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It’s not unheard of that a principal will balk at the shared territorial development request. When that happens, according to Cohon, “I’ll let the principal know that I’m aware of some rep firms that will take on a line with no existing business and require no shared territorial development cost. Here are the names of some of those smaller rep firms that I know of who are very good.”
Views For and Against Shared Territorial Development Costs
As a preface for discussion of the subject of shared territorial development costs, consider the following: If we all hold the same opinions, there’s very little for us to talk about. That’s why the thoughts, opinions and experiences of two individuals concerning this subject are so interesting:
The first opinion is that of an independent manufacturers’ representative who has placed consideration of shared territorial development costs on the front burner in all of his discussions with prospective principals.
The second is a consultant who connects manufacturers with reps. In that capacity, he maintains, it’s becoming more and more common for reps to raise the subject of shared territorial development costs.
While the former is a huge advocate of shared territorial development costs, the latter holds a slightly different view that such “retainers” aren’t always the ideal path to follow.
Let’s begin, however, with a scenario described by MANA member Charley Cohon, CPMR, Prime Devices Corp., Morton Grove, Illinois.
When contacted by a manufacturer that has no existing business in the territory covered by Prime Devices, Cohon explains, “At the outset I’ll explain to him that, sure I’d like to represent him, but there has to be the prospect of my agency receiving shared territorial development costs. After all, it’s simply not fair for me to exert an effort on his behalf when he has nothing in the territory right now. However, I’m quick to point out that I can bring to bear on the effort six salesmen who are professionally backed by a secretary and all the assets of my agency.”
He continues, “It’s predictable that the manufacturer will counter that the reason he’s interested in working with me is that reps traditionally don’t get paid unless they sell product. Plus, what difference does one more line make if I’m already calling on those customers anyway? I’ll educate him to the fact that a cost is expended whenever I include a line in the sales presentation of my synergistic product offering.”
Cohon emphasizes that his requirements for shared costs are hardly exorbitant, but “I need something that shows good faith and commitment on the part of the principal.”
He emphasizes that whenever he walks away from a potential line, he’s always parted company with a manufacturer on the best of terms.
If that scenario is fairly typical, here’s how the rep and then the consultant relate their experiences with the same subject. First, let’s consider the rep.
The Rep’s View
Bob Johnson, CPMR, is hardly a novice when it comes to broaching the subject of shared territorial development costs. As a matter of fact, he’s so adamant in his belief that that’s how reps ought to approach the prospect of developing new business for a manufacturer that he’s not afraid — just as Cohon — to walk away from a line even though it might be an ideal fit for his business.
Johnson, The Growth Partnership Co. (TGP), Green Village, New Jersey, explains that recently he was contacted by a rep search firm that was attempting to locate representation for a manufacturer. Johnson determined that the manufacturer’s products would be complementary to his present offering and would offer the type of synergism that would benefit him, his current manufacturers and customers. “I felt that this was an opportunity that would be advantageous to pursue,” he says.
Following his normal process in cases such as this, Johnson opened a dialog with the prospective principal and, as is his habit, he began by posing a number of questions, the answers to which he needed before they could move ahead in the process. Among the many questions asked were:
* What do you know about going to market with reps?
* Do you presently use reps, and for how long?
* What has your experience with reps been?
* Have you ever heard of MANA?
* Are you a member of MANA?
Key to some of the answers, according to Johnson, is the fact the principal had a history of working with reps, but it wasn’t all that positive. “When he told me that he’d had three reps in the territory prior to contacting me, I asked him how long they had worked for him and why he thought the relationship didn’t work out. I followed that by asking if he made any effort to correct identifiable problems, and ideally what he would like to see in a rep.”
Questions About the Rep Firm
And finally, Johnson explains, “I had a number of questions about my organization that I felt any interested manufacturer would like to ask. Unfortunately, he asked none of those questions. That told me something about the manufacturer — that he wasn’t all that informed, educated or truly interested in how a rep operated or what it did in the marketplace. It led me to believe that whatever cost was involved in marketing/selling his product, he wanted me (the rep) to bear it, not him, the manufacturer.”
Notice that Johnson has not yet raised the subject of shared territorial development costs. That is yet to come.
“Remember that just as a prospective principal is qualifying/evaluating me, I’m doing the same with him. There are so many things I have to learn about him before we can move forward:
* What type of manufacturing equipment does he have?
* What’s his shift arrangement?
* How’s his record on completing deliveries on schedule?
* How competitive is he in other markets?
* How does he handle quotes, questions from the field, customer problems?”
After gathering that information, Johnson is ready to address the manufacturer’s desire to develop business in what might be referred to as a “virgin territory.”
For Johnson, and for a growing number of manufacturers who are encountering reps who require an agreement on shared territorial development costs before they’ll take on a “missionary line,” the dialog that follows is fairly typical. The manufacturers will open with such things as:
* “Looking at your line card, you presently don’t rep a product line like ours.”
* “You’re already calling on customers that buy products that are used with our product. Since you’re already calling on those customers, what difference does one more line make?”
* “There’s no real additional cost for you to introduce our products to your customers. Can’t you just drop in, take advantage of existing relationships and generate new business for us?”
Since he is no stranger to this opening gambit, Johnson is quick to counter with:
* “You’re absolutely right — we already have the relationships and we’ve been calling on those customers for some time.”
* “Yes those customers buy products used with yours and they buy products manufactured by your competitors.”
* “The fact is, however, they’re simply not sitting there waiting for your product to drop in their laps. Chances are their business has already been placed elsewhere. That doesn’t mean they’re not having problems, but to gain that business, the timing has to be just right. And, by the way, this doesn’t happen overnight. To generate business for you where none existed before could take some time, and by that I mean a period of months.”
Then Johnson raises the subject of what it costs to complete a sales call.
“In this case,” he explains, “I asked the manufacturer what he thought it cost for a salesperson to talk through a customer’s door and he answered, ‘About $500.’ I countered that in my opinion that figure was a bit high, but for the purposes of discussion, I’d settle on $300-$350.
“So, sure, I’m meeting with these customers anyway, but it’s not at no cost. And since the manufacturer has no existing business, why should I have to bear the market development cost all on my own. Wouldn’t his willingness to share in the effort show a commitment to me the rep and also to the potential of the territory?”
Johnson notes at this point in the conversation, the manufacturer is getting a little antsy and defensive. “He’s obviously reluctant to part with money that he defines as a ‘retainer.’”
That’s when Johnson presents his view of “retainer”: “I tell him that the requirement for me to take on his line is the payment of $x on the first of each month. At the same time, I’m quick to let him know that the last thing I want is to live off retainers. That’s why from the first day I work with him, the commissions I earn are deducted from that retainer.
“For instance, let’s assume the monthly shared territorial development fee is $2,400. By the second month, however, if I earn commissions of $1,200, that fee is halved. My goal is to get off the retainer and actually eliminate it as quickly as possible.”
Reaching a Part of the Way
The ultimate breaking point in negotiations between this prospective principal and Johnson occurs when the former holds firm by saying, “I’m adamant that I don’t feel I should have to pay a fee for you to call on customers you’re already calling on.” At the same time, Johnson was as adamant that “I can’t afford to do this and will have to back away from this opportunity.”
Johnson continues that the cessation of negotiations was accomplished amicably and he communicated to the manufacturer that at any time in the future if they felt they could work with his firm, he’d be more than happy to speak again.
A Consultant’s View
If that represents one side of the discussion, here comes the other — from a consultant that works at putting manufacturers together with independent manufacturers’ representatives.
Before he addresses the subject of shared territorial development costs Gary Giallonardo aims compliments MANA’s way when he stresses, “MANA is to be commended for all it does for the rep profession. I’m not sure the association recognizes its influence on the profession. I certainly do. It’s more the rule than the exception that I recommend to the manufacturers and reps that I work with that, if they’re not already members of MANA, they take steps to join immediately.”
Giallonardo is the president of Industrial Visions Company (IVC), Troy, Michigan. According to the consultant, IVC works with small- to medium-sized, business-to-business manufacturers as their part-time, outsourced, business development resource. “We are well versed in the ways of many industries and perform market research, develop client-specific strategies based on the research, and then drive implementation to improve top-line results.
“We often get involved in assignments to grow a client’s sales that have been stagnant over many years. Or, we get involved with clients who have recently lost business and need to stabilize a rapid revenue decline, and then grow revenues back beyond their pre-crisis level.
“Typical IVC clients have annual revenues of $5 million-$30 million. We don’t work with start-ups, and every once in awhile, we’ll function as a part-time marketing resource to units of much larger public firms.”
He continues that IVC’s clients are usually privately-held businesses, and in most cases family owned or operated. Most often they are operated by the 2nd, 3rd or even 4th generation. “Often the 2nd, 3rd and 4th generation owners or operators function more as administrators of past strategies set forth by previous ‘entrepreneurs.’ A common problem is that while not much has changed internally with regards to their products, processes, capabilities, market knowledge and general strategies, there have been huge changes in the marketplace. Why? Because by its very nature, markets are comprised of customers, competitors, and suppliers, and they’re always changing (in other words, they’re dynamic).”
The Value of Reps
He continues that IVC assists companies in staying relevant in the ever-changing world of today, instead of allowing them to slowly lose competitiveness by sticking to the ways of yesteryear. And, one of the ways IVC assists them in staying relevant is to put them together with independent manufacturers’ representatives that can help them grow their companies. Giallonardo does that with regularity because he believes in reps. If he believes in reps, however, he doesn’t always agree with the implementation and acceptance of a shared territorial development fee.
Giallonardo explains that the subject of shared territorial development costs is one that comes up frequently with reps — but primarily with reps who are members of MANA.
As far as scenarios involving shared territorial development fees, Giallonardo just as Johnson, has taken part in any number of conversations and negotiations between manufacturers and reps. According to the consultant, “Reps are integral not only to what I do, but they’re also integral to jump-starting a manufacturer’s marketing efforts.
“As important as it is for a rep to be integral to the manufacturer’s marketing efforts, it’s perhaps more important that the rep currently has synergistic lines on his line card and that he is intimately knowledgeable of a manufacturer’s products and the needs of the marketplace.”
According to Giallonardo, it’s reps that lack the aforementioned attributes that set themselves up for requiring a shared territorial development fee or some other form of retainer.
“If I’ve accomplished a good fit between a manufacturer and a rep,” he explains, “then the rep already enjoys relationships with customers, calls on them regularly and sells them complementary products. As a result, there is no missionary effort involved.
“Why then should a manufacturer pay a retainer to a rep when the rep benefits as much as the manufacturer by having him on his line card?
“I, and many of the manufacturers I work with, maintain you’re already familiar with these customers and you’re selling them products. As a result, any increased cost associated with a new line is negligible.”
He continues, “Sometimes the development of a manufacturers’ rep network can play an important role in improving an IVC client’s top-line performance. If reps are needed, then IVC works to identify and secure reps who can expand our client’s sales into new customers within existing markets and geographies, or into new customers in new markets and geographies.
“Based on IVC research, reps are identified who carry complementary lines, have a fundamental knowledge of our client’s products or capabilities, already sell to clients, markets and geographies that we’ve targeted, and who can quickly capitalize on new opportunities.
“Just as important, IVC seeks reps who welcome the addition of our clients’ products or capabilities as they see benefits in the development of a more robust and synergistic portfolio. If IVC can provide a rep with products or capabilities complementary to their existing line, which enables them to promote a fuller, more complete portfolio, then the rep will eventually benefit with higher sales and commissions.
“On the flip side, IVC has little interest in partnering with reps who:
· Don’t know the fundamentals of our client’s products or processes.
· Don’t feel that they can sell our products or processes to their existing customers and markets.
· Do not see synergies with their existing line.
· Are more interested in developing a total missionary effort to justify a monthly retainer.
“IVC does believe that missionary efforts justify retainers. However, IVC rarely looks for missionaries. We try to match our manufacturing clients’ need for reps with a reps’ need to expand their line with synergistic products or capabilities. This matching, thoughtful to the needs and considerations of both rep and principal, justifies no retainer.”
Citing Some Justification
In conclusion, Giallonardo explains that reps can be a critical part of a principal’s market development plans. “Although I typically work on behalf of a principal on any rep organizational development project, I look to find reps that can benefit a principal, but can also benefit from a relationship with a principal. If it’s only a one-way relationship in which the principal needs a rep to penetrate a specific market/prospect base where the manufacturer currently has no business or few relationships, then I believe a retainer is justified. That would be considered pure market development (‘missionary’) work to benefit the principal.
“However, if the rep can benefit equally and quickly from a principal relationship (e.g. the new principal’s capabilities plug a hole in the rep’s current line card and makes the rep an even more valued ‘overall’ resource in the marketplace, or the rep sees immediate and future potential in selling the principal’s capabilities to current customers), then I don’t see any need in paying a retainer.
“Many MANA members now refer to shared territorial development fees as the way for principals to share in the reps’ marketing costs. If I do my job and match the right reps and principals (reps and principals that gain a mutual benefit from each other), then the principal more than shares costs by providing reps with quoting, problem resolution, brochures, sample kits, website, lead generation, on-site training, on-site customer visits, trade shows, support, etc.
“Again, although I’m typically being paid by the principal, it’s my role as a ‘matchmaker’ to ensure that principals do everything equally in their power to hold up their end of the deal in supporting their reps. A successful, long-term rep-principal relationship can only work based on mutual trust and respect with constant, ultra-high levels of two-way communication.”
The views expressed in this article by Bob Johnson and Gary Giallonardo hardly cover all the aspects of discussions related to ‘shared territorial development costs’. However, they do illustrate the importance that reps and prospective principals should have an appreciation for the other’s point of view — and to engage in a dialog on the subject. If you have an opinion in agreement or disagreement with what appears here, we’d love to hear from you.
Reprinted with permission from MANA's AgencySales Magazine
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