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Component Manufacturing dverti$er
June 2018 #10227 Page #30
Adverti$er
Don’t Forget! You Saw it in the
Are Your Salespeople Selling Your Company into Eventual Bankruptcy? How you commission your sales reps could lead them to do things that hurt you.
Todd Drummond
M
ost people have a mistaken belief that my services are all about making component manufacturing more efficient. Actually, more than half my time during a consultation is taken up reviewing things like management practices and the sales process. Fact is, sales— correction, healthy sales—is the most important aspect of any business or services. So, it is critical that the management team and the sales team have a proper perspective of what healthy sales entail. The title of this article is not a joke. Too many component manufacturing companies in our industry are screwing up their markets with self-inflicted wounds, and they fail to understand the causes. Eventually, their sales team will lead them to bankruptcy. Consider the graphic below showing how sales commissions affect a $1 million sale at various gross margin (GM) levels. In this case, GM covers the direct cost of material plus labor as a percentage of the sales price. “True GM” describes gross margin after the cost of the salesperson’s commission—something that also ought to be considered a direct cost. Thus, a $1 million sale may yields $350,000 on a 35% GM, but if the salesperson gets a 2% commission, that takes $20,000 out of the proceeds. That makes the True GM $330,000, or 33% of the sale price. The worst thing you can do is pay salespeople a flat percentage of the total sales price without regard to gross margins. This is a terrible practice; stop it immediately. Why should a salesperson make a commission when the company does not earn enough of a gross margin? *
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