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Change Your Commission Structure, Fast!The Final Sayye by Gary Kayye
Now it's really a new economy.
The dot-bomb economy was hailed as the new economy but after September 11, 2001, no one denies that we are in a new, new economy. Military spending is up, churches have more money for technology than corporations, the home theater market is booming and any technology that's security-related is taking a front seat to virtually all other sectors of information communications markets.
And margins continue to erode. Product margins are not rising. With few exceptions, ProAV manufacturer products are being sold below list price at something commonly referred to as a "street price." Even systems aren't immune to the reduction to profit percentages in the world of the ProAV sales person.
So what's a ProAV integration company to do?
Change your commission structure. Think about it. The Sales Department has not been the most profitable part of the average ProAV dealer in years. In fact, it's not even the second most profitable department. In most cases it's dead last, after rental, service, design/engineering and installation. So, all the "customer service" or labor service-related departments are more profitable than sales. Don't believe it? Figure it out for yourself.
So, if service departments are more profitable than sales, then why not commission salespeople appropriately? Why continue to commission sales more? Or, even the same? Shouldn't service sales (i.e. selling service agreements, design contracts, etc.) be commissioned at a higher percentage (or rate) than selling products?
As the ProAV market continues to mature and the projector moves closer and closer toward a commodity (if you don't think it's a commodity yet, look at the last three companies to get into the market: Compaq, Dell and HP), product margins will continue to decline. It just plain makes sense. And you certainly can't blame the manufacturers -- okay, maybe you can -- but it's not going to make a difference. They need to sell more products to survive as their margins have eroded as well. Raw component prices are unstable. Technology has driven the cost of goods higher as customers and OEMs have demanded a more competitive price. And they need to sell more and more product to compete. We (the ProAV market) certainly can't sell the numbers they want and need to sell. We don't reach anywhere near the numbers that a PC reseller reaches. So, consider it a done deal.
Move on to where the money is. Service. Selling service agreements, design engineering, integration (even integration services on other people's/company's jobs) and rental services is more profitable than selling just gear. So encourage it by structuring your company's commission plan to sell services over products. There's no simple, secret formula. Just pay a higher commission percentage on a systems sale when selling services versus selling products. Make it 1%, 3%, 10% higher, I don't care, just make it higher.
And, speaking of services, isn't training a service? Shouldn't that be sold as well? There are a select few integrators out there who have realized that serving a customer/client goes much further than selling, integrating and servicing an installation. It means teaching their clients how to use the stuff more effectively. Not just to use the gear -- that's should be included in the integration contract. I mean making presentations, making handouts, making the message clearer and making better presenters. That's a service customers need almost more than all others. Just ask, they will tell you.
And what about rental -- the foundation of the ProAV market? What ever happened to that as the model for funding a business? If you don't have a rental department, get one. A well-run rental department is not only the most profitable segment of a well-oiled AV dealer, but it also fills the pipeline of customers, encourages loyalty (remember that?) and provides an AV dealer with one heck of a demo inventory at virtually no cost. Have you noticed that four of the top five AV dealers in the world have huge rental departments? Rental is service, too.
Oh, and by the way, I don't see a reversal on the product margin erosion trend real soon. I doubt if too many manufacturers will wake up one day and say, "Hey, I'm going to buck the trend and raise my margins and become less competitive with all my competition."
Unless they get rid of those useless list prices -- but that's another story.
Gary Kayye, CTS is Chief Visionary at Kayye Consulting, Inc., a Chapel Hill, NC-based marketing consulting firm that serves the ProAV and Home Theater markets. In addition to strategic marketing consulting, Kayye Consulting, Inc. is also a training development company. Gary can be reached via e-mail at email@example.com or through his Web site at www.kayye.com.
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