Manufacturers' Agents National Association Logo

Step 7 - Analyze Your Lines for Profitability

Back to Course Main Menu
Forward To Next Step 8 - Leverage Technology to Maximize Productivity

Skip to page section:

Principal relationships change over time. Sometimes, the changes are so gradual, you fail to notice them. Are all the companies you represent still as profitable as they were a while back? Invest time on an annual basis to perform a profitability analysis on your current lines. The analysis may bring out the fact that one (or more) lines you represent are not bringing a return on the time you invest in them. If so, time to make changes.

Line Card Profitability Analysis

Stop Wasting Your Time on Your Worst Lines

Changes Can Trigger Line Productivity Analysis

By Jack Foster

© iStock.com | frankpeters

Sometimes it takes a trigger to spur a rep into action. It might be something along the lines of a change in commission rates, new ownership taking over a manufacturer, or dealing with a new sales manager, but whatever the cause, reps report that performing line productivity analysis can be an indispensable tool when these changes occur.

That was the gist of conversations that took place in the course of a MANAchat devoted to the subject of reps carefully analyzing how profitable their lines are.

One rep started off the conversation by stating a fairly common predicament that many reps find themselves in: “As I regularly analyze my line card, I’ve realized that I’ve taken on several lines that had zero revenue at the beginning. I’ve had to take the necessary steps to actually create the market for them. Since these are manufacturers that are new to the market, I really have to struggle as I view them from a profitability standpoint. They’re not mature. It remains a constant struggle. That’s one of the things I have to figure out. At the same time, some of these companies want me to spend a large amount of time for very little revenue in return. I’m in a quandary determining whether it’s worth it or not. What’s the right amount of time to spend before you make a decision whether to keep them or not?”

Keeping those considerations in mind, the conversation continued when a couple of reps described how they put line productivity to use for their agencies.

“We’ve conducted these analyses for the last 7-8 years primarily on the recommendation from MANA. The execution of the analyses has helped us take a close look at our core lines and determine which ones are truly competitive and profitable.”

A second rep noted, “We review our lines on a quarterly basis and what these reviews do is to show us how we’re trending. Are we meeting expectations and what is our return on investment? Our process is relatively simple as we just comb through all of our manufacturers’ lines to make sure that we’re spending our time and resources in the correct areas.”

A third rep conducts a three-day retreat annually and a component of the retreat is the line productivity analysis. “Everyone in our agency participates in a survey and we discuss each of our lines. What we consider is more than just the dollars and cents attached to each line. Other considerations are whether the manufacturer is easy to work with, do they leave us alone and is the quality of their products consistent?”

Another rep explained, “Once a year, we simply stop the clock and let our manufacturers know that while we’re certainly aware of the fact they are constantly evaluating us, so too are we keeping an eye on them. We remind them that what we’re working with is a mutual relationship and what we’re striving to create is an atmosphere where the relationship works for both of us. This is hardly a master/slave relationship. We need them and they need us. We make every effort to work professionally, and we stress the fact that they should appreciate the fact that we’re independent businesspeople.”

The decision to arrive at the point where the agency terminates its relationship with a manufacturer can follow a number of different paths. The decision many times really depends upon one of those triggers cited earlier. Speaking to that point, one rep cautioned, “If you’ve been good in selecting your lines from the beginning and there really hasn’t been any stupendous change on their part, some change that makes them intolerable, don’t automatically make a change. If you start from a good place in your original selection and there remains fairly good alignment with your other products and with your customer base, don’t jump at the chance to terminate a line.” Admitting that his agency has dropped a number of lines on several occasions, he explained that “Sometimes you have to dance with your partner for an extended period of time before you really know if you’re a good fit or not. All I’m saying is be careful before making a decision.”

Echoing that view was another rep who explained, “I’ve been a rep for 45 years and my rule of thumb is that you never want to resign a line unless you absolutely have to. If there’s money coming in the door and there’s not an immediate need to resign, don’t do it, because you don’t know what’s around the corner and you might be making a huge mistake.”

Staying on the subject of whether the rep has started at a good place with his selection of lines, one rep described a situation he finds himself in presently: “I don’t know if it’s just me or not, but I’ve recently been whipsawed by some manufacturers I’ve been considering to take on. One time I was told by a very upscale company that they were going to take me on and then for no apparent reason they backed off. Then, two other companies said they had considerable business in the territory and wanted me to represent them. Thankfully, in the course of conducting due diligence, I determined they had very little — if any — business in the territory. These people have taken me off guard. As a result, I’m glad I didn’t align with them and then have to go through an analysis to determine whether they’re profitable for me. I think the honesty quotient is something important that has to be considered in any type of analysis.”

The importance of making the right decision when you start with a line was emphasized by several reps. An aid in making that right decision was the ability to learn all you can about a company before taking on the line. “Before I make a decision, I’ve made it a habit to speak with other agencies that represent a manufacturer. I can recall one instance where I was skeptical, even though the line looked like an especially good fit. But as it turned out, by talking to other reps I quickly ended my conversation with the manufacturer. And, it wasn’t because of any management, quality or commission reason, it was because the other reps let me know that this manufacturer didn’t really have enough volume for me to move forward.”

If after performing a line productivity analysis the rep firm is inclined to terminate a line, it’s not always a simple process, according to several reps. “Here’s one wrinkle that I’ve run into,” explained one rep. “While our overall analysis determined a specific line wasn’t all that profitable for the firm, one of our guys let us know he had great success with them and was able to collect very sizable commissions.”

Another rep who began his career as a manufacturer pointed to another situation he recalled when a rep made a serious error in terminating a line. “This was a rep who had been repping our company for about 30 years. At the time he was looking out the window at his retirement and he was collecting a huge commission on our line. He didn’t keep us in the loop and just let the business go. I don’t think he had a clear understanding of how much money we were sending him even though he wasn’t really working the territory as he should have.”

When it came to actually putting an analysis together, the group of reps who participated in the MANAchat agreed that there was a wealth of information available from MANA on the process.

Finally, at the end of the MANAchat devoted to this subject, there was a consensus among the reps who participated that was best stated by one rep who maintained, “Whatever your decision regarding your lines, we’ve all got to keep in mind that whether you’re collecting commissions or not, it’s not ethical to keep a line unless you rep them faithfully.”

↑JumpToTop

Line Profitability Remains Key to Rep Success

By Jack Foster

© Sergey Nivens | stock.adobe.com

The February issue of Agency Sales magazine profiled a MANA-member firm that at its beginning was willing to take on any line it could secure. Once the agency turned the corner to profitability, however, the agency owner explained, “Now we keep our product focus narrow and limited so we can effectively serve the objectives of the manufacturer, designer, builder and distributor.”

And elsewhere in this issue of Agency Sales, we describe how at its inception one agency took on 60 lines of products to represent. Now that agency has whittled its representation to a dozen because there’s no way you can keep track of that many lines.

This leads up to the importance of the subject matter of a MANAcast earlier this year devoted to the subject of Line Profitability Analysis.

At the outset of the presentation, MANA’s President and CEO Charley Cohon stressed the importance of regularly conducting a line profitability analysis when he said, “After you’ve signed on with a manufacturer to represent them, you may find that after three or five years, things have changed and you’re not really dealing with the same company.”

What can happen is that for any number of reasons (e.g., the company is purchased by another company; the manufacturer’s lines have changed and they no longer work for you; or, the rep firm simply decides the effort it puts forth isn’t worth the return it receives in commissions), it’s in the best interest of the rep firm to move on.

The process for arriving at that decision should be something the rep constantly keeps in mind and an analysis should be conducted frequently.

Performing the Process

When it actually comes to performing the analysis, Cohon explained that “One of the first things a rep should do is to take out their line card and separate primary from secondary lines. Usually there will be one, two or three lines that actually bring in the most in terms of commission. Then when you get to your secondary lines, you want to make a determination as to what might not be a great fit for the agency.”

He explained that the secondary lines that hold the most promise to continue with are those which are truly complementary to your primary lines and you’re able to ride the coattails of the primary line when it comes to presenting them to customers. What happens is that the agency ultimately earns a good return with a reasonable effort on those secondary lines.

As an example of a secondary line that might not be in the best interests for the agency to continue to represent, Cohon used the example of the automotive market. “Let’s say for example that you’re a rep with a line of adhesive products who calls on automobile tier-one suppliers. You can imagine that there are any number of adhesive products — products that allow pieces to stick together — that are needed in the production process. As an example, there might be adhesive products that are sold in 55-gallon drums that are a great fit for the agency. Well, along comes a manufacturer CEO for the adhesive lines and he looks at the profitability of selling those products in 55-gallon drums. He determines that the company is losing its shirt selling the product in drums. On the other hand, the company has realized tremendous profit in selling the very same adhesive to craft stores in one-ounce blister packs.”

Presented with the dual challenge of selling the adhesive in one-ounce blister packs and selling them to craft stores, the agency probably will make the decision that it’s no longer profitable for them to represent that line. As a result, a decision must be made. “This is obviously a glaring example, but it serves to show that a line may no longer fit on that agency’s line card.”

Contributing Factors

Cohon emphasized that there are a number of intangibles to consider when making the evaluation of what lines to carry. Among the considerations that an agency ought to weigh are:

  • How well does the secondary line fit with the agency’s primary lines, i.e., those lines that you spend most of your time with?
  • Is the secondary line what would be considered a “door opener”? In other words, is it a line for which the customer would normally make time to see the rep?
  • Weighed against the effort expended to sell the line, how much income in commissions does the secondary line generate?
  • While the agency may have their “toe dipped in the water” with the secondary line, what is the potential for future sales? Is it going to take off at some point?”
  • Is this line one that would serve to generate leads for the future?
  • Is the line easy to work with? (That always gives more weight for retaining a line.)
  • Is the line usually price competitive?
  • Is the line one that quickly responds to requests for quotes and is the manufacturer flexible to deal with them?
  • Does the principal provide quality products on time and pay its commission on time?
  • Are there a lot of post-sale issues and does the principal require a lot of reports?
  • Is there an absence of house accounts?
  • Is the line one that helps the rep break into new industries?
  • And finally, is there a chance the agency is already carrying too many lines? According to Cohon, “The number of lines an agency should represent varies by industry. I’ve seen firms with as few as six lines. However, in the lighting industry it’s not that uncommon to have 50-60 lines of lighting fixtures. In order for an agency to do a good job for its principals, it should be sure it’s representing an appropriate number of lines.”

These are all issues that the rep ought to keep in mind as it works its way through the analysis.

Prior to Resigning

Continuing his discussion of the analysis process, Cohon issued a word of caution considering what it should do when and if the decision is made to resign a line. According to Cohon, “In the interest of supporting the rep business model, if a rep decides a line doesn’t fit on its line card, you want to give that manufacturer notice that it’s simply not a good fit anymore. At the same time, you should respectfully suggest that it’s time for them to sign on with another rep. A good case can be made at this time that it would be beneficial for the rep to conduct some research to have two or three of your fellow reps to recommend that would be a good fit for the manufacturer.”

In addition, he noted that prior to resigning a line, it would be a good time to pull out and read the original agreement that was signed between the rep and the manufacturer. “There might be words that affect the mechanism on how you resign the line. You might have commissions that are due to you. You don’t want to lose credit for orders already sold.” He concluded by advising that prior to resigning a line, it would be wise to consult with a MANA attorney.

The Time-Honored Practice of Evaluating Lines

By Jack Foster

© Visual Generation | stock.adobe.com

The practice and the accompanying benefits of line productivity analysis are hardly new.

Consider the description of the process and the advice offered on the subject earlier this year by MANA’s Charles Cohon during the MANAchat described elsewhere in this issue of Agency Sales.

In addition, the subject was discussed and analyzed in depth in the Operations Manual for Manufacturers’ Representatives Firms, a lengthy publication produced with MANA’s assistance in 2006. In that manual the following endorsement for line productivity analysis was offered: “Regardless of the size of your representative firm, knowing and understanding each line’s profitability is a must. Without this knowledge, you may be focusing your company’s efforts in the wrong direction. Any method of analysis can be used, separately or together with others, but some measure should be used and used proactively. Having a better understanding of what lines are profitable is essential to the success and growth of any representative firm and should become a part of the culture of your firm. The analysis should be conducted on an annual basis at a minimum, and on a quarterly basis if possible.

“The knowledge you gain from a profitability analysis can do nothing but increase your awareness of what each line represents to your firm and how a line’s relative importance changes from year to year. From the analysis, you should be able to determine:

  • If you are truly making a profit on an individual line.
  • Which lines are paying the bills.
  • If you are spending too much time on a particular line.
  • If the amount of time spent on a line is an asset or detriment to your firm.
  • Which lines are slipping in terms of commission.
  • Which lines are ‘high pain and high maintenance.’

“A better understanding of line profitability will also help improve your relationship with principals. Your awareness of how important they are to your firm will be beneficial to all. In addition, you can use the analysis to focus your salespeople on selling what is profitable for them and the company.

“Profitability can be measured many ways, to one degree of accuracy or another. In the final analysis, however, you can relate a line’s profitability to how much time the line demands per dollar earned and how well it fits with the rest of your line list.”

Resigning Lines

Interestingly, taking that advice to heart, two years later, a MANA-member firm announced in Agency Sales that “…it was ending its relationships with several manufacturers and focusing its efforts on working with eight remaining ‘premier’ suppliers. According to the rep firm, this was done as the result of industry feedback with the goal of dramatically increasing customer service, end-user activity, specification, and demand creation.”

In explaining the decision to part ways with five long-standing, largely successful lines, the agency’s president said this decision “…will allow us to reposition our resources and assets towards the aforementioned premier manufacturers. With fewer lines to sell, our salespeople will have a more-focused product expertise, enabling them to effectively drive new products sales, which is crucial to distributors’ sales growth and profitability.

“During the course of the process, one of our goals was to identify that which we were truly good at. We didn’t want to be just okay or mediocre at anything — we wanted to be excellent. Once we did that, we had to determine what to do about it.”

Once having come to the conclusion as to what was going to be good for the agency, its customers and principals, the agency management moved on from some of the manufacturers it had successfully represented for years in order to focus on others. “We take great pride in the fact that we’ve been able to hit the quotas for the lines we represent, However, it’s very difficult to do so on a regular basis when you represent 14 or 15 lines. Invariably you and your team are going to be diluted.”

Arriving at the decision to end relationships was difficult, according to the agency president, “…because over the years we had developed close business relationships with some of the companies we no longer will be working with. But throughout the entire process, we followed our goal to make the best business decisions for us and the other people we worked with.”

In conclusion, when asked whether there might be anything other reps could learn from the moves made by his agency, the rep said, “There are so many unknowns in our business lives that we have no control over. The bottom line is that our destinies aren’t necessarily in our hands. That’s why it’s always so important to make the decisions you feel are best for yourself and your company. Then you just put faith in yourself and move forward. That’s what we’ve done, and we’re confident it will work positively for us, our principals and our customers.”

Those words sound very familiar to what MANA’s Cohon offered during the MANAchat earlier this year. If anything, it gives credence to the axiom, “The more things change, the more they stay the same.”

↑Jump To Top

Surviving a Change in Management

By Jack Foster

“You have the line and there’s a management change with the manufacturer. Now what?”

© MASP | stock.adobe.com

At the outset, the words of one rep should be taken to heart when that question is posed. According to the rep, who boasts of representing a number of lines for more than 30 years, “No one likes change and whenever there’s change in management or ownership of one of your principals, there’s a fair amount of trepidation. Naturally, problems can follow. At the same time, however, it would be wrong to paint all manufacturers with a negative brush in terms of their relationships with their reps.”

This rep went on to explain that while she has little or no unease with the majority of her agency’s lines, when a change is announced with a major line, you can’t help but be a little uneasy.

According to the rep, “Financial holding companies are buying manufacturing companies and putting incredible pressure on them to grow. For us reps more and more responsibility is being pushed down and expected of us. While commissions are not increasing — and sometimes decreasing — we are expected to fill out sales funnel reports and provide more service. Often, the companies we represent are in a mature industry. Expecting double-digit growth immediately and a high return on investment forces management to satisfy these anonymous faces with constant reports. We sell specialized, custom equipment. We cannot know all the time when a purchase order will be issued. We are afraid to put all of our sales ‘opps’ in the system and then get dogged to death. As independent reps, we are highly motivated. We sell nothing, we make nothing! In fact, some of these directives are dancing on the edge of IRS rules regarding independent contractors.”

With a thought to the future, she added, “My son has joined the business and I am concerned about the future of this business model. The pressure is compromising long-term relationships. Also, some manufacturer dictatorship styles are threatening long-standing contractual agreements. When you have repped a line for 30 years and are given ultimatums, the ripple effect through our industry is huge.”

To illustrate what can happen that causes her the type of frustration she refers to, the rep noted the following two examples:

  • “A financial holding company purchased one of our principals. Their big mistake was in thinking that the products we sell are commodities — that’s hardly the case. Then they began to put pressure on us to deliver orders in a hurry. That’s a big mistake in an industry that’s as mature are ours. This is all happening at a time when the economy is healthy and business is good. Every week they pressure us to submit reports. Maybe I could see that when business is bad, but certainly not now.”
  • “In another instance we went through a change in manufacturer management. The new national sales manager was someone experienced in working with mega-companies and on top of that he doesn’t like reps. He’s got a reputation for bullying his reps, and several of his reps resigned the account. What remains for us to do is to decide whether we want to continue to work under these circumstances. Then when you consider the size of the business we bring in (in excess of $3 million) that’s a lot to walk away from.”

What results in circumstances such as the rep described is that “We’re all feeling a certain level of disrespect. The reality of it is that I forgot more about our territory and the products they sell than they will ever know.”

Evaluating Line Cards

She concluded, “One possible solution to this problem is that every year we should be evaluating the manufacturers on our line card. If a company undergoes the type of changes we’re talking about, then perhaps the decision has to be made that they’re not a good fit any more.”

Striking a somewhat positive tone, another rep located in the East related some of his thinking when his long-tenured regional sales manager retired earlier this year. “Thankfully, the rumors we hear are that he’s going to be replaced with someone I know well and have worked with in the past. In that kind of circumstance it’s not necessarily as disconcerting as it might be. But having said that, if the new RSM was someone we’re not familiar with, it would give us pause.

“We’ll always do our level best to work with whomever they bring in, but if it doesn’t look like it’s going to work out, you’ve got to take a look at where that company sits on your line card and determine if it’s going to be worth the effort.”

Head Down and Working Hard

A Midwestern rep whose agency has been in business since 1975 has made every effort to follow his father’s advice as he regularly faces challenges from his principals. “My father always told me that ‘If you just keep your head down and keep selling, then everything will work out.’ I’ve learned that’s not always the case. Looking back over the 32 years I’ve been in business, most of our principals at one time were all family-owned firms. As business progresses, however, companies grow larger and they get purchased by another company. Sometimes those sales are good for us and sometimes they’re bad. Now that we’re dealing with several much larger companies, even though we’re performing the same functions that we ever did, problems arise — and those problems aren’t easily solved. In attempting to solve those problems, you make an effort to climb the ladder to the top decision-makers and you’re not always successful.”

He continued that one of the more painful experiences he’s suffered as an agency owner was “When we had to take the initiative to terminate our relationship with a principal. We had the line for more than a decade, but then came the change in ownership. Even though we continued to be a top performer, their management didn’t agree with the way we were working in the territory. They were one of our top lines and we took a major hit.”

Ever the realist, this rep maintains, “As your principals grow larger and larger and go through growing pains, as the independent sales guy, I’ve had to learn to deal with them. Often that results in taking on more responsibilities and paperwork. But in the long run, as a rep you have to change. If you stay stuck in the old ways of doing things, you’re doomed.”

Understanding the Agreement

After considering the question that began this article, another rep observed that “In some ways this is a new problem; in another way it’s not, it’s happened before.”

As to why it might not be a new problem, she noted, “It used to be that the person you signed your contract with was going to be with the manufacturing firm for a long time and they understood the terms and more importantly the spirit of the agreement. On the other hand, where it might be relatively new in many cases today, there is a faster change in management. Companies are changing hands at a pace we haven’t seen before.”

How can/should reps deal with these changes? “In order for the rep-manufacturer relationship to be successful it’s necessary that there be a true balance. On those occasions when circumstances have changed and the rep finds himself working with new manufacturer management, then there’s an excellent opportunity for the rep to engage in some education on the role of the rep. The bottom line is that when the manufacturer and the rep truly understand each other’s role, they form an unbeatable team.”

In conclusion this rep made reference to an “Editorial in the Field” that appeared in the March 2019 issue of Agency Sales. In that editorial, John Beaver, MANA’s chairperson of the Board, advised: “Being a first-class rep in some cases means being a good soldier. The trick is to survive until the nightmare ends, so go with the flow. I believe in the old saying, ‘Water seeks its own level.’ Eventually the person who is a nightmare either comes around or goes away. In either case, the unnecessary reports, excessive travel, and other unproductive activities fade away.

“And being a good soldier can pay some real rewards. That house account may one day be yours. Or you may be spared from a proposed commission rate reduction.

“That nightmare manager could someday be your best advocate at the factory. After all, factory staff is in the best position to remind upper management that sales don’t fall from the sky — sales come from the reps’ efforts, which sometimes involve a grueling travel schedule and 60-70-hour weeks. So, taking good care of reps is good business.”

A Manufacturer’s Perspective

No discussion of this subject would be complete without input from a manufacturer that has undergone a fairly recent management change. In this case, the manufacturer is a family owned business that can boast of a lengthy track record with its network of outsourced sales professionals.

According to the company’s president, “A good number of these consolidation moves that we’re speaking about have occurred among much larger companies. When those moves take place, it can involve the company taking on a much wider scope of products. As a result, perhaps there’s some justification in their minds when it comes to changing the business model. They may make certain moves because they feel they have the capability to save money.

“With us, however, since our inception more than 40 years ago, we’ve been in love with the rep business model. I couldn’t ever foresee another way of going to market. Because we sell specialized products we rely heavily on the leads our reps provide because of their ability to cross sell. If we worked solely with a direct sales force, we could never develop the number and quality of leads that our reps provide us.”

While this company does not make use of a rep council, the company president explained that an important tool he uses to ensure that company management and its reps continue reading off the same page is periodic meetings with its rep network. “This year, for instance, one week we had half of our reps come into the factory for two days. That meeting was followed the next week with a similar meeting with the remainder of our reps. During that time we conducted roundtables and asked them what we can do to improve. Finally, we put our reps together with each other to provide them with an opportunity to share their concerns — and let them work through their own problems.”

The company president went on to explain that his company certainly undergoes changes in their sales management, but when that occurs, “There’s never a change in our philosophy as it relates to our reps. There’s never been a change in our sales culture, and there never will be.”

↑Jump To Top

Back to Course Main Menu
Forward To Next Step 8 - Leverage Technology to Maximize Productivity