What You Need to Know about Using an Independent Sales Agent or Manufacturer’s Representative.

What is an Independent Sales Agent (aka Manufacturer’s Representative)?

To avoid confusion in terminology, this article will discuss specifically Independent Sales Agents which has the same meaning as a manufacturer’s representative. An Independent Sales Agent (know as “Agent”) is an individual who is either a sole proprietor, partner or incorporated entity working in an exclusive geographically designated territory or a particular market/customer segment, representing one or more principals.

An Agent may represent one or several non-competitive lines. The Agent is remunerated primarily on a commission-only basis for goods shipped or billed from the company represented. Agents control their own time and level of sales effort. The responsibilities and obligations between the Agent and principal or company are usually outlined in a written contract between the parties.

It is important to note that Agents must maintain an “independent” relationship with the company that has retained them. The Agent should not be ‘tied’ to the company in any way such as a partner, shareholder or board member. Neither should he operate under any constraints imposed by the principal or company such as being directed by the principal as to how much time he should be spending with specific customers or allocating his sales efforts on call reports. The Canadian Customs and Revenue Agency closely monitors both independent sales agents and those principals/ companies that use them as a distribution channel. For more information about what constitutes this relationship, refer to Revenue Canada’s Self-employed/Employee Test

The term principal is used to describe the manufacturer or supplier of goods or services sold by the Sales Agent.

Distribution Channels
Companies today are awash in the number of channel choices that are available: agents, dealers, wholesalers, web site sales, email, catalogue, telemarketing, direct salespeople and more. Usually, one or two channels will become the firm's primary selling methods with several lesser channels being left available for smaller or specialized clients. The key question becomes whether your firm has the right mix of distribution and selling

Many companies experiment before making a final commitment to a direct course of action. In this way, companies may find that a blend of several direct and non-direct channels is best.

So how do you know if using Agents is the right channel strategy for you? Listed below are some questions to ask yourself:

• How your customers prefer to buy—over the telephone, web, direct mail, in-person etc? Remember, customers have never been in such an information-rich position as they are now. They have an unlimited amount of resources at their fingertips.
• What is the nature of the product/service being sold? The nature of the sale and to whom the product or service is being sold makes an enormous difference. Are you selling a commodity-type of product (e.g. 500 kg oil drums) to petrochemical distributor or single unit cosmetic/toiletry items?
• Examine core competencies. Find out if your best customers are happy with the way you do business now and what changes they would make if they could. Perhaps you need to make your products lighter weight, more attractive or of superior quality.
• What are your limitations and time constraints. As a sales manager or company owner, how much time do you have to supervise sales personnel? Have you managed a direct salesforce before? Do you have experience using agents? Are you under pressure to deliver sales results?
• What is your sales expense ratio? What are the true costs of selling your product through current distribution channels? Can selling expenses be isolated by geographical boundaries? Do you want to increase sales but decrease sales expenses? Is there a more cost-effective way to sell your product/service?
• What is the market potential? What is your company’s market share for a product/ service in the industry, the country, or internationally? What are your competitor’s market shares? What distribution channels do your competitors utilize?
• Segment your markets. Which products are sold to which customer groups? Where are your customers located? How do they buy? What things can you do that will attract them and make them want to buy more? Should you be looking at agent networked, catalogue selling, telemarketing, web sales, email or other channels?
• Prove your channel. Test out your ideas by setting up the channel and have limited numbers of solid clients try the selling system beforehand. Obtain feedback sufficient to make a decision to proceed and then launch with confidence.

Why sell through an Agent?
There are many advantages to selling through an Agent:

• Synergistic selling. The sale of one product can act as a trigger for the sale of other products, as agents represent lines that are compatible in nature or customer segment. Agents have a greater opportunity to upsell or cross-sell the products they represent from several principals. Selling costs are reduced, since a single visit by an agent can result in a larger sales order for a variety of product lines.
• Quick penetration into a new marketplace. Agents have an intimate knowledge of the industries and customers within their territories. This knowledge allows sales agents to pinpoint where new products can be sold and to whom they can be sold. It also saves a principal considerable time, effort and monies if he were to utilize a direct salesforce as a sales channel.
• Minimized risk. If you have developed or introduced a new product and are not sure about it’s success in the marketplace, you may want to “test” it through a limited distribution channel for a specific period of time, before committing further monies to marketing and promotion. An Agent offers you the opportunity to test your product in the marketplace.
• Easy to forecast sales expenses. You will always know in advance what your selling expenses will be with an Agent.
• Agents are cost-effective. Agents are paid only for results. Poor sales performance results in no or lower commissions being paid out. You always know the cost of a sales agent as any contract you sign with them sets out the commission rates in black and white and the conditions under which they are paid out. An Agent appears to be a very good bargain indeed when you evaluate what it costs to put a full-time, salaried salesperson into the territory—total target compensation, fringe benefits, vehicle reimbursement allowance, travel expenses etc—that may run up to $130,000 per year.
• Sale expense monitoring eliminated. Sales agents assume all operating expenses—personnel, office, travel—for the territory. One of the benefits of having Agents is that the time you would normally spend on monitoring the activities or expense accounts has been eliminated. If you are a sales manager, this frees up time to spend on other activities (e.g. marketing).
• Quick service response to customer problems. Since the assigned territory is within travelling distance of the Agent’s home base, the Agent can respond quickly to any problems that may relate to a product shipment.
• One stop shopping service. Some purchasing managers or department heads prefer to use an Agent who represents multiple lines or manufacturers (e.g. fasteners) to obtain competitive pricing. If the Agent has developed a trusting relationship with the buyer, he may be the first one the buyer prefers to call to obtain competitive quotes rather than spending valuable time calling different salespeople for quotations.

Disadvantages to using a Sales Agent
Some of the downsides to using a Sales Agent to sell your product or service are as follows:

• Unrealized sales potential. One of the fears some principals have about using Sales Agents is that the Agent will only pursue accounts that have the greatest potential for monetary returns without making new sales or acquiring new accounts. This short-term orientation is the result of a conflict between the Agent’s need to realize profits on any and all volumes and the principal's need to build business or focus on strategically important products or markets.
• Lack of sales control. Agents are independent contractors NOT employees, therefore a principal cannot demand that the Agent perform a specific action or allocate his/her selling efforts to a particular customer. It is for this reason, a principal should take a hard look what they want to achieve in the territory and whether the Agent is willing to respond to “reasonable” requests or periodically meet in-person with the principal or communicate via telephone. If you want to exert “control” over the Agent’s sales techniques or training, then an Agent might not be the best option for you.
• Need for extra incentives. An Agent does not owe any degree of loyalty to a manufacturer or principal especially if he/she is representing several lines from several principals. Agents who represent premium and non-premium products may place more emphasis and effort into selling non-premium lines as it may be easier for them to make the sale. Extra financial incentives (e.g. higher commission rate) may be needed to push the principal’s products.
• Buyer preference. Some purchasers or buyers prefer to deal directly with a supplier, as they may be operating under the misconception that the Agent’s services are contributing to the “cost” of the overall product/service. Principals should be aware of this factor and not provide a “special deal” to those customers or buyers who call from within an Agent’s designated territory. Usually the Agent receives credit for all sales emanating from the territory and it would be counter-productive to pursue such a course.
• Lower level of customer service/support. Customer service is generally thought to be higher with full-time sales staff. Customers get to know and trust full-time sales representatives and can rely on them to follow through with instructions. If the customer has a problem with a sales rep’s handling of their account, there is a higher level to appeal e.g. sales manager or other company executive, than with an Agent.
• Temptation to go “direct” and save money. Some principals are tempted to go direct after they have had an Agent in a territory, especially if the commissions being paid out are in the high six figures. Principals forget that it takes time and effort to develop a territory and that these development costs have not been incurred directly by the principal himself. Second, the Agent’s effectiveness might be so strong that there is little hope of attaining the total sales volume by substituting a full-time sale representative.
• Customers may move with the Agent. Depending on how the contract was worded, the Agent may take many of the customers with him, when a contract is cancelled.
• Lack of detailed reporting. If you are the type of principal or manufacturer that wants up-to-the-minute reports about sales in the territory, don’t look towards your Agent. Agents are paid by commission based on the sales volume or number of units sold. They are not paid to fill in paperwork or provide market/competitor intelligence. If you need market intelligence you may want to consider a full-time representative instead of an Agent.
• Level of technical support. Depending on the level of technical expertise an Agent may possess, you may want to ensure there is additional sales or a technical support option to properly advise customers on product application. As a principal it is unrealistic to expect that an Agent will become technically conversant with every aspect of your products, applications and operations. If you have a complex product (e.g. computerized paint sprayers) that can be utilized by different industrial customers for different applications, you may want to have the Agent go through the your company’s training program. If this option is not feasible you may want to have detailed sales literature and manuals available to assist the Agent and maximize his/her effectiveness.

Remember that the cornerstone of agency selling is that agents are paid only for the results achieved. As a sales manager, manufacturer or company owner you need to look beyond the bottom line and evaluate using an independent sales agent based on a variety of factors—buyer preference, product type, sales volumes, management control etc. You alone possess the knowledge to effectively evaluate your sales channels and come up with the right balance to maximize profits and marketshare.

©Sales Resource Centre. Canadian Professional Sales Association, 2001.