Tag Archives: Commission

How Do You Evaluate Distribution Alternatives? Four Thoughts

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.

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How Much Should You Pay a Salesperson? Five Guidelines

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?
      • Hunter/Gatherer
      • Contact manager
      • Relationship manager
    • 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.

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How Do You Tell Hunter from Farmer Sales People? Four Tips

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.

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How Do You Identify New Customers? Four Alternatives

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.

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What Are Best Practices for Selecting Business Development Staff? Four Thoughts

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:
    1. High Base/Low Commission
    2. Medium Base/Medium Commission
    3. 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?
    1. Understanding of customer’s requirements as well as purchase behavior.
    2. 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

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How Do You Reduce Dependence on One Large Customer? Three Thoughts

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.

Key Words: Revenue, Risk, Markets, Sales Person, Hunter, Commission, Technology, Shared Ownership, Legal Suit, Adjunct, Proprietary, Rights

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