The Economics of a Manufacturer Representatives
Manufacturers may be driven to use manufacturer rep firms by basic economics. The demonstrated success of going to market this way vs. traditional in-house sales keeps 50-80% of all manufacturers using rep firms in at least some of their territories, if not all of their market segments. One reason for this is that the cost associated with outsourcing the sales function to rep firms are covered simply by commissions on direct sales those representatives are generating.
We can’t say specifically what a commission might be on a product or even give percentages or category names due to the wide divergence of accounting allocations and standard commission rates across industries. But sales cost comparisons can be made a number of ways:
- Within a specific category
- Across a product category
- Through company-wide data
The importance of a comparison between outsourcing sales to a manufacturer representative and traditional sales doesn’t simply lie in the minute details, but in the bottom line. When factories see in the bottom line that they do not incur any cost for sales until a sale is actually made, shipped and paid for (and even then the rep firms’s cut will always be a fixed percentage of sales), the impact to the overall bottom line becomes quite clear.
But in addition to that bottom line, there are other benefits and intangibles to opting for rep firms, which a manufacturer should consider. These are not so easy to quantify, but remain crucial to success:
- Manufacturers can realize cash flow benefits because the rep firm will not be compensated during the gestation of a sale.
- Firms are only compensated once sales are made
- Human Resources issues and legal expense can be reduced without an internal sales team
- The opportunity to gain market research because the rep firm places significant focus on this
- The leveraging of existing business with other product lines to create synergistic solutions
- The improvement of market access and penetration at lower cost
In the direct sales environment, factories often spend at least 50% of the salesperson’s salary on supporting that salesperson in other ways. Recent estimates from the business-to-business environment show that a typical yearly cost for a salesperson including salary, benefits, incentives, office, travel and other support services run in the range of $260,000 for a single salesperson. When sales in a specific territory grow, a CFO may figure that it is actually possible to hire ad support a dedicated factory salesperson and save money. But this often ignores the cost borne by rep firms, which would otherwise be a factory liability. Also, larger growth may be compromised by overlooking the rep firm’s multiple salespeople in a territory, long-term relationships and the synergistic product lines that give vendors better market penetration.
The fiscal reality of this comparison is that one direct salesperson cannot cover the territory as effectively as a rep firm, and any way you slice it, manufacturer representatives are a benefit to a vendor’s bottom line.