farmer. The company’s product-service mix is new to the market and requires a sales person who excels at landing new accounts. How do you tell hunter from farmer sales candidates?
Advice from the CEOs:
The hunter sales person is naturally more aggressive and loves the thrill of landing new accounts. The farmer excels at follow-up sales and cultivating existing accounts for new purchasing potential. Neither is particularly good at the others’ job, and it is rare to find individuals who excel in both roles.
To differentiate between these two personalities, behavioral interviewing is better than tests.
Screen resumes for past sales success in companies in a similar size range as yours to select a group for further evaluation.
Behavioral interviews are very different from traditional interviews. They the focus on specific skills and requirements associated with the job and require candidates to give concrete examples of when and how they have demonstrated the skills needed for the job. The interviewer then follows up with probing questions to elicit more details. Responses can be verified in follow-up with references provided by the candidate.
During the questioning process, the interviewer may interrupt the candidate with a question like “what are you thinking right now?” These questions provide more insight into the interviewee’s personality and also help to filter out B.S.
You are seeking someone who’s “been there done that” in a company which resembles yours and who can convincingly demonstrate what they’ve done.
Thoroughly check references – not just those provided by the candidate, but dig and talk to others in the same companies.
Strongly align the pay and incentives for a hunter. Hunters prefer a comp package that is heavily commission-based and this will scare away farmers. If they don’t sell, they get paid little.
Offer an extended trial period with burden of proof on performance by the sales person.
Situation: A company wants to expand its markets and customer base. Currently their business is dominated by a single customer. What best practices have you developed for identifying new customers and markets?
The key to getting new customers is to devote dedicated time to this task.
If your company is populated by engineer or software specialists, consider hiring a sales professional – a commission based hunter sales person who has experience landing big accounts in markets similar to yours. You may pay this person a good percentage of sales for brining in this business, but gaining the additional business can be worth it.
Much depends upon your relationship with your large customer. When a single client has rights over or ownership of the technology of the company but is not pursuing broader markets that the company is interested in, is it feasible to negotiate rights to pursue this business?
The larger client will pursue their own interests, not those of the smaller vendor. Perhaps a win-win deal can be worked out, but it may be difficult – particularly if the larger client is concerned that use of the technology in other markets could affect its interests in their primary markets.
Be very careful in this situation. The easiest tactic for the larger company to defend itself from a perceived threat is to sue and simply bury the smaller vendor through legal expenses. While the smaller company may be legally within its rights, deep pockets can beat shallow pockets through attrition.
In the case that the larger client simply continues to buy all capacity of the smaller company, an alternative is to raise rates, or perhaps to just say no.
Consider recreating the opportunity – create your own adjunct proprietary product with your own software or design talent and expand your horizons with this product.
Be aware, the large client can still sue if there is any appearance that your proprietary product impinges on their product rights. As in the case above, the larger company has the resources to bury the smaller company in legal expenses regardless of who is legally correct.
Situation: A company wants to expand its business development staff. What is your experience, and what has worked best for you in selecting among business development candidates?
Advice from the CEOs:
Your first priority is your compensation plan for the new person. There are three basic compensation schemes:
High Base/Low Commission
Medium Base/Medium Commission
Low to No Base/High Commission
Choice between these options depends on your own philosophy, as well as common practice within your industry. Compensation is central to candidate selection. The CEOs recommend asking candidates about their own preferences for compensation.
If they prefer Option 1, don’t hire them – they either lack experience or confidence.
They ideally prefer Option 3 – they can make more money, but cost you little unless they perform.
If they prefer Option 2, probe. They may be good but face personal obligations that make it difficult to choose the high risk/high reward option. Ask about past compensation and performance. Verify any claims made during the interview.
You want to structure sales compensation so that non-performers leave of their own accord – without costing you dearly in time or money.
What are the most important traits to seek in a good B.D. candidate?
Understanding of customer’s requirements as well as purchase behavior.
Understanding of your product or service.
How do you find candidates?
Use a Head Hunter who knows your industry and competitors.
Use written tests to evaluate the individual’s traits.
Let the recruiter find and screen prospects and present the top 2-3 to you.
Key Words: Business Development, Candidate, Compensation, Experience, Traits, Evaluation, Base, Draw, Commission, Industry Practice, Verification, Performer, Non-Performer, Selection, Head Hunter, Personnel, Recruiter, Test
Situation: A company has been very successful, but one customer represents over 60% of their sales. To grow, the company needs to diversify its customer base. How do you reduce dependence on one large customer, and what are the risks involved?
Advice from the CEOs:
The key to getting new customers is to dedicate time and resources to the task.
Consider hiring a sales professional – a commission based “hunter” who has experience landing big accounts. You may pay this person a hefty commission for brining in new business, but diversifying your customer base can be worth it.
If there is shared ownership of technology co-developed by the company and client and the client does not wish to pursue markets beyond its strategic focus, is it feasible to negotiate rights to pursue this business?
The larger client will pursue their own interests, not those of the smaller vendor. Perhaps a win-win can be worked out, but it may be difficult – particularly if the client is concerned that use of the technology in other markets could have a negative impact.
Caution. The easiest way for the client to defend itself from a perceived threat is to sue and bury the smaller vendor through legal expenses. Regardless of who is “legally right,” deep pockets can win through attrition.
Consider recreating the opportunity. Create your own adjunct proprietary product with your own software or design talent and use this to expand your horizons.
Be aware, the large client can still sue if they believe that your proprietary product impinges on their rights.