Scenarios that you may not be aware of: Starting with Sales Representatives

by David Wright (dwright@artmaze.com) - Artmaze (http://www.artmaze.com)

Today I will write about a range of scenarios that you may encounter soon in your future. This information should help you to recognize these situations so that you know how to act appropriately. I am dedicating this month’s article to the sales process, mainly about contracting with executive sales representatives.

Numerous entrepreneurs often do not like the executive sales process; they may prefer to hire someone or contract with a sales representative. The common first impression is that this is a good idea, where you simply assign a commission and someone takes care of the rest, right? You think that you are creating a win-win situation, right? Let us explore in some detail what this really means, and situations that may or will happen, if you are not careful.

Let us start with commissioning. You have two options: the first is that you pay a base salary and a commission; the second option is that you offer only pure commission. The first option is harder to execute since you are responsible for paying a base salary, with or without any guarantee of sales, but in the second case you do not seem to have much risk involved. Does that mean that is better to offer pure commission? Sounds less risky right? I personally disagree; the second option can potentially bring you many problems. Is the first option better then, and can it be without risks? Technically yes, as I will explain further.

a- Commission rates: We agree that this hypothetical person is working on a pure commission basis, so the percentage commission should be considerably higher than the base plus commission basis. These rates tend to be in a range from 5% to 30% of the total value of the contract. The actual number depends on many factors, such as the amount or value of the contract, participation in the sales process, exclusive rights, and other factors such as what you assign as your valuation of the sales process contribution.

b- Exclusive Rights: In the case of a representative that is not on the payroll, have you realized that this person is not your employee? Obviously he is an external contractor, so what is the problem? Well, since he is someone that does not really belong to the organization; do you think he will work exclusively for you, at, let’s say, a 15% commission on a contract and with no base? It’s possible but not likely. So what happens if this person finds themselves in a position to work with someone else? A competitor for example?

I hope you now see what can happen. These professionals tend to carry many reels and many business cards under their belt, representing you and others at the same time. Typically they will work first and put more effort with the company that pays the most commission. What will happen if the bid they proposed is out of range? Is your representative going to be motivated to work with you and your client, to get and win the bid, or will he simply move to the second name on his list? It depends on your luck and how professional he (or she) is.

Have you thought that a potential client is probably only talking with your representative thanks to the quality of your brochures and great videos? Not only your great work, but the money that you invested in printing brochures and other collateral? In other words, your representative got into the door because of your work and his phone skills, but some other competitor may benefit from your work? This happens all the time in this and many other markets. My recommendation is to never work like that. Now, if your sales contract is an exclusive one, in other words, the representative only works with you and under contract, is that better? Apparently it is. But how can you know, or how can you control this without supervision? Can you realistically enforce it? Do you have the means and budget to enforce contracts? Not just because on paper you have a guarantee, do you really have any guarantees. The paper is better than nothing but I am trying to be realistic about this.

A representative on payroll is safer to work with and perhaps more motivated to work only for you; I honestly do not recommend the commission-only assignment unless you have exclusivity of service and that you definitely trust this person.

c- Commission negotiations: Let us pretend that your commission rate for a non-employee and commission-only representative is 20% maximum. This should cover the complete executive sales process without many extra costs, and here are typical problems you may experience. The complete process should be divided into steps, such as the generation of leads (finding potential clients) to warm-up; getting a meeting; and closure of a contract (put as a simple process). Your representative should execute all of these for that agreed rate. Typically a process will be incomplete, perhaps you yourself generated the lead, or you participated in the sales process; so you should have a formula to cover these situations, and a pro-rata rate assigned. Your representative should have this all explained in advance so there are no surprises. If you don’t have this, you may find yourself doing important parts of his/her work and still be legally forced to yield up a goodly fraction of what your contract brings.

d- Adding a Middleman: Some representatives prefer to act as a middleman, who works for you for a commission but also acts as a gateway between you and the client. You have to be sure that this person understands the workflow and that he will work with you and not against you, or create more unnecessary stress. I recommend that, unless you trust this representative, only work on a defined trial basis first, and enter into no agreements until you know more about them. Most of the times you definitely want to cut “middlemen” as much as you can.

e- Client portfolio: You should agree in the contract that these clients are yours and that you are free to market and communicate to the actual client. What will happen if you cancel your agreements with your representative? Of if he decided to leave? Perhaps to work with a competitor? As you can see, things can get very complicated very quickly.

f- Limited Commission: You should agree by contract that starting with some “n”th contract from a single client, the commission assignment rate should decrease with time in a specific manner. For example, on reaching the fifth successful representation you should be assigning a specified commission rate (if he/she has really participated), but this rate is lower than each of the previous ones. At some stage with the same single client, the reason you are getting the contracts is more due to your continued high quality of work than your representative’s skills in the sales closure process. And if they are really not contributing to further sales, then you shouldn’t be assigning more commissions.

g- Assigning quotas: For motivational purposes you should have a fixed quota per year or quarter for a fixed rate, and a different and higher commission after passing markers, such as 8% to start with, 12% after 100K and 18% after 150K. These numbers are just examples only, I am not proposing these as working values; there are lots of other factors to consider.

h- Payment of commission: You should agree that your representative gets paid after you collect. At the beginning of the relationship this may not seem fair to the representative since he/she is putting time and effort at his/her own risk, assuming that he/she is under pure commission. Some may reasonably request that you pay something on signing, no matter what. Here is what I think. The representative should be responsible for getting honest paying clients, and what happens if he/she signs up for a 150K contract that never was executed? Executed (signed) but no work was done because no advance payment was ever collected? Or a contract that defaults or stops half way? I am sure you now understand. You should agree to pay commission after collection of payments. Your representative should only bring in good healthy clients; this should be part of their role. Taking this case a little further for less common cases as something to think about, what happens if your representative unprofessionally gets you sign a bogus contract? If you are not careful with your representative’s contract with you, you may still be legally forced to pay your representative.

i- Expense accounts: Clearly you will need to cover some expenses such as some travel, shipping and other “cost of sales”, but take care that you have limits and approvals for all of these, including limits food per diems and hotels rates. If you have more than one person at your company, you should have an expense policy in place.

j- Confidentiality agreements: A representative will have access to your workflow and procedures, you should have him/her sign a non-disclosure agreement first.

k- The right to decline a bid proposal: What happens if your representative closes a contract for 40K, but the actual work represents 60K? You should control the final bid process; the final price must come from you or be approved by you. Many of these representatives don’t know much about the technical processes involved, nor do our clients, so clearly you should always have the control on everything that has your company name on it.

l- Business Cards: You should have a policy for the use of these. You may think I am exaggerating, but the reason is as follows. Let us pretend that your representative, or even an employee, commits with or without knowing it, a crime or fraud. If a business card from your company was used for something that is unethical, no matter the nature of the unfortunate event, your company may be liable for some damages. At the very least some lawyer will think hard about including you in a lawsuit just to add one more pocket for his client. A quick solution is to have a policy that describes the use of letterheads, business cards and other collateral and an employee manual should exist that describes the task for each employee or representative. This may allow you to demonstrate the person was knowingly acting outside the scope of his work.

m- Calculating a commission rate: I honestly do not want to dictate a rate, but I can guide you on typical values that I know off. For a sale representative that is on the payroll, with no base, you normally do not assign more than 1%, or else you can have a profit share system in place. For a sales representative that has just a small base, the commission, typically runs from 5% to 10%. For exclusive commission-only representatives, you are looking at 12% and above. As I already mentioned, you should divide these into segments, by task done.

Final Words

There are other scenarios that involve the assignment of a commission, such as to a person doing part of the technical work, or to a production house, or a single freelancer that can’t handle a big task. These should be treated differently, on a per-case base with a quick and simple straight-forward contract.

Executive sales is a key task, one that should be valued, and by value I mean that has to be treated professionally both in compensation and in the execution of the task. Nonetheless both parties should be careful, because realistically speaking, honest straightforward executive sales business partners are not all that common.

I think this kind of advice and data should really be available from the kind of professional organization that I wrote about in my last article, as being needed. There is more to cover even is this single topic and I will try my best to go into some more scenarios later. Don’t be afraid or discourage about this information, I know it sounds negative, which is not my intent, but I simply want to warn our group about these situations, and where I can, offer a solution.

David Wright is a long-time 3D user and CG artist and has succeeded in the A/E/C (Architectural / Engineering / CAD) market with “Artmaze”, becoming a leading provider of integrated 3D animated visuals and multimedia services. Comments or suggestions about this article are welcome; David can be reached via email at dwright@artmaze.com