Sales Comp II: Are You a Supplier or a Vendor?

The next question to consider when you are designing sales compensation is: "Are we a supplier or a vendor?"

Without wasting time on the differences or similarities of the dictionary definitions, here are mine:

A supplier provides goods or services (collectively "products" throughout these discussions) as purchased by the customer when they are needed. The products are available from other suppliers, and there is little difficulty for the customer to purchase them from another source or multiple sources.

A vendor delivers products that for reasons of exclusivity, regulations or barriers to exit can typically only be provided to the customer by one vendor at a time.

So the local fastener house or auto parts distributor, who sells against 25 other similar suppliers with the same products, are suppliers. The accounting firm or the janitorial service is a vendor. In my last post, Boeing is a vendor; the beauty products distributor is a supplier.

In my last post I mentioned business owners who wanted to pay "commission only" inappropriately. For an extreme example, lets take a CPA firm I work with. They recently interviewed a prospective business development rep. He offered to work on commission only.

Unfortunately, this man disqualified himself in my mind with his initial offer. He was not (at least to my knowledge) fabulously wealthy. Yet he was offering to take a job where the average sales cycle is two years or more! What did he plan to eat between now and 2011?

Vendor salespeople are much more likely to have a base salary or guaranteed minimums. If you are completely devoted to the idea of commission only, then the salesperson should get an existing book of business that pays a decent living income. Unfortunately, most business owners balk at the concept of paying "again" for existing customers. In a vendor relationship, however, keeping the client is just as important as getting a new one, so why not have incentives for paying attention to the current book of business?

For the same reason vendor salespeople are more likely to get residual income. They can build their wages by growing the overall book of ongoing business. Supplier salespeople should be paid on what they hunt today- period.

How can you tell if you are a supplier or a vendor? Try this questionnaire.

1. Do you have a contract to provide products for a specific period of time?
2. Are there regulations that require special effort to change providers for your product?
3. Do you have exclusivity? Are you the only supplier in the territory? Are you the only authorized repair or service facility? Does a warranty depend on using you?
4. Are there barriers to exit? Would changing vendors require an outlay of time, effort and money by the customer before a new vendor would be effective?

If your answer is yes to any one of these questions, you are likely a vendor. That doesn't mean that you can relax; you still have to provide customer service and quality to survive. In some ways it makes your job harder.

If your customers have a vendor relationship with you, then it is more likely that those who aren't your customers have a vendor relationship with someone else. That relationship has to be weaned away, and the objections to change overcome before anyone makes any money. Your incentives should take into consideration how long it will be from first contact to opportunity to delivery to payment when you think about sales compensation.

The Rhythm of the Sales Process

With so many of our clients trying to boost sales in a tough environment, we've been having lots of discussions about sales incentives. It's surprising to me how many business owners create incentives that don't fit their business, simply because a concept like "straight commission" or "straight salary" appeals to them.

I've worked on sales incentives for years, and find that if they don't fit your business they are inevitably doomed to failure. By "fitting" the business I mean that the rhythm of the sales process and the timing of the incentive must match. Salespeople need to eat regularly, just like the rest of us. Letting them eat too regularly, however, isn't the number one priority of a compensation plan.

Let's take an extreme example. You are a salesman for Boeing. You spend many years cultivating, just for fun say, the national airline of Tonga. They aren't big, but they are clearly committed to buying their first giant new airplane to bolster national pride.

You wine and dine them at the Paris air show, bring them to Seattle for a plant tour, and eventually land the sale. The order winds through Boeing's process of suppliers, manufacture, testing and delivery. Finally, the customer pays for the plane, about 7 years after your first trip to Tonga for a cold call. Since you are on straight commission in a "pay when paid" system, you have gone 7 years without any income at all, and now receive a commission check for $13,248,911.

Ridiculous? Of course. But it is no more ridiculous than this scenario. A beauty supplies distributor has salesmen with distinct territories. They are not exactly route men (like a Snap-on tools guy) because they don't carry inventory. Otherwise their job is the same. Call on every customer once a week or so. Determine what the hair stylists have consumed. Write an order to replace the inventory. Make sure your product is being displayed well. Watch for any competitor making inroads.

This distributor is paying his salespeople a salary, with a small commission at the end of the quarter based upon their performance against goal. "Why?" I asked. "Because there are a lot of weeks where they don't sell enough to make a living." he replied.

This is just as silly as my Boeing fairy tale. These people are being paid to make sales; all day every day. They are expected to sell something on virtually every call, perhaps up to a dozen times a day. Why would you pay them for not performing? The job requires instant results, and should bring instant gratification. Straight commission is most appropriate.

There may be other reasons that they can't make a dependable living on straight commission. There might be a monthly or seasonal business cycle of highs and lows, or special pricing offers that distort the sales flow. Their territories may be too small. They may be expected to do in-service, classes, training or other peripheral activities that take away from their sales time.

Those are not reasons to distort the entire incentive process, however. You can adjust compensation with a draw, or larger territories, or an inside support person to get orders when the salesman can't. These are mechanisms for fine tuning the rhythm of the compensation, not making it into something that doesn't fit the business or the employee.

Lots of things go into the rhythm. Your products, sales cycle, customer relationships, technical skill levels of the salespeople, size of the average sale, payment terms, gross margins, and more. In my next post I'll discuss the difference between being a supplier and being a vendor.

Another Swimming Metaphor

"Only when the tide goes out, do you discover who has been swimming naked." This classic bromide by Warren Buffett has come to mind several times in the last few weeks. As the economy hits dead low tide (coming back according to Bernanke, stuck there according to Buffett) we are seeing some sales departments finally, finally just run out of momentum.

These are folks who were making a living by answering the phone. They are in relatively small companies that serve really big customers, so the phone didn't have to ring all that often. They made hefty six-figure salaries largely for writing up an order and tossing it to someone else to fill. The had residual income from accounts where they answered the phone for the first order, and years later were still collecting commissions on the repeat business.

Then the phone stopped ringing. At first it was no problem. They had lots of leads from busier times that they had never followed up with. A few of those were still interested. A couple of them bought. Then the backlog on incoming leads was exhausted. And these salesman have just now, 18 months into a recession that they thought they had beaten, found out that they've been swimming naked. They don't know how to sell.

They don't know how to prospect. They don't know where to go to find new leads. They don't know how to how to develop a contact network. They don't know how to qualify. They only know how to close on a customer who approached them in the first place.

A lot of sales departments faced this problem a year ago. In many, it is the junior salespeople, the ones who were scratching to find new business, the ones who were condescended to by the alpha dogs, the guys who had the big accounts, who are coming through to keep the company afloat. They are the new heroes, because they really know how to hunt.

In the businesses where the momentum is just dying now, I'm not sure what a recovery looks like. Is there business model so strong that they just have to start answering the phone again as soon as things start getting better? Or have the little hunters, the furry mammals of sales evolution, stolen all the eggs before they become customers big enough to attract attention?

The newspapers are proclaiming the end of the recession. Look around now, because it is a great time to see (and remember) the folks for whom that last bit of water had to go away to show what they were wearing.

The recession didn't impact everyone in the same way, and the recovery will be just as uneven. This rising tide won't lift all boats. An that's the end of my water analogies for a while.

"Only Dead Fish Go with the Flow."

That quote, by Minnesota Congresswoman Michele Bachmann, is one of the best I've heard in a while. While she wasn't commenting on entrepreneurs at the time, she hit the nail on the head regarding small business success.

There are times when you have to go with the flow. Small businesses don't have the resources to battle upstream all the time. Like Salmon, you jump an obstacle, then rest. You push for a sales goal, then rest. You make an uncomfortable termination or focus on a critical hire, then rest.

The resting part is normal, but if you rest too long you start floating back downstream. Losing ground in the water, so to speak. Then you have to make up yardage, with the added frustration of facing the same obstacles and seeing the same scenery as before.

We often think of these rest periods as the reward for our accomplishment. The problem with that approach, at least for many entrepreneurs, is that they don't put parameters around the reward. It winds up lasting for as long as they can stretch it. Then they begin swimming again when they realize that they've floated too far downstream.

What I'm describing is the typical reactive mode of an entrepreneur. Get the adrenalin up for the challenge, then wait until circumstances dictate that you need the adrenalin again. That's how you sink into perpetual firefighting mode, going from crisis to crisis with little progress other than merely undoing the latest problem. It's why so many small businesses are stuck at a level of competence and comfort. Swimming only when you have to isn't progress, it's just fighting not to lose ground.

The next time you feel that sense of accomplishment for surmounting a difficult obstacle, ask yourself what you are going to do with your rest/reward time. Use it to think, to plan how to avoid that obstacle in the future. Use it to plan your next challenge, instead of waiting for that challenge to float down to you.

Most importantly, set a time limit on how long you will wait until starting on the next goal. Taking control of your rest periods will go a long way towards freeing you from the adrenalin/crisis mode.