How customers buy is challenging the traditional role, function and purpose of the distributor field sales position. But many distributors have resisted changing their approach to sales for fear of losing sales reps, customers or both to the competition. This article, the first of a two-part series on the changing role of distribution sales reps, examines what’s driving the shift and why distributors should act.
Join Indian River Consulting Group and MDM for Sales GPS, a live event on the future of field sales. Learn more at SalesGPS2017.com.
The B2B world of buying and selling continues to change at an accelerating rate. The traditional self-directed field sales rep has become the 800-pound gorilla in the room, wielding power far beyond the impact he or she has on the top lines of most of today’s distributors.
Despite this disparity, the field sales rep role has remained largely unchanged. We now have technology that can help us serve the customer more efficiently, as well as tools such as CRM systems, smartphones and tablets, but most field sales reps are still doing things the same way they were done back in the 70s and before. What’s more, most incentive plans are still based on a percentage of gross margin generated within the rep’s assigned customer base.
This is happening despite the fact that the way customers buy is shifting. Research consistently shows that customers value the inside sales function more than the outside sales function. It also reveals that customers now complete most of their purchasing evaluation before they ever reach out to a sales rep.
The cost of the field-selling function for most distributors is roughly 15 percent to 20 percent of total gross margin. In competitive bidding situations, the range from low to high bid is less than 4 percent, unless someone makes a mistake. In most situations, the need to fund their field sales function is the difference between winning and losing.
So why has the function remained largely unchanged? Why do distributors continue to invest in field sales when the market is telling them to change their approach?
The underlying belief is that the economic value of the relationship is between the sales rep and the customer, not the distributor and the customer. Distributors are afraid that if they introduce too much change, sales reps will quit and go to a competitor – taking customer business with them.
Distributors are also afraid of losing business if they eliminate the traditional field sales role and substitute inside sales and electronic ordering. If we don’t call on the customer, another competitor will send in their field sales rep and steal the customer away.
This fear is deep-seated and pervasive. The industry has generated myths around why the field sales rep model can’t change. For example: “You really don’t understand. My customers are unsophisticated and have chosen to buy from a trusted field sales rep. That is the way that my industry works, and we can’t change it.”
Unfortunately, this belief has become a self-fulfilling prophecy.
Bought or sold?
According to the National Association of Wholesaler-Distributors 2016 Cross Industry Compensation Study, the typical North American field sales rep working for a privately held distributor earns $81,037 a year. Assuming a 27 percent gross-up to cover employer taxes, benefits, insurance and travel, costs rise to $102,917 per year. Using a typical number for sales calls of five per day, or 1,250 per year, a sales rep costs $82 per sales call.
Imagine this scenario: A sales rep walks into a customer with a yellow sticky note on her forehead that says $82. The customer asks: “What does it mean?” The sales rep replies: “That is the extra price you are paying today because I am visiting with you.” Many customers would choose to keep the $82 instead. It is simply a question of value provided for the cost incurred.
Many senior sales executives would say this scenario misses the point. Their response would be something like: “I pay my field sales reps to capture new business and share of wallet with their customers. They work with my strategic suppliers to introduce new products and help solve technical problems for their customers. The role of a sales rep is to disrupt the customer’s supply chain with their
existing suppliers so they choose us instead. This is the foundation of market-share growth.”
Sounds great but it is a data-free opinion, an affirmation of faith in what worked before. For any distributor, well over 90 percent of the products that they sell to their customers are the same products those customers previously purchased. So are those products being sold or are they simply bought? Did a field sales rep just happen to be there at the time of repurchase?
We have done the same analysis for dozens of distributor firms. The lowest number we have seen in 29 years has been 87 percent as repurchases. For most it is more than 96 percent. When faced with this data, the senior sales executive typically says: “My reps also prospect and bring us new customers.” While this may be true for a new rep in a new geography, is it really true for reps in established territories?
We did a study many years ago for a distributor with hundreds of field sales reps. We took a subset of the reps that had been in their territories for two years or longer, which was around 800. We then measured total sales to customers who had customer-creation dates less than 12 months as a percentage of each rep’s total territory sales. Sales to new customers as a percent of total sales was low. So low that when we rank-ordered the 800 reps from high to low, the largest value was 0.7 percent. The most frequent result was 0 percent.
The field sales reps were not prospecting for new business in established territories. They were tasked with introducing new products and capturing customer’s spend with solution expertise but more than 90 percent of the gross margin generated was from the same products that their customers purchased repeatedly.
Evolution of sales
Wholesale distribution’s sales model follows the Walter Friedman book Birth of a Salesman pretty closely. We typically hired an energetic, ambitious young man who probably just got out of the armed services as an officer and had a wife and 2.3 children. We put him to work in the warehouse for a while, ran him through the other functions and put him out into a “Rest of the World” territory, created when the other sales reps gave up their low-value accounts to create the new territory.
We told him to sell himself first because people like to buy from their friends. We went on to tell him to think of his territory as his own business. We then gave him a draw against a commission for a period of time to help develop a revenue base. There was an implicit transaction that if he worked hard, he could build something of value that would effectively belong to him going forward.
Distribution business formation was strongest in the 50s and 60s; at the time, this sales rep business model was perfect. Startup firms were entrepreneurial and undercapitalized. But the rep, after the guarantee expired, was essentially a variable cost. It was linear, but cost was not an issue in the high-growth period that followed. The distribution industry grew much faster than GDP, driven by new product lines and expanded geography. Scale produced better supplier pricing, and all was good in the world.
By the time the 90s arrived, today’s $5.3-
trillion industry of more than 245,000 wholesale distributors had created a deep-seated culture around a self-directed sales force.
Distributors built a structure around the sales force with sales meetings, product training, call reports and the like, but each rep still exercised considerable judgment with respect to how they invested their time – and much of that was driven by how they were paid. Our first research project for NAW, summarized in our book What’s Your Plan? Smart Salesforce Compensation in Wholesale Distribution, was around the effectiveness of field sales incentive programs. One of the punchlines was: “If you want them to sell hammers, but you pay them to sell shovels, then you will sell a lot of shovels.” Another key takeaway from that project was discovering that the key determinant of territory sales volume was tenure, not performance.
Given the high repurchase rate, field sales reps became reluctant to risk their existing revenue stream to advocate or push a new and unproven product.
In fact, in some cases the sales rep negotiated on behalf of their customer with their own management. Given the less reliable supply chains of that day, the sales rep often proved their value with
heroic recoveries when the supply chain failed. Reps knew that their economic benefit and market power were in the trust they had developed with their customers. They could change employers and, in many cases, the customers would follow. This would have been uncomfortable for the distributor owner, but it was a sovereignty conflict that could be managed.
This cowboy approach to the market created that 800-pound gorilla when the market shifted in the late 1990s and early 2000s.
Forces of change
The most powerful forces of change in the late 1990s and early 2000s were in how customers buy. Customers discovered they could improve their cost positions by leveraging their purchasing power, and national accounts were born. Distributors felt significant competitive pressure as the global race to the bottom developed, putting a premium on productivity and cost efficiency. The combination of Jose Ignacio Lopez’s revolutionary auto part purchasing at General Motors and the rise of Wal-Mart in the 1990s let the efficiency genie out of the bottle — and it never went back.
In the 2000s, the industry saw the rise of the Internet and a dramatic increase in price transparency. This was coupled with gigantic strides in supply chain efficiency, and reliable delivery became the ante to even bid on a piece of business. Information management and technology became key determinants in customer service level, which diminished the role and impact of the field sales rep.
How did distributors respond to these changes? They invested in technology, central distribution centers and productivity improvements. With respect to the field sales function, many added CRM systems, tablets and sales technique training along with incentive changes.
Few actually dealt with the fundamental role. The field sales rep was a generalist and self-directed, so many reps added value by providing “free or special services” to their customers to retain the business, allocating their time as they saw fit. This was essentially an artisan process produced by a self-directed field sales business model.
It worked but it was economically inefficient. The majority of distributors still have expensive generalist sales reps completing many tasks that could be completed by lower-cost resources. Examples include delivering product to a customer and even receiving and putting it away, bringing sold equipment online for free, creating quotes on behalf of the customer or putting in special inventory without a purchase order.
The gorilla in the room
Distributors need to address the 800-pound gorilla in the room – an aging field sales rep who has been self-directed and is expensive compared with other selling alternatives.
Today’s field sales reps often own considerable relationship equity that will not transfer well when they retire. They are paid some version of an individual incentive based on volume that promotes independence from the rest of the organization. They are supposed to perform a myriad of tasks well and be great time managers.
It can’t be ignored: The role of the traditional field salesperson is rapidly changing. A distribution company can no longer survive with self-directed sales reps who are torn between masters. Distributors must evolve their sales model to be management-directed and more responsive to changing customer demands in how they shop and buy.
Part 2 of this series will address what’s disrupting the relationship between the field sales rep and the customer, as well as what the future of sales looks like for successful distributors.
Mike Marks is managing director of Indian River Consulting Group and specializes in helping distributors and manufacturers accurately diagnose problems and identify risk-bound alternatives so they can take their next steps confidently. Call IRCG at 321-956-8617 or visit ircg.com.
Learn more about or register for Sales GPS at SalesGPS2017.com.