Where Do Commissions Manufacturers Send to Manufacturers' Representatives Really Go?
By: Jerry Leth - MANA VP/General Manager
Sam Franklin’s* representative firm earned a half million dollars in commissions last year. But Sam didn’t get to keep it. Here’s how this typical manufacturers’ representative spends the commissions he earns.
In addition to himself, Sam employs two other outside sales people plus a support staff person who works from a home office. Each salesperson earns $85,000 and the inside person earns $45,000. By the time you add in payroll taxes and benefits like health insurance, the total payroll adds up to $302,770.
He also needs general business liability insurance, travel and entertainment costs as well as the expenses of maintaining a website and the CRM software they use. Total annual cost equals $45,060.
So, out of the $500,000 commissions the business earns, Sam gets to keep $152,170, less than a third of the total. A fair amount, but not excessive for an entrepreneur who launched his own business and accepts the risks of commission-based income.
Not realizing these facts, manufacturers sometimes decide to terminate the manufacturers' representative’s agreement and hire a direct salesperson. Said one: “I pay my rep $500,000, think how much I can save with a direct salesperson.” What that manufacturer failed to realize is that Sam’s company brought him $10,000,000 in sales, and a single direct salesperson couldn’t effectively manage that volume of business alone.
“Good” news for that manufacturer, though, was that soon that direct salesperson didn’t have to manage a $10,000,000 territory. Pretty soon it was just a $5,000,000 territory. Why? Because Sam’s customers knew him, trusted him, and wanted to buy from Sam. The direct salesperson lacked those relationships, so Sam moved half the business to a new competing line the first year after he lost the line, and the rest is in his sights to secure in year two.
Sam’s new principal really “gets it” and is thrilled to be writing large commission checks to Sam. “Every time Sam earns a nickel I earn $.95. I would be thrilled to pay Sam $1,000,000 next year, because that would mean I got $19,000,000. I love signing big commission checks, and I only hope Sam’s doubles every year!”