I recently returned from doing a two-day business management workshop for 22 owners/managers of bath and kitchen showrooms.
The good news is almost all these folks are enjoying an up sales year. The bad news is the gross profit margins on almost all these sales are down. In almost every case, expenses had been cut back over the past several years. Even though sales were up (10% +/-) and expenses were down (5% +/-), the bottom line was still too darned low (1%-2% before taxes).
I asked who or what they thought was driving margins down. The answers were pretty unanimous: “The competitor down the street has lowered its prices,” and “The Internet.” I certainly do understand how tough it’s been out there the last few years, but I will never, ever understand why you would cut margins. You have too much value to offer. You should be raising your margins, not lowering them.
So you might ask “What values are you talking about?” Please allow me to list a few of them
An expensive, beautifully built-out showroom;
A broad selection of great products;
Very knowledgeable sales consultants;
Large inventories of products;
Delivery to the jobsite;
“Tag and hold” of products;
A long-term, well-established business;
Probably a family-owned business; and
- Terrific service.
All these things and much more have cost your company a lot of money. They have great value and you have to sell that value to your clients. The odds are you offer several things that are better, different and more unique than the competition down the street.
Buying on the Internet doesn’t begin to offer the many value points you offer. If you don’t articulate each and every one of your value points to your clients, all they’ll be looking at is the price.
Here’s a very important statement that I’d like you to read, memorize and make part of your everyday selling efforts: Every time you recite one of your value points to a client you make price become less important! When you articulate several value points you get clients thinking less about price and more about how much value they get when they buy from you. All of us know what the headlines say, but until you read or hear the fine print you don’t know the real story. You must clue them in on the fine print of your value and get them past the headline!
Okay, so what does the “Win-win compensation program” title of this article have to do with all this? When I owned my showroom business we tried a number of different compensation programs. We started with a straight salary (hourly) program. This worked great, but there was no incentive to sell more. Then we tried a straight commission program.
Unfortunately, some folks didn’t have the self-confidence (or expertise) to work under this type of program. We finally evolved into a combination salary plus commission program. At first we set the commission up on sales only. Sales went up, but margins went down! Finally, we settled on a combination plan driven by both sales and margins. Guess what? We started to see both sales and margins start to increase and our sales consultants made more money.
I’ll be the first to admit not all salespeople are motivated by incentives. Some folks will give you 110% regardless of the program. But my experience told me most sales folks like incentives and will work harder and smarter to try to maximize their income levels.
You’ve heard me hammer home this point several times in past articles. I believe profitability is more important than volume (sales) at the expense of lower margins.
Here are a couple examples of a combination compensation plan you might consider. I fully realize whatever plan you use, it has to be good for both the employees and the company. I also understand that anytime you change or tweak a compensation plan there is some risk. Having said this, take a look at these examples:
Let’s assume you want your showroom sales consultant’s compensation plan to be 50% salary (hourly), which would give the employee a guaranteed amount every payday. That means the balance would be commissions driven by sales and margin.
Let’s further assume the average sales consultant averages $60,000 in sales per month at 33% gross margin.
For this productivity you want to pay $50,000 per year total compensation (not including fringe benefits). To bring the incentive portion into the equation, I’m going to use a sliding scale commission format. Here’s what it looks like:
Monthly GP Margin Monthly Commission %
40% + 14.5
Less than 26% 0
Monthly sales: $60,000
Monthly GP%: 33%
Monthly GP $: $19,800
Monthly salary:$2,083.33 (Hourly - $11.95 per hour)
Monthly commission:10.5% X $19,800 = $2,079.00
Monthly comp: $2,083.33 + $2,079.00 = $4,162.33
Total annual comp: 12 X $4,162.33 = $49,947.96
Now let’s assume sales and margins go up. This is what it would look like using the same sliding scale:
Monthly sales: $65,000
Monthly GP%: 34.5%
Monthly GP $: $22,425
Monthly salary: $2,083.33 (Hourly - $11.95 per hour)
Monthly commission: 11.5% X $22,425 = $2,578.88
Monthly comp: $2,083.33 + $2,578.88 = $4,662.21
Total annual comp: 12 X $4,662.21 = $55,976.52
Comparison summaryIn Example #2 sales went up $5,000 per month. The margin increase is 1.5%. GP$ increased $2,625 of which the salesperson enjoyed a $499.88 per-month increase and the company a $2,125.12 increase. A win-win for all concerned!
Suffice it to say a program such as this puts the sales consultants in charge of their own destinies as far as compensation is concerned. When they work harder, sell more value, do a better job following up on quotes and close more sales, they can give themselves a pay increase by increasing sales and/or increasing the GP margin.
Certainly, the opposite also will hold true. If sales and margins fall off, so does the commission. Isn’t this still fair to both parties (company and employee)? There’s fewer dollars coming in – so it’s shared by both.
The key to making this work is explaining it in detail and convincing employees that it’s being done for their benefit. They can make more money by selling more and increasing that all-important margin. If employees are skeptical of this plan in the beginning, the company can guarantee a certain amount for a short period of time (six months).
Another key is making sure everyone knows which vendors and products are the most profitable. They need to know where they can maximize margins. Salespeople should then “push” these products to their clients.
My experience has shown me this program leads to increased sales and margins. The result is sales consultants earn themselves a higher monthly and annual compensation - and so does the company!
I used this program at my business and have helped install it at several dozen of my consulting clients’ businesses. It works! And it’s good (a win-win) for both the employee and the company.
Now the best for last: Regardless of what your current compensation program is, start today by adding just one more point to your gross profit margin. You’re worth it. You deserve it. If you’re good – and most of you are – you won’t lose orders by adding that one point. I guarantee it!