Motivating and Guiding a Commission Sales Rep

This thread starts with a question about how to structure a contract with a commission salesperson, then expands into a broader discussion of effective sales and marketing strategies. February 6, 2010

Our company is still trying to grow despite the economy. What is the best way to set up a contract with a commission sales person? He is to find work and sign contracts on behalf of the company. We have in-house designers and support staff to handle the client beyond his contact.

How do you handle discounts and short sales? Our sales cycle for custom cabinets has a very long time frame in most cases. Should we pay out commission only when the job is 100% paid for? How much are professional sales people with little knowledge of cabinetry paid? And what about commission deductions, i.e. mistakes in measurement?

Forum Responses
(Business and Management Forum)
From contributor W:
From my experience, you are on the right track in attempting to keep salespeople out of the process after the sale.

I do have a couple of suggestions. Expecting your sales people to determine the creditworthiness of customers is putting control of that critical step in the hands of someone whose personal interests lay in making more sales and, as a result, extending more credit. Your accountant or another administrative person would be a better alternative. I believe most sales people worth a darn will be okay with holding commissions until a job is paid, but if you take deposits, that should count toward their commissions.

I have also found it better to have measurements and templates done by installers, not salespeople. It seems that the two skills required are completely alien to each other, and removing responsibility for final measurements from salespeople removed a great deal of finger pointing after errors turned up in the form of finished cabinets. I compensated installers with a flat rate for measuring jobs, and the resulting improvement in the rate of errors paid for it ten times over and made the installers happier people.

I don't think you want anyone selling your cabinets who knows nothing about them. I also found it very helpful to have my salespeople work (observe) in the shop for a week before they even tried to sell - it gives a very valuable perspective on how things work!

From contributor G:
Some folk use the outside sales agents to solicit what amount to offers, in the legal sense. There is a clause inserted that provides that no sale is agreed to until accepted by the home office. It keeps your agent on a shorter leash. They are not able to commit you to deals with bad credit risks or lock you into unprofitable jobs or impossible delivery times. Worth having your attorney draft if you think you need a bit more control in the process. Sales people don't like it because it looks like the typical car dealership crud - "I'll have to go see if the boss will accept this deal."

From contributor K:
Think about what you are saying - "Our sales cycle for custom cabinets has a very long time frame in most cases. Should we pay out commission only when the job is 100% paid for?"

Unless you are paying out a draw or salary as part of the commission package, these people have to live. The quickest way to de-motivate a salesperson is to not provide them instant gratification with compensation they will think they are due after 3 days Rite of Rescission.

A full commission salesperson is going to want a substantial piece of the pie (8-13%), as they have to live on full commission. Once the deal is signed, and deposit check issued, you should be issuing them at least 75% of the commission upfront and that last 25% at the end. This allows for variances in what they sold.

Put that 25% in a commission-bank that is paid quarterly. They must be employed to receive the remaining 25%, and only projects that are completed if they leave will they get paid on, as someone else will have to service the account if they leave.

There are many ways to formulate this commission, but be prepared to pay on the gross, and have your pricing reflect this. This is what they get paid for.

From the original questioner:
We are paying a small salary, about 25K/year. This was designed to cover gas, cell phone, car, etc., and presently we pay 5% of the gross sale. We have one salesman working now, and this year (two months to year end for us) he has sold 1.2 million. He is very good, works 4-5 hours a day, and I don't think he has put in 5 days a week yet. On our system he will make 95k this year. That is a ton of cash for a part time job. However, you are making me think because I can't get other sales people started. Our other sales people are all on salary and do start to finish projects, work a lot more hours, and get paid a lot less, so conflict is brewing.

From contributor R:
There is so much here to talk about. I make my living as a commission sales rep. I run a company of 3 other people with commissions as our sole base of pay. I also run a National Association of Independent Reps calling on woodworkers. Another source for information and sample contracts is the Manufacturers Agents National Association.

With all that said, your main problem is finding someone who can live with the ups and downs of commissions. The best answer is to find someone who reps several lines to your customer base, not just yours. They might have a line of cabinets, flooring, windows and doors. The addition of several lines keeps the commissions strong enough to support them through the roller coaster of commission pay. Ask your customers who is calling on them and you may find the person with the right mix. The right mix is essential. We call on woodworkers so we are always looking for lines that will go to our current customer base of cabinet manufacturers, store fixture, window, door and display manufacturers. You need someone who is already selling to the kitchen dealers or consumers.

Remember that independents are paying all their own health insurance, gas, travel expenses, office expenses, etc. So while their checks may look like a lot, the take home is greatly reduced.

From contributor Y:
Have absolute control of pricing and the little perks that salesmen like to use to close the deal. Same for having the salesman give a ballpark idea on the cost of customizing the product. They want the sale, so will tend to lowball anything they add and the customer won't understand that the salesman can't price truly custom features.

From contributor W:
Is there some reason the one sales rep does so much better than the others? It would appear that what you are doing with him is working and should be duplicated.

From contributor L:
What you really need is a marketing program. An outside sales rep is like a shop without the tools; he relies on contacts that also dried up in this mess. They have to search for new contacts. This does not work. Look at the sales reps coming to your shop now trying to sell you things so they can eat. Set up a marketing plan; it works better and you will make far more money.

From contributor G:
Contributor L, are you talking about replacing the sales rep with a marketing plan, or augmenting him with it? And what sort of marketing plan?

In the current mess, or at any time, a marketing plan is only a set of management guidelines. After you decide to be more profitable (the easy part of a marketing program), which of the limited options do you suggest? As I see it, you can decide to sell more by offering discounts (price decrease) or by obtaining new accounts. Otherwise you can sell less but charge more (price increase). You might increase features and value or economize. If seeking new accounts, you either hire agents (straight or commission) or advertise. After those, all I see for a "marketing plan" is perhaps to diversify the business. (Which immediately leads you back to a sales plan for the new lines). Have I missed something?

From contributor L:
Sales and marketing go hand in hand, but they're different. No one knows you're there unless you tell them. Outside sales is the same; they travel around telling people about you in hopes that they come across a buyer and close a sale. Marketing is the same but instead of reaching maybe ten people per day, it reaches hundreds and in my case thousands.

We get about 50 calls per day. Out of 50 calls, 11 turn into jobs, which puts my marketing budget at just a few dollars per day. Right now things are good for this shop.

But to look at marketing, look at your competitors - if there are shops in your city that you do not know about, then their marketing is no good. I know every shop within 100 miles of my city or town because I have to compete with them. If I cannot get in by the back door, then I will make it a point to go in the front door.

Outside sales reps rely on contacts they have built up. Most are contractors that have just about dried up. Dealing with contractors unless they are commercial is a waste of time; they will come to you when whatever shop they are using does something wrong. The best thing to do is go straight to the homeowner. No one knows your product better than you. Sell you and you will be far busier than you ever thought possible. There is a lot of work out there waiting for you.

The marketing plan is easy. Figure out your customer base in your town and go after them. I go by streets with homes of $400,000 plus and I mail out letters, not flyers, addressed and personal. You'd be surprised what they will do. Anyone that comes through our door to look, buy, or get a quote, I get their contact info and send them a thank you letter for coming by and doing business with us.

From contributor G:
You send out over a thousand letters a day to owners of $400,000 homes, get 50 calls a day from them, and close a sale on 11 out of those 50? Amazing. You are doing quite well.

From contributor L:
I broke Daytona, Orlando, and Tampa up into grids. I send out 800 to a thousand letters per day but they go to different areas. These letters go to the same home 30 days apart and in the middle of the month I send to Naples and Dade County. This is called branding and we stay on it full time. One thing we do not do is waste time and money on home builders.

From the original questioner:
This conversation has become quite interesting and informative for me, but the content has totally changed from the original question - how to best set up a contract with a sales rep, not how to get work.

You send out a 1000 letters a day? 5 days a week, 50 weeks a year - by my math, that is a quarter million letters. How many people does that take, how much does that cost? Stamps alone would be $125,000.00. What percentage of your sales is your advertising budget?

I have three sales outlets. All are company owned and staffed with salaried employees.

Clone the sales person I have? Took a year and a half of my time to get him up and running. Wasnít easy, but I do think it works better to have diggers and designers working together. And the day of sitting there waiting for the order to come in I think is gone.

As far as your distain for home builders goes, I think there are good ones and bad ones in every trade. The trick for us is to align ourselves with a mix of architects, builders, designers, and homeowners to keep work coming in (donít put all your eggs in one basket).

From contributor L:
One thousand letters per day at bulk rate. It may sound like a lot, but when you look at the area it is covering, it is not. 200 in Daytona, 200 in Orlando, 200 in Naples, 200 in Tampa, 200 in Sarasota and so on. Our budget for this is 12% of net sales, but it works.

You had a year in training a sales rep. That amount of time, to me, is lost sales. There is another way to bring in more sales. Sales people rely on their contacts. Their contacts and sales may be just about dried up. Sales reps are good, but only to follow up on leads from what marketing brings in.

In the company I'm working with we are in the sixth month of the year and sales are at 1.5 million USD. This is not bad for what this country is going through.

But without a careful marketing plan, the 3 sales reps we have would be at 0 sales. The answer to your question is think, and think again. Hire sales reps but have a plan for them to work with. Shops close every day and you are right to not put your eggs into one basket, and the same goes for sales.

From contributor W:
I understand why you would hesitate to try and clone your successful sales rep because it took a year and a half to get him where he is. However, I would be willing to bet that if you change your strategy, it will probably take just as long. If there are changes and improvements you would make to the strategy you used with him, would that not reduce the time to make a new rep just as effective? Sometimes, the faster solution is not the best (think tortoise and hare). It worked very well once - why would it not work again?

From contributor V:
So, how many of you posting are actually involved strictly in commercial sales? How does that change the game concerning sales, salary and commission?

From contributor L:
The company I'm with does both, but we are slowly doing away with residential and putting more focus on commercial. I also have my own small touchup and repair company, where residential is king. It does not change anything as far as sales - we pay everyone the same.

From contributor C:
I'm a certified designer (that used to produce custom cabinetry) in the Los Angeles area and have worked for several showrooms. I agree that a good designer and salesperson that is well versed in measuring, designing, selling and dealing with problems in the field is hard to find. If you segment just selling to salespeople, you'll be better off. I wouldn't hire anybody that does not know cabinets and the process.

A 10% commission is pretty standard. I feel that commissions should be paid out whenever the company receives payments. I would set up the contracts so that the last payment is significant enough to cover any errors in design past a preset threshold. If the error(s) are bad enough to eat up all of the salesperson's last payment, they are not penalized. You know, you win some and you lose some and by the end of the year it evens out. It's also helpful if the salesperson's work is double checked before the sale. It is the overall responsibility of the company to ensure successful projects to keep the referral links coming. Giving perks such as a gas card benefits the employee and at the same time is a deductible expense that isn't paid out as part of payroll.