When manufacturers contact manufacturers’ representatives in territories where they have no existing business, those they reach ask for a “Market Development Fee.” This fee covers the additional costs of developing sales for the principal. It does take more time to develop sales in a new market as opposed to growing an existing level and that costs the manufacturers’ representative more.
As a manufacturer, you may ask yourself, “Why do this? I can probably find a rep who will take on my line without me having to pay them a Market Development Fee.” That’s definitely true, you can do that. The question you need to ask yourself is, “How much will that cost me in the long-term?”
Manufacturers’ representatives are not all created equal. Fortunately, there are a number who perform exceptionally well for those they represent and these usually won’t sign an agreement without a Market Development Fee. Others perform at a lower level and may sign an agreement without a Market Development Fee.
Let’s look at the cost implications.
You sign up a rep with no Market Development Fee, but because of their lower performance, they sell only 60% of what a higher performing rep would have.
Let’s say your potential annual sales in that territory are $500,000. That means the rep you signed up sells $300,000 per year. If your margin is 20%, that means you make $60,000 in profits. If the relationship lasts 15 years, that’s $900,000 in profits.
You invest in a $2,000 monthly Market Development Fee for 12 months and sign up a really high performing manufacturers’ representative who sells $500,000 per year. In the first year, you now make $100,000 in profits, $40,000 more than if you signed up the other manufacturers’ representative. Over 15 years, that totals $600,000 more in profits, $576,000 when you deduct the $24,000 Market Development Fee.
Imagine a one-time $24,000 investment that brings a $576,000 ROI. Why wouldn’t anyone do that? Think about it.
Manufacturers, before you sign an agreement with a manufacturers’ representative, be sure to conduct a very thorough and complete interview process to make sure they are high performers and will deliver the higher sales volumes. Read the Selecting the Right Representative or Principal Partner special report found in the member area of the website. That guides you through the process.
Manufacturers’ representatives, when you negotiate an agreement that includes a Market Development Fee, be sure to exceed the principal’s expectations. Please consider providing monthly reports showing how you use their Market Development Fee to get their products established in your territory.
Work with each other as strategic partners so it works well for both of you and lasts a long time.