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Managing Commissions With Dealer Profitability

Two solutions to handle this three-way challenge

Today’s sales manager must be able to manage the sales process for his dealership. He must also be capable of reconciling his management team’s expectations for profits.

When it comes to dealer profitability, the role of the sales manager is to sometimes juggle the objectives of three very different constituencies. In this triangle, the manufacturer, the dealer principal and the salesperson, each has a different set of goals as they strive for increased profits. While each has a different set of objectives, each is dependent on the other. It can be a marriage made in heaven or hell depending on how the sales manager juggles the dealer principal’s objectives for increased profitability, and the manufacturer’s objectives for increased market share.

The Triangle
The sales manager routinely addresses the expectations of the dealer principal, any one of dozens of manufacturers, and a team of sales personnel. Each has a set of expectations for profitability and how those profits should be achieved during each fiscal period.

The Dealer
As a sales manager my chief priority is satisfying the expectations of my employer.

He signs my paycheck. He expects to see an increase in profitability measured by the gross profit on each item sold. He evaluates my performance by reviewing what has been budgeted vs. actual year-to-date financial statement.

The Manufacturer
As more dealers represent more manufacturers (we’re trying to be all things to all customers), accomplishing our mandate becomes more of a challenge. Each manufacturer wants a larger slice of the pie. Each manufacturer wants to command my sales team’s attention. Each manufacturer is focused on market share, on the number of factory orders we deliver, and on our ability to match up with our forecasted numbers.

Dealer Principal’s Objective: Increased Profitability

Test: Budgeted vs. YTD Financials

Manufacturer’s Objective: Increased Market Share

Test: Annual Forecasts vs. Factory Orders

The Salesperson
Meanwhile the sales department is focused on winning a sale in an environment in which a flat (or shrinking) customer base can and will demand price concessions as they shop various manufacturers. The customer has an unprecedented number of manufacturers from which to choose.

The commission-based salesperson wants to make the sale and often finds himself in the midst of a tug-of-war between the need to generate sales to cover his commissions, and the need to generate an acceptable profit level as dictated by his company’s management. And he or she may not necessarily be focused (especially at the end of the month) on profitability unless his commissions are impacted by dealer profitability.

The Solution
The sales manager must work closely with the salesperson and communicate the goals and expectations of the manufacturer and those of the dealer principal. Management must make salespeople and support staff aware of the corporate objectives of the company, and most important, communicate changes in corporate objectives as they occur.

Annual business plans should be presented to the sales force so they are aware of these objectives.

Salesperson’s Objective: Commissions

Test: Meeting Dealer Management Objectives

Solution:
A. Frequent communication of manufacturer’s and dealer principal’s objectives. Communicate: annual business plans, monthly market share and P&L reports.

B. Re-structure commissions so that they are based on profitability and market share gains as well as gross sales.

Monthly profit and loss reports should be shared with the salesperson in order to keep that salesperson apprised of how well the department and he as an individual are performing. Market share results should also be reviewed with the sales department. Salespeople should be encouraged to track their progress against the goals and objectives of the manufacturer and the dealership.

Instead of commissions being based on sales volume alone, commissions should be structured around profit margin and market share objectives. If salespeople are simply paid commission on equipment sold, their objective is going to be to sell as much equipment as possible, regardless of profit level, to generate a paycheck.

If commissions are predicated on minimal profitability and market share gains, the salesperson’s objectives will be optimally aligned with management’s objectives, as well as the manufacturer’s objectives.

Material Handling Equipment Distributors Association

Chris Beckman Meet the Author
Chris Beckman is sales manager at Gregory Poole Equipment Company in Raleigh, North Carolina.

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