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Print Your Own Money: With A New Compensation Plan

15 Oct, 2003 By: Lou Slawetsky imageSource

Print Your Own Money: With A New Compensation Plan

One of
the trends most noted by Industry Analysts in its annual Copier Dealer
Distribution Strategies for 2003 report was that gross margins for hardware
placements are continuing to decrease. Currently at 28.5 percent considerably
lower than the 32 percent sales and general administrative (SGA) expenses. What
this means is that every time a sales representative sells hardware, your
company loses money.

of counterfeit, make your compensation package profitable with towards printing
pages Don't you think it's time to Changing your practically printing why not
pay your sales reps to generate those pages.

faster the box goes, the more behind the company! And, it's not easy for the
rep, either.


Today's reps are increasingly finding themselves in a compensation bind. The
rep receives commissions on the placement of hardware at a rate that
approximates 40 percent of the transaction's gross margin. That was more than
equitable when gross margins often exceeded 45 percent. Increased competition
coupled with imaging systems that are approaching commodity status have forced
gross margins to only 28.5 percent. All other things being equal, that
represents a 37 percent drop in commissions.

all other things are never equal. Not only have gross margins dropped, but the
revenue per sale has dropped as well. Cost for basic features, such as black and
white copying, continue to decrease in order to make room for the digital
"add-ons" such as copying, printing, fax, scanning and color. That's a
double whammy for the sales rep. When both revenue and gross margins decrease,
sales reps are hard pressed to sell enough incremental hardware to make up the
difference in lost compensation.

only is the sales representative hurt by the current compensation model, but the
company is hurting as well. Industry Analysts' research shows that SGA expenses
average approximately 32 percent. Yet, the average gross margin for hardware
sales is only the aforementioned 28.5 percent. In fact, taking hardware and
supplies into account, the average dealer derives only 36 percent of total
profits from hardware sales (see Figure 1 below)

Figure 1
- Source: Industry Analysts' Copier Dealer Distribution Strategies Report 2003

more, when SGA expenses are considered, each successful hardware placement
actually results in a loss of almost 5 percent! Why do we continue to pay the
sales representative to lose money for us? Because, in the past, the strategy
worked. We were willing to place hardware at or near cost in exchange for the
expectation of a profitable cash flow from service and supplies.

Honest Look At Connectivity

The strategies that worked just a few years ago are flawed by today's
technology. Pure copy volumes are decreasing year to year at a rate analysts peg
at between five to ten percent. But, you say, aren't we picking up those pages
as volume migrates from copiers to printers or integrated imaging systems? The
answer is NO.

it is true that volume is migrating to printers or integrated systems, few
companies are receiving the benefits of this movement. Data published in
Industry Analysts' Copier Dealer Distribution Strategies Report for 2003
indicates that that connect rates remain low, averaging only 40 percent. What's
more, even when connected, these devices aren't capturing print volume. Our
research indicates that, when an integrated system is connected, less than 30
percent of total output is print volume. The majority of the balance is from
copying, with some facsimile thrown in.

Figure 2
- Source: Industry Analysts' Copier Dealer Distribution Strategies Report 2003

if your profits are driven by aftermarket supply and service revenues, decreased
page volumes do not work to your advantage either. Simply, sales representatives
can't earn a living selling lower priced products with lower gross margins and
your company can no longer afford to sell products at or near cost with the
expectation of enough aftermarket revenue "clicks" to generate an
overall profit.

solution is to have the sales representative focus on increasing page volumes in
each account by capturing more printing applications. But they won't. Why?
Because sales representatives will do exactly what you pay them to do. And, what
you pay them to do is sell boxes.

called for, then, is a significant change in the way we compensate sales

Compensation Criteria

If pages generate the majority of your profits (some would say all of your
profits), then why not pay your sales reps to generate those pages. So, how
exactly do you implement a page-based compensation plan that's fair to both the
sales rep and the dealership at the same time? Let's examine some of the
criteria for a good plan.

o Keep
It Simple
-As soon as you change a sales compensation plan, your reps will
take the month off to try to "figure the angles." Minimize this impact
by keeping the plan simple. Your sales representatives should immediately
understand what's expected. Sell a page = make money. Replace the installed base
without incrementing page volume = starve. I recently had the opportunity to
visit the president of a large dealership who couldn't understand why his sales
force was not responding to his new compensation plan. Then he showed it to
me-all 200+ pages of it. Enough said.

o Reward
-Pay page-based commissions the month following the activity. The
longer the time between the activity and the reward, the less likely your plan
will drive reps toward the desired behavior. Some dealers have told me that
their sales representatives, in reality, participate in page revenue, since they
receive a commission on service contract sales or renewals. However, the renewal
doesn't come for a year after pages are generated. By then, the reps won't
remember (or care) how they generated the commission dollars.

o Transition
To The Plan
-Don't shift from hardware to page-based compensation all at
once. Rather, migrate from your current plan to the new one so that your sales
representatives have a chance to adjust and plan their new market strategies.

o Train
- Focusing on the generation of page volume, rather than the placement of
hardware, requires different skill sets. It's simply unfair to expect sales reps
to focus on new objectives without supplying them with the skills they need to
succeed. For example, can they: o Conduct workflow analyses to identify
potential page volume? o Identify specific applications? o Load print drivers to
the workstation? o Train users at the workstation level? o Set an imaging system
as the default printer?

sales representatives will resist these activities if their compensation is
based upon placing incremental hardware. However, tie their income to
incremental page volume, and they'll eagerly seek the opportunity to capture it.
Again, training in this uncharted territory is essential to their (and your)

o Don't
Let Annuity Inhibit Activity
-Tying compensation to page volume encourages
sales representatives to protect their base by maintaining a relationship with
the account. But, be careful in your design so that you do not let the annuity
(repeating volume) build to a point where the rep can earn a living without
generating new business. You'll need to strike a delicate balance.

o New
Account Bonuses
-Don't ignore the impact that new accounts have on page
volume. In these cases, every page generated is incremental. To foster this
activity, you may want to consider a separate bonus for new account sales.

Sample Page Plan

Here's what a page-based compensation plan could look like. Note that you'll
have to adjust to match your current compensation levels. Also, remember that
these guidelines assume that the plan is fully implemented. That is, you've
already made the transition from hardware to page compensation.

P romote
incremental activity by increasing the compensation rate for all activity over
100 percent..

A djust
base quarterly or semi-annually in order to reduce the impact of the annuity.

G auge
existing page volumes in each sales territory. When possible include printer,
copier and facsimile activity. You may need some help with this. Vendors such as
OMD, LaCross, EFI, Imaging Portals, and Equitrac, to name a few, have programs
to help you in this area.

E xclude
payment on the first 80% of existing volume. After all, sales reps can achieve
this with no effort at all. Compensate at a base level for 80% - 100% of volume.

Set a
rate per page such that, under the new plan, compensation levels are equal to
the old quota when the increase in page volume is approximately 110 percent. For
example, assume your average hardware gross margin is 28 percent and that the
sales representative receives 40 percent of this in commissions. If the average
quota is $35,000, then the average commission would be $3,920 per month ($35,000
x 28% x 40%). Set your rate per page such that, when monthly page volume
increases to 110 percent of the existing base, the commissions equal $3,920.

are countless variations on this theme. The bottom line is that you can no
longer count on profits from hardware placements to contribute to your business
plan. Further, sales reps, under existing plans, have no incentive to focus on
page volume. Finally, increased page volume, resulting from capturing printer
volume, is your only path to survival. If you earn profits from increased
volume, the sales representative should earn them as well.

- - -

Slawetsky brings more than 38 years of experience in the office automation
industry. He is currently President of Industry Analysts, Inc., a senior
marketing and management consulting firm specializing in market research, focus
groups, training program development and product testing for the office
automation industry. The company also publishes The Office Products Analyst
monthly newsletter based on more than 50,000 user interviews each year. For
information, visit www.IndustryAnalysts.com
or e-mail Lou at Lou@IndustryAnalysts.com.

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