Setting up a salesman

[Scott Shepherd]

We have a guy who has apparently seen some potential in us and wants to start selling for us, paid on commission only. He has a full time job that he doesn't plan to quit, but he has a ton of contacts, contacts that are in the very places we have been trying to crack into.

He's already setup a meeting with a very large client with us, all before anything has been discussed about how the commission will work.

I have little experience in this area so I'm at a loss. What my gut tells me is a long way from the type of things he's speaking of. That's why I'm here.

I have a few questions :

1) What's a fair commission rate in this business?
2) What's a fair rate for jobs that repeat?
3) What happens if we go our seperate ways and have a good working relationship with the customers he set up? How's that work? Certainly he's not entitled to payment years after we go our seperate ways?
4) We're currently quoting some places that he says he has contacts in. So how's that work? We're already actively quoting there, so how's that work?

I'm sure I'll have a bazillion more questions, but that's about all for now. Hopefully someone can give me some insight.

[Joe Pelonio]

I ran into the same questions when I first started in signs, and a guy approached me with that kind of offer.

The number 1 problem is that if he is not completely knowledgeable about your business, he is likely to make your company look bad when he cannot answer the questions. He could also be quoting way too little and cost you money.

If such a deal is struck there has to be a written contract on the commission, duration for repeat customers, non-compete in case he leaves your service and starts working for someone else and stealing the customers. That to me is a big issue, because he could meet a competitor and be offered a bit more $ and start giving all those customers' jobs to the new company. I was suspicious of this guy, he seemed a little sleezy so I passed on it. Later I found out he was doing the same for two other companies (competitors) already and neither knew he was doing both.

Then of course commission, even 7-10% is coming out of your profit. On something really profitable like lettering a 20' truck that's still a good job, but if he gets you a lot of little jobs is it worth the trouble?

Referrals cost you nothing, of course, but maybe you could give this guy a bunch of business cards, with a special mark on them. Tell him that if he gives you any referrals where the customer spends $100 or more you will give him a percentage or flat amount on that first order. Have him tell the people he refers to show you the card he gave them.

Here's one that burned me once. I offered cards giving a 10% discount to existing customers on their next order when they gave me a referral. One regular sent a guy that bought one coro real estate hanger (new price, view, or something, maybe $15). Then the regular came in and ordered 12 4'x6' plywood signs, 2-sided and claimed the 10% (hundreds). I wonder to this day if the guy he referred was a fake.

[Phyllis Meyer]

Great question Scott! We are also very interested in hearing what the experienced folks here have to say!

Your own site? Selling Wholesale? Word of Mouth? Advertising? Or do you have a salesman, or middle-man working with you? Has anyone looked into the brokers?

Have a great day!
Phyllis (Scott, I sent a PM)

[Doug Griffith]

My 2 cents if there is a contract:
1) make sure there is a performance clause.
2) put a time frame on it with auto out and optional renew if agreed upon by both parties.
3) grandfather existing customers.
4) customers brought in by salesman remain yours with a percentage of future sales to salesman for set period after leaving company.
5) failure to fulfill contract voids #4

You might want to put a cap on #4

Also, do not give exclusivity to anything.

Cheers

[Craig Hogarth]

I have a few questions :

1) What's a fair commission rate in this business?
2) What's a fair rate for jobs that repeat?
3) What happens if we go our seperate ways and have a good working relationship with the customers he set up? How's that work? Certainly he's not entitled to payment years after we go our seperate ways?
4) We're currently quoting some places that he says he has contacts in. So how's that work? We're already actively quoting there, so how's that work?


1) First and foremost, commssions need to be low enough in order for you to profit. Secondly, it must be high enough in order for the salesperson to make a suitable income. Regardless of industry, salesmen make 30 to 60% on self generated leads and 10-25% on company leads.
2) Even though the customer belongs to you, while the salesman is employed/contracted through you, for intents and purposes, the customer belongs to that salesperson for the duration. He should remain the primary point of contact for your company and should be compensated on all future sales he is involved in.
3) Any customers he brings in belongs to you and in the event he is fired or has quit, the customers still remain your customers. It's not uncommon for employers to put a no-compete clause into contract, but doesn't hold much weight in court.
4) The contract should include a list of clients that he will either not get paid for or will receive a lower commission on.

At this point, you should be able to agree in principle, but I suggest not locking into anything until you speak with your state's labor department. I've done all types of sales and in my state (Washington) there are strict guidlines on the types of sales and how salesmen are compensated depending upon which industry they are in. It'd hurt the checkbook finding out next month that he's entitled to minimum wage for hours worked even if no sales were made.

[Scott Shepherd]

Craig, 30% to 60% commission? Are you kidding me? If that's the case we'll do without a salesman. I hate to sound harsh, but I'll be &^%ed if I'm going to work my butt off making the product and worrying about quality control to make less than the guy who called an old buddy and asked him to "give us a chance".

I had the numbers between 5-7% as reasonable.

I'm talking total sales, not profit, are you talking 30-60% of the profit? Or of the gross sale?

[Joe Pelonio]

Craig, 30% to 60% commission? Are you kidding me?
As the saying goes, "There goes the profits!"

A real estate agent is happy to get 3%, on a million dollar home he get's $30,000. I know a couple of luxury car salesmen that get 30%, that's
$1,800 on a nice Mercedes. But. . .on a 3'x12' vinyl banner priced at
$180 30% is only $54, he'd have to sell a bunch of them to make a living. Meanwhile my profit on that banner may be as little as $100, sharing that $54 with him cuts it nearly in half. Sounds like a lose-lose. Most of the other sign shops that I know of and/or work with only have outside sales people if they do electrical signage, where the average sale is $10,000
or more.

[Daniel Cline]

Hello everyone,

I have been sitting on the outside of this forum for several months...learned alot...thanks everyone.

I have similar issues I am trying to deal with. What to price things and how to work with people who want to market our laser etching.

For example, i have a municipality who would like a large oval sign from wood 48 x 30...any ideas on pricing. Cost of wood, painted, etching...

As my market is more toward the higher end I was thinking in the 20 to 25% range for salespeople. No matter how you slice it it is a challenge because you need to make a buck and generally so does the salesperson.

We are fortunate so far that by making strategic alliances with other business, they are promoting our business for free! It is added value to their work, granite shops, fireplace, tile and glass shops, etc.

[Craig Hogarth]

Commissions is typically based on net, since all jobs/products are generally not marked up equally.

You'll never see a salesman at 5% unless it's a bonus on top of a regular wage. Even the real estate agent gets on average 70% or more. The 3% is the gross profit that goes to the broker, with a commission split going to the agent.

As Joe mentioned, if all you're doing is $100 jobs, then it may not be worth your while to have a salesman. An option to consider would be to offer wholesale pricing to your salesman and let them mark up for their own profit.

In case you're curious my previous sales positions paid:

Mortgages: 40% on net Company leads, 60 self generated leads
Windows: 20 to 50% on net on sliding scale
Cars: 20% on net minus "dealer pack", vets get up to 35%
Furniture: Wage plus 10% gross

[Doug Griffith]

It also appears the guy is going to keep his full-time job and do this on the side. He should be more than happy with a lesser percent than ussual because its gravy money and there's possibility for residuals. 5 - 7% seems fair. He can always walk. It would be his loss for a simple referral.

[Joe Pelonio]

Commissions is typically based on net, since all jobs/products are generally not marked up equally.

An option to consider would be to offer wholesale pricing to your salesman and let them mark up for their own profit.


Thanks for that education on commission, Craig. I also like your wholesale idea the best. I do that with some regulars. They do the artwork and send it to me via e-mail with a pdf PO. I either ship it to them or drop ship to their customer. A little less profit but I save a lot of time not dealing with the customer on color, design, material etc. They typically manufacture nothing, just buy and resell from me and others, like printers or advertising specialty manufacturers.

[Scott Shepherd]

Yes, let me be very clear on his role. No quoting, no involvement in the work at all. He found out we did signs, said "Man, I know a TON of people in that market" (most of them in the actual decision making process). His role would be to do nothing more than setup meetings with the client for us to walk into. He's simply calling in his contacts and getting us in the door.

Nothing we couldn't do ourselves without some hard work. So he'd just be accelerating the process.

Here's where I have a problem with that. Sell a sign for $1000, $350 in material, $250 in labor. That's $600 in the job. Take $300 off for 30%, that's $900, leaving us with $100.

Let me see if I understand this right. I did all the work and we made $100. You didn't even pick up the phone for the order, since it was "your customer" and you made 3 times what I did? That just doesn't make sense. That's a sure way to take a fast track to the poor house in my opinion.

How about this- I give you $100 and I keep the $300 and everyone feels lucky for what they got? Sounds a lot more realistic to me. You'd have to be crazy as a loon to think that the person who did nothing deserves more than the actual business itself. Here's a little tip- if the business goes belly up because you were making too much, then you'll be making zero.

[Larry Bratton]

We have a guy who has apparently seen some potential in us and wants to start selling for us, paid on commission only. He has a full time job that he doesn't plan to quit, but he has a ton of contacts, contacts that are in the very places we have been trying to crack into.

He's already setup a meeting with a very large client with us, all before anything has been discussed about how the commission will work.

I have little experience in this area so I'm at a loss. What my gut tells me is a long way from the type of things he's speaking of. That's why I'm here.

I have a few questions :

1) What's a fair commission rate in this business?
2) What's a fair rate for jobs that repeat?
3) What happens if we go our seperate ways and have a good working relationship with the customers he set up? How's that work? Certainly he's not entitled to payment years after we go our seperate ways?
4) We're currently quoting some places that he says he has contacts in. So how's that work? We're already actively quoting there, so how's that work?

I'm sure I'll have a bazillion more questions, but that's about all for now. Hopefully someone can give me some insight.
Scott:
Keep it simple. Base the commission on gross profit. Trying to pay on net is too complicated. Look at what you need to make to provide equipment, insurance, your expertise, taxes etc. You and your salesman work out each deal together or at least approve every deal before it goes to contract and then pay a percentage of the gross when you get paid. If he pays all of his expenses it can be more, if you pay them or any part, then less accordingly.Be sure I check out this guys references.
I've been working for myself on this basis for nearly 20 years now. (not in the sign business, but building supply business).

[Scott Shepherd]

Sorry, you did say Net :)

So that's $400 profit, 30% of that is $120, where as 7% of gross would be $70. That's more better :)

[Scott Shepherd]

Thanks Larry, he doesn't have references as a salesmen. He's just someone who's been in a business long enough to know a lot of people. He won't be negotiating with customers. Simply calling a few people and pulling a few strings when he can.

Not such much a proper "salesman" role, but rather someone just trying to make some extra money on the side by using his contacts.

It has the potential for big money, as one of the customers has an annual signage budget of about $1,000,000. I'd just like a piece of that pie. I'm not greedy, I'll take 80% of it :)

[Craig Hogarth]

Here's where I have a problem with that. Sell a sign for $1000, $350 in material, $250 in labor. That's $600 in the job. Take $300 off for 30%, that's $900, leaving us with $100.


Car Dealers take into account the commissions when pricing a deal. You need to do the same. Also, is it you getting the $250 in labor or someone else?

But since you've explained that he's only setting you up with customers, then it's not really sales per se. If all he's doing is getting you referrals, just give him a small percentage like you were originally thinking.

My whole point on sales is that unless you are currently working 100% of the time, it makes sense to pay someone a good commission to get you to that point. Every hour you're not producing is a lost hour and no matter what you do, you'll never get any revenue from it. I'm pretty decent at sales, but I hate chasing customers. That's why I opened a storefront, but every now and then, I still have to hit the pavement. Not just as much anymore. :)

[Scott Shepherd]

Thanks Craig, sounds like we agree on the situation. I wish I could up my price to allow for such commissions. If I did, I'd lose most of my business. It's never mentioned, but it's always implied, that if my price is too much then I will lose the business. It's in my best interest to keep the prices reasonable.

I don't have time to run a profit/loss statement on every job, so I think 7% on the gross sounds reasonable in this situation.

I also agree, if I were twiddling my thumbs most of the day, then paying someone anything would be better than having no work. Fortunately I'm not in that position at this time.

[Mike Null]

I have had some experience in this and related businesses. The examples previously posted are not similar and not really good for comparison.

The businesses like this are awards and engraving and promotional products. Because the total sale is relatively small the commission rate ranges from 10% to 20% of total sales.

A typical sales contract would cover a territory and sales generated in that territory (or category of customer) would produce commission for the salesman. Re-orders would also generate commissions.

In many years of dealing with this and similar situations I've never heard of one where a salesman retains a customer should he leave the company. Your going to make the product and do the invoicing. It's your customer.

What makes more sense to me is to set up an arrangement with this guy as an independent contractor who receives a flat dollar (finders fee) amount based on each order that he personally generates.

[Bob Keyes]

Here's what I pay. 35% of the gross profit, period. I provide samples and catalogs and nothing else. The salesman is essential self employed. I don't have any other obligation. I pay commissions in the first 5 days of the month following the sales.

Works quite well for me.

[Dave Sinkus]

I can take a stab at #3 and #4. My experience has been with sales people selling print and mial room outsourcing and with professinoal services, network consulting.

3) What happens if we go our seperate ways and have a good working relationship with the customers he set up? How's that work? Certainly he's not entitled to payment years after we go our seperate ways?
I would say he is not entitled to future sales. The comissioning process works for each sale - I'm assuming 1 sign = 1 sale. 12 copies of a sign = 1 sale, and so on. You can bet you will go your separate ways at some point. You have a right to do business with the people you have been doing business with when he parts ways.

4) We're currently quoting some places that he says he has contacts in. So how's that work? We're already actively quoting there, so how's that work?
He should "earn" his commissions on the sales he makes. You are making the sale on the quotes you have submitted, therefore, you get the commisions allocated for the sales person, in this case it is you.

What I have experienced is when sales people resign, it is usually immediate, not a regular 2 week notice kind of thing. Main reason is they don't want to pay them for selling their new job.

When they quit, they take their relationships, contacts, etc. with them. After a short time period, they start calling their contacts to sell their new wares.

I'm not understanding the role he is playing from the first couple of pages from the post. He sets up appointments for you to sell your product and services and he gets a commission? I think you should pay him a referral fee, regardless of the price of the sale. Say $25. He has no skin in the game.

[Stephen Beckham]

Mike - concur - in all situations where I've seen this type of thing done, it would be more like a Car Salesman who pays a finder's fee for anyone that one of his customers sends his way. It's not a commission, but more of an incentive.

This guy recommending someone to you won't keep them as your customer if you don't do the work to keep them. If he had to sell you to that lost customer all over again because of new equipment or better management - maybe give him a finder's fee again.

You might consider the flat rate $$ amount for anyone he sends you way - you might even consider % rate on the first sell only - you could even give a lawyer's response of X or Y whichever is the greatest amount for the two different payment types. The key is make it upon the completion of the sell - not the walk in the door.

The nice thing about a good percentage rate on the first sell only would be that he would encourage the larger amount to his friend to get a higher chunk. That would keep him from sending small jobs to you.

Good luck...

[Scott Shepherd]

Just an update. Had a meeting with the guy and he obviously has some contacts that could help us fast track into several very large companies. However, the companies named are already people we are working on getting into. Essentially, he'd be speeding up the process that we're already working on. What's that worth?

I know what he wanted is unreasonable. He wants part of the profit on every job sold under his "customer", which is a level of detail I don't plan on going into on each job. I'm not doing a job cost analysis on a $6 name tag just so I can give him his cut. I've worked for companies in the past that were freaks about counting pennies and I'll never go that route. Just to keep track of the money I'd owe him, I'd be spending hours and hours a week. Last time I checked, that function was overhead and one I have no plans to take on.

He also believes that he should get some compensation on all sales to that customer until we go out of business or he dies, whichever one comes first. I have a really REALLY hard time giving someone money for the next 20 years when all they did was make a phone call to a friend that took 30 minutes. Does a 30 minute phone call really entitle you to money for the rest of your life? I personally don't think so.

I'm much more inclined to offer a one time referrel fee. I'll even be generous and give you what I consider a lot of money for that, but I'll only do it once for each customer, providing an order did come in from that customer. No orders, no referrel fee.

Bottom line, without this guy, we're still working on the same customers, it'll just take longer. I'd still like to have him help out, but darned if I'm giving away the key to the city to do what I'm already doing, just sooner.

Am I being unreasonable?

[Joe Pelonio]

There's really no way to know for sure whether a referral is going to be one job or many a month for years. If you agree to a referral fee of say $25, that first job may be a $25 job and you make 0 unless they come back for more.

I still have a problem with paying him to make a quick phone call. Maybe you'd be better off just offering him for his list of contacts and allowing you to use his name when you call. If you do nothing, he will probably look for someone else to sell his service to, and in effect steal away the ones you have been working on.

Also, I currently have 4 regular wholesale customers that are now in business for themselves after being salesmen for other companies. In fact two of them worked for the same company, and are now competitors but still friends.

All of them had signed non-compete agreements. What they did was to start off concentrating on new and out-of-the-area customers until the agreement date expired. Then they started calling on the old customers and most went with them.

[Todd Schwartz]

Scott,

You are right on target - you need to decide what it is worth to you and your company to "speed things along".

A one time flat referral fee is fair and the only way to go. I would limit it to a named set of accounts and pay regardless if any sales were made. You would invest that same money on marketing materials, phone calls, letters, promotions, lunch, and especially time.

As commissioned salesman, once you leave the company, you are entitled to no more commission. This is true across the industry, with the exception of insurance, and even those residuals die off after awhile.

His requests are unreasonable and my red flags would be going up if I were you. Be careful, offer what you think is a fair referral payment. Put it in writing and stick to it. If he does not like it I would cut bait and run, not walk away from this..

Good luck.

Todd

[Scott Shepherd]

Believe me, for this first account, he'd tell us to take a hike if we offered $25. The people have over $1,000,000 a year sign budget, which is under contract (and we are currently able to openly bid on that without his help), but this is a large division of that place that are very tired of waiting over a month for simple signs. However, they aren't actively looking for someone else, we just happened to be mentioned at the right time in their frustration process, which lead to a "give me a call" to the guy.

I've been on some of the property and it looks like an easy $50K a year account. For that, I'm willing to pay $500 for a referrel. I think that's reasonable (or more than reasonable).

Point being, I'm already on the bid list for the place. Haven't been on it long enough to see any work, but still on the list. Plus, I'm busy now and have been. If I had that much more work, then I couldn't do it all myself and I'd be looking to add an employee anyway.