No to ‘Value-Added’ Plans –Farquharson/Tedesco

“Hey Bill, Let’s try something different this month. How about dedicating our next two columns to scratching the surface of sales compensation?” —T.J.

About a month ago, I gave a talk to a bunch of printers and finishers in Chicago. Sales compensation plans were on this group’s mind. In this column, I’d like to tackle one component: Payment on “value-added” services. Whenever this topic comes up with clients or industry friends, my vote is a resounding “nay.”

Imagine two printing industry sales reps, Joe and Jane, working for competing commercial print shops. Both are bidding on the same job for a new customer, which consists of printing and postpress services that need to be outsourced.

Joe’s company is run by a CFO-type who says, “We print. Our future is print. We’ve invested heavily in our pressroom, along with a few additional closely-related capabilities. We have a ‘value-added’ sales compensation plan: Sell what we do in-house and that’s it. If we have to buy it out, we ain’t gonna pay commission on that part of the job.”

Jane’s company is run by a sales-type who says, “Gimme the business. We compensate salespeople based on how much revenue they bring in, not on how much of the work is actually done in our plant. Sure, we’re going to mark up buyouts appropriately—more than 20 percent, of course—but we’re not going to let this job and client slip away. The heck with ’value-added.’ We’re paying our salespeople on the whole job.”

What do you think will happen in this scenario? Printing sales reps are motivated to do what it takes to say, “Yes, we can do that!” Joe and Jane are no exceptions. But, more importantly, printing sales reps are rational creatures who work to their incentive plans.

Jane will outsource the part of the job that her company would do inefficiently or can’t do at all. On the other hand, Joe will do his best to convince the prospect to restructure the job to meet his own capabilities. Jane’s less-restrictive sales compensation plan gives her the freedom to work to the prospect’s best interest, not her own.

The ‘Value-Added’ Conundrum

Value-added comp plans reduce print sales reps' willingness to problem solve because they're incentivized to work in a small sandbox: Either they can do it or they can't. Less restrictive sales plans based on total revenue allow salespeople to play in a much larger playground and are free to pursue client needs. Of course, reps working under total revenue comp plans still look for ways to tweak job engineering specifications for use and cost advantages, but they're doing it for the client, not for themselves.

How would Joe and Jane react to the following opportunities?

• Job 1: $100k miniature folding job

• Job 2: $50k polywrapped and mailed booklet with a customized reply form inside the book matching the address on the outside cover

• Job 3: $25k plastic spiral job with laminated covers

Assuming neither Joe nor Jane's employer has miniature folding, automated plastic spiral inserting, laminating, polybagging and inside/outside inkjet imaging equipment, this is what each would probably say:

Job I:

JOE: “The miniature folding portion of this job is 90 percent of the value of this job. We’ll take a pass.”

JANE: “Bring it on baby! We have the perfect miniature-folding partner for this job. I’ve been in their plant many times and, rest assured, we’ll take complete responsibility for the whole thing; you don’t have to worry at all.”

Job 2:

JOE: “Yes, we can bid this, but let’s substitute shrink wrapping for polywrapping. Also, rather than binding the reply card inside the booklet, let’s lay it on top of the non-addressed side of the booklet before shrink wrapping.”

JANE: “Got ’cha covered. Polywrapping is 1/4th the price of shrink wrapping and perfect for this job. Sure, we can save a buck by onserting a free-floating reply card on the backside of the booklet before polywrapping, but is this in your best interest?

“A bound-in reply form would allow subscribers to take action either when they first open the package OR at anytime in the future. Onserts usually get thrown away unless they’re used right when the package is opened the first time. Are you sure you want to do this?”

Job 3:

JOE: “Instead of expensive plastic spiral and laminating, how about double-loop wire and UV coating instead?”

JANE: “Substituting double-loop wire is a fine option. An advantage of double loop is that there is no ’step-up’ as pages are turned. However, double-loop wire, if crushed, becomes useless whereas you can stomp on plastic spiral binding elements and they spring right back to form. It’s your choice; we have automated manufacturing resources for either plastic spiral or double-loop wire. Regarding UV, yes it is a lower cost option than laminating. I can talk you through the benefits of each and help you make the right decision that’s best for your needs.”

Get the point? Because Jane's not tied to a restrictive, value-added sales comp plan, she is properly incentivized (i.e., free) to work the job to her customer's best needs. Joe, a slave to his value-added comp plan, will work to shoehorn the job into his employer's plant, regardless of whether or not it's in his prospect's best interests.

A Peek into the Numbers

Let’s consider the $100k miniature folding job referenced above. In this case, $10,000 of printing should generate about $1,000 of net profit. For the outsourced $90,000 portion, a 20 percent markup will generate $18,000 of incremental income, of which we can easily assume at least 50 percent will be left over in contribution margin after appropriate management and admin costs are deducted. This leaves at least $9,000 additional profit, which is significantly greater than the $1,000 generated from internal operations. Better yet, this printing company still has a lot of capacity to produce core business.

You can run this scenario further. Perhaps the person awarding the miniature folding job has other print jobs up for bid. Maybe there are colleagues at the same business who also need printing work. What if this company has a corporate parent and sibling companies that appreciate print vendor referrals? Jane, having been able to get her foot in the door with this miniature folding job, has a leg up on this profitable referral base.

Dick Gorelick, an awesome friend of mine who passed away a couple of years ago, was spot on when he said: "The definition of knowledge has changed. Knowledge used to mean knowing how to do something. Now, it means knowing where to go to get something done."

Printers should give the boot to value-added sales compensation plans, freeing up their salespeople to focus on what they do best—providing the best possible solution to customers' communication challenges. Who cares if some of the job is done with the help of trusted partners? PI

About the Authors
T.J. Tedesco is team leader of Grow Sales, a 16-year-old marketing and PR services company. He is author of the newly-released "Direct Mail Pal 2012" and seven other books. Contact Tedesco at (301) 294-9900 or e-mail tj@growsales.com. Bill Farquharson is the president of Aspire For (www.AspireFor.com). His Sales Challenge can help drive your sales momentum. Contact him at 
(781) 934-7036 or e-mail bill@aspirefor.com.