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Big Profits Are in Aftermarket

12 Jan, 2007 By: Tom Callinan imageSource

Big Profits Are in Aftermarket

Knowing what you do now about the financial drivers of a copier business,
would you still choose the same approach to compensate your sales force?  Most
dealers in the copier industry compensate their sales force based on a
combination of equipment revenue and equipment gross profit. While the payout
rate may vary by the type of agreement (cash, lease, CPP lease) reps conceivably
make the same commission whether they sell a segment I unit or a segment IV

We all know that the segment IV unit produces substantially more recurring
revenue, which we call the aftermarket. We also know that even in an extremely
well run copier dealership, equipment gross profits are not going to cover sales
expense, and have a contribution rate greater than our general and
administrative expenses. You are going to lose money selling the box while
generating profits on the aftermarket revenue stream. Isn’t it therefore logical
to compensate sales reps to drive aftermarket revenue?

From the Beginning

At the time I entered the copier industry in 1983, equipment margins were
extremely strong and service was almost considered a necessary evil, which seems
unbelievable today. Many dealers were focused on building telemarketing
departments to sell supplies and service contracts, and the cost-per-copy
contract was not yet conceived. The dealer made a lot of money selling
equipment  so  it made sense to compensate the sales rep on their equipment
sales. As the industry began to mature, equipment margins decreased and
aftermarket revenue became critical to a dealership’s survival.

Nevertheless, equipment reps were used to getting compensated on equipment
sales and it would have been revolutionary for a copier dealer to switch the
compensation plan to aftermarket. Sales reps do not like revolutionary changes
in their compensation plan (to be fair, nobody likes a revolutionary change in
their compensation plan) and it would be a highly risky move.

Today, many copier dealers are using this same compensation approach to sell
print management. Do not make that mistake!  First of all, many print management
transactions start out small; it is easier to convince somebody to make an
incremental change than to make a revolutionary change, so the contract starts
out with some asset redeployment and a few new printers or MFPs to replace the
oldest assets in their fleet.  The equipment aspect of the contract may be less
than $10,000—not a lot for an experienced copier rep.  Second, the selling cycle
is longer than selling a copier. You need to conceptually think this out, then
get the first meter read, the second meter read, conduct a strategy review with
the customer, and finally, compose and present a proposal. Not overly
complicated, but it appears alot more arduous than arriving with a proposal that
merely gives the customer a new box with more features for basically the same

Aftermarket Print Profits

That initial print management contract may only include a few new printers
and maybe an MFP, but it probably has an aftermarket revenue stream of $2,000 or
more per month.  I think many copier dealers would be surprised to find how
common it is for customers to be doing 100,000+ prints per month on their
printers. The $2,000 per month printer customer is as common as a $400 per month
copier customer.  You definitely want this business!

So with quite a bit of work to get a $10,000 equipment sale, your reps
probably are not going to spend a lot of time selling print management if they
are paid solely on hardware.  Yet, you want that $2,000 per month in highly
profitable recurring revenue. The solution is simple, pay the sales force on the
value of the aftermarket.

Like everything financial, I recommend you model a plan so that you are
comfortable with the payout. In my own print clients, I have seen the payout as
low as 5 percent of aftermarket revenue and as high as 8 percent. The commission
is paid every month on the aftermarket revenue so the more contracts the rep
writes, the greater their monthly annuity payout.

Now, let us address the second trap most copier companies have fallen into.
They pay their sales force exactly the same way for upgrading their own base as
they do for writing new business.  The current copier customer probably has
aftermarket wrapped into the lease, which makes it financially prohibitive for
the competition to upgrade your base, yet your reps can make a nice six figure
living rolling over your own customers—at lower aftermarket revenue.

How do you fix this trap when designing your print management compensation
program?  Give each sales rep an increasing quarterly revenue quota.  Do not set
a target that is unattainable, but make certain that the sales rep is closing
new business and not living on their annuity stream.  Maybe increment the quota
at $5,000 per quarter for the first year.  As long as the rep achieves their
quota they continue to earn the target payout you modeled in your plan.  Let us
call it 8 percent  Each time a rep misses their quarterly quota, their payout on
their entire aftermarket annuity stream decreases by 25 percent.  The first
quarter that quota is missed, the payout drops to 6 percent  Miss quota two
quarters in a row and your payout drops to 4 percent  If you achieve quota the
next quarter you are back to 6 percent payout.

Think about this: two years into the program a rep has a monthly aftermarket
annuity stream of $100,000 and they miss quota for the quarter.  Their monthly
commission payout drops from $8,000 to $6,000.  That is a $24,000 hit for the
year.  That is a lot of incentive to achieve quota!  On the other hand, a rep
earning $96,000 in annual commissions from their base of accounts may not be
motivated to go out and find new customers. When their income drops by $24,000
because they rested on their laurels, they will suddenly get motivated to grow
your customer base.

And Furthermore

You will also want to compensate on the equipment portion of the
transaction. Wrapped into a CPP lease, there is no reason why you cannot make 30
percent plus margin on the printer equipment. Nevertheless, it is not like a
copier sale. At 30 percent margin you are looking at $2,000 for a 40 PPM
printer.  The good news is, quite frequently your customers buy printers in
bunches, like bananas, and you will sell five, six, ten at a time. The most
common payout on equipment is 10 percent of profit and a set dollar bonus for
attaining quarterly bonus; in the area of $1,500 payout for a $90,000 quarterly

Those equipment commission payouts look foreign to many copier dealers—far
too low.  Keep in perspective you want the aftermarket business and now the
hardware is the necessary evil.  If the rep wrote a deal similar to the one we
have been discussing with $10,000 in equipment at 30 percent margin ($3,000) and
$2,000 per month in aftermarket with commissions set at 10 percent of equipment
GP and 8 percent of aftermarket, they would earn $6,060 over 36 months.  That
does not include any possible quarterly equipment bonuses.

Finally let us discuss recognition. If you have a sales rep who goes out and
writes $5,000 per month in net new cost-per-page revenue for an entire quarter,
$15,000 in total, and at the quarterly sales meeting, he or she sits there and
watches  all of the reps who wrote $150,000 plus  in equipment sales getting the
recognition, he or she is going to start selling equipment. Call me crazy but I
think you’re going to make a heck of a lot more money on that half million
dollars in aftermarket (keep in mind that the $5,000 per month in new business
equates to a $180,000 contract over 36 mos. at 50%+ margin!) then you are on the
$150,000 in equipment sold, and likely, primarily back into your own base

I am not suggesting you stop recognizing the high performing equipment sales
representative. They are the lifeblood of your business today and deserve
recognition.  What I am suggesting is that you consciously look for
opportunities to recognize those reps that are transitioning into the highly
profitable print management market space; an area that will be the lifeblood of
your business five or more years down the road.

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