Determining Your Commission Structure for Independent Sales Reps
Independent sales reps are an important part of many wholesale companies’ sales and marketing strategies. Often referred to as manufacturer’s reps, independent sales reps offer wholesale brands the opportunity to extend their reach to markets far from where their company may be located and to take advantage of reps who may have existing business relationships in target markets. Independent sales reps are not employees; they are independent contractors paid on commission to represent your brand in a certain territory. It’s important when working with independent sales reps to keep in mind that they are business owners, just like you––choosing to work with your brand is a business decision for them, just as much as it is for you. The challenge in dealing with independent reps is figuring out how to motivate and compensate them. We’ve talked in the past about motivation: independent sales reps are typically looking for the best commission structures, with the most support but least amount of interference from you. Their job is to get out there and sell, and a good commission structure is the key ingredient to getting them excited about doing that. So how do you set up a commission structure that motivates and inspires them to effectively sell your products? That is the subject of today’s post.
Some Tough Truths About Independent Sales Reps
Independent sales reps generally work on a commission-only structure, which means hiring them is inexpensive––until they start closing deals. You can get them out and working on your behalf with little upfront financial investment, which makes them a great choice for smaller companies who are trying to scale quickly. Independent sales reps usually have several related manufacturers that they represent, promoting their products to a network of buyers in their territory or market area. Reps are hired based on the territory they cover and who they know within the territory. Those with the best networks of contacts are in high demand; they travel frequently to meet with buyers, show products, make deals, conduct training and solve problems. Their commission accounts for the value of their network and their time, and also has to cover their business expenses. Independent sales reps are like most sales people in that they tend to be very money-motivated. This is a desirable quality in a commissioned salesperson, but it can work for you or against you. As you determine your commission structure, keep in mind that your line isn’t the only one your reps may carry. In a sense, you are competing against that rep’s other product lines to ensure that reps spend adequate time on your brand. One of the biggest risks related to hiring independent sales reps happens when companies underestimate the effort it may take to sell their products, or over-estimate the attractiveness of the compensation package they are offering. The commission structure may be good enough to convince the rep to work with you initially, but if they perceive it to be more difficult to sell your products with less payoff, they may choose to spend more of their sales time with customers promoting products that pay better.
Commission Structure: Key Questions to Consider
Commissions are usually figured as a percentage of sales––the challenge before you is figuring out what that percentage should be. It generally varies depending on what is required of the reps. Some questions to ask include:
- How expensive are the products being sold? Higher priced items sometimes pay a lower commission, but it depends on the sales cycle and what is required of the rep––the more effort to sell the product, the higher the rate should be.
- What is the rep’s role? Do they provide leads that you close? Do they provide complete sales and service? If they are providing leads and you are doing the closing, that would typically mean a lower commission.
- How much support will these reps need to provide to customers?
- Who handles customer service and account management?
- Will reps need to provide training to buyers?
- Is this a one-time sale or will there be repeat business? How often do you expect re-orders to come through?
The general rule is, the more effort and time required on the part of the reps to sell and provide service, the higher the commissions should be to compensate them for their effort.
Crunching the Numbers
There is not really any standard commission rate for independent sales reps, since commissions vary depending on what is required. Commissions for independent sales reps can vary from as low as 5%, to as high as 40%. The industry average seems to be between 20% - 30% of gross margins, or 7 – 15% of gross sales, with lower commissions being offered for “easy sales,” i.e. manufactured products with a simple sales cycle and little or no service or training required and higher commissions being offered for sales that are more complex and have higher service requirements. In addition to the level of effort required to sell your products, some of the other aspects to consider as you set your commission rates include:
- What specific target markets or geographies are in the rep’s territory? Costs of doing business in urban areas are higher than rural areas – but rural areas require more travel to move from customer to customer. Factor this variability into your commission structure.
- What level are the target contacts? Selling to the C-level requires a more sophisticated, solution-oriented approach than selling to someone in the purchasing department; compensation should be higher to reflect this.
- What is the rep’s work environment? Do they work from home, have a mobile office, or a company office? The less they have to offer your company, the less they should be paid.
- How will the rep approach potential customers? On the phone or in-person? Phone approaches would not need to pay as well as in-person sales since there is less of a time/travel component.
- How will you compensate volume sales? Will you pay a bonus on top of the commission?
There are a number of factors to consider as you set your commission structure for independent sales reps. The most important thing to remember is to understand what it really takes to sell your products and compensate your reps fairly for their efforts and what they offer your company. If you approach commissions from this perspective, you can expect your relationship with your independent sales reps to be long-lasting and rewarding for all parties. Have you been successful at working with independent sales reps? We want to hear your stories in the comments. For more help on optimizing your independent reps strategy, download our guide on "How to Maximize Your Investment in Independent Reps."