One of the biggest costs for a small business is personnel. Yet with a new product or service, sales personnel -- either on your payroll or working on commission -- are the primary way of getting your product out into the world where it has a fighting chance.
A good sales force can make your product. A lackluster one not only doesn't bring in money -- its payroll can devour profits.
``The primary advantage of having your own direct sales force is control,'' says Steven D. Popell, author of ``Big Profits From Small Companies'' (Lomas Publishing, Mountain View, Calif.)
You control the sales reports, quotas, and changes in commission schedule. If you have a high marketing budget, an established territory, and if your product has a complex technical component, your own salespeople could be your best choice.
The disadvantage, he says, is that you have to support your sales people whether or not they are successful in selling your product. Even if they are on straight commission, they may have an expense allowance, or draw, and they absorb a certain amount of overhead while they are employed by you.
In contrast, if sales representatives (``reps'') don't sell your product, they don't get paid. A sales rep is an independent agent that sells for many different companies for a commission. The costs -- and the risks -- are substantially lower.
The problem with reps, though, is that you have less control over them. They usually have many lines of merchandise besides yours to sell. They typically spend most of their time on their ``bread and butter'' lines, the ones that bring in the most income.
And there are still costs of maintaining reps, Mr. Popell says, although they are fewer: the expenses of telephone calls, printing up marketing brochures, and sending out someone from headquarters to help them.
Also, once sales in a territory are built up, the commission you pay to reps may be more than your expenses would be for your own salesperson.
Because of this, managers will often use reps to build business in a territory, then dump the rep and put in salespeople in an attempt to cut costs, Popell says.
But this is not always the best way to do business, he contends. The rep's skill has built up the territory. The new salesperson may not be as effective, may not know the territory, and may not be as experienced in sales of your kind of product. He won't necessarily have an ``in'' with existing accounts -- and, of course, the new salesperson has to be trained.
Instead of replacing good reps, says Popell, it makes sense to pinpoint those who are not doing well in territory that you feel has good potential. Replace them one by one with your own salespeople to build up an effective nationwide sales effort.
Distributors -- who buy your stock and resell it to their customers -- can help you gain entree to large accounts that would be difficult to get on your own, such as department store chains. They can also sell economically to small accounts.
Your markup is smaller, however, when you sell to distributors, because they need to take a profit, too.
If, for example, you manufacture an item for $40 and sell it for $100, your gross margin is $60, or 60 percent. The distributor, though, demands 40 percent off retail. That leaves you only $20, or a 331/3 percent gross margin.
Selling to a distributor at a reduced price is worth it, says Popell, if you are able to reduce your manufacturing and marketing costs through a higher sales volume to bring in a higher overall profit.
The price of your product can also help determine the kind of sales effort you need to employ.
If your product is a $3,000 widget, for instance, a tenth of that, or $300, would be a good sales cost allowance. If you estimate getting every fifth sale, your allowable sales cost drops to about $60.
Since the cost of a sales call can average more than $100, using your own salespeople to sell this product is not a good idea. Sales reps could afford to spend $60 per call, though, as they are selling other products at the same time.
If your product has a price tag of $30,000, it would make sense to spend $600 ($3,000 divided by 5) per sales call.
It is not necessary to choose only one of these alternatives -- direct sales force, reps, or distributors -- Popell emphasizes. You might want to use your own salespeople in your local area and in proven markets, and reps or distributors in other parts of the country, he suggests.
Eleventh in a series. Next: How a microcomputer can help your business.