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InHouse versus OutSourced Sales Force Which Is Best for Your Business

Written by: Alec Schibanoff

Article Overview: In building a sales force for your business, you have a critical choice: Hire a traditional sales force of employee-salespeople or out-source your sales to a network of manufacturers’ representatives. Which option will produce the best results for your business?

InHouse versus OutSourced Sales Force Which Is Best for Your Business

Some businesses have a sales force composed of employees who work for the company as employees. Other businesses have a network of independent reps, known as “manufacturers’ reps”, “manufacturers’ representatives” or “manufacturers’ agents. And some businesses have a hybrid sales force composed of both. What sales force structure is best for your business? There are many factors to consider.

First, in case you are not familiar with the concept, let’s define what a “manufacturers’ rep” is.
• Multiple Principals: A manufacturers’ rep sells the products of several companies, and these companies are known as the rep’s “principals”. In fact, the term specifically uses the word “manufacturers’” with the unusual “s’” because “manufacturers’” is a plural possessive. The whole idea behind a manufacturers’ representative is that he represents several manufacturers.
• Non-Competing Principals: However, the manufacturers a manufacturers’ rep represents are always non-competing companies. They are what are called “sympathetic” suppliers. While their products do not compete directly with each other they are used by a common customer base. For example, a manufacturers’ rep might call on computer, data storage, telecommunications, medical electronics and other high-tech equipment manufacturers selling plastic parts, metal parts, rubber parts, enclosures, housings, latches and related hardware, insulators, backplanes, printed circuit boards, integrated circuits, switches and connectors, and other parts and components needed to build such products.
• Straight Commission Sales: A manufacturers’ rep is paid a commission on the sales he generates, usually straight percentage on net paid invoices.
• From One Person to 15 or 20: When the manufacturers’ rep business was created at the height of the Industrial Revolution in the 1880s and 1890s, most reps were just that, a rep–one man out making sales calls traveling from town to town by train. In the movie “The Music Man” a manufacturers’ rep comes to town looking for the Robert Preston character, a con artist who is poisoning the emerging trade’s reputation. Today most manufacturers’ reps are small businesses with from one or two to ten or more field sales reps and a support staff.
• Independent Contractors: And whether a manufacturers’ rep is just a one-person agency or a larger more sophisticated business, manufacturers’ reps are 1099 independent contractors.

What Reps Do NOT Do: Manufacturers’ reps call on businesses, but they also sell to government agencies and not-for-profit agencies. That means that if you sell your products direct to consumers, manufacturers’ reps are not an option. Also, manufacturers’ reps are really best equipped to sell products, not services, so if you are primarily offering programming, consulting, maintenance, design, repair or other services, manufacturers’ reps are really not an option.

NOT Limited to Manufacturers: When manufacturers’ reps first appeared in the last decades of the 19th Century, they worked exclusively for manufacturers as the name implies. At that time the US was well into the Industrial Revolution and had a primarily manufacturing economy. Today, you do not have to be a traditional manufacturer to use manufacturers’ reps. Businesses that import products, distribute products, or purchase and modify or add value to products they then resell, all use manufacturers’ reps quite successfully.

Benefits of Manufacturers’ Reps: Many industries, especially those that sell industrial products, almost exclusively use manufacturers’ reps because of the many benefits they offer the companies they represent.
• Selling Costs Are Fixed at a Flat Percent of Sales. When sales are down, selling costs are also down, and selling costs only go up after sales have increased.
• Selling Costs Are Back Loaded: You can hire a salesperson, pay him thousands in salary or draw and expenses, and he might generate little or no sales. Reps are only paid after they make a sale, and often only after the invoice has been paid. If your plan is to dramatically grow your sales, it is attractive to have that cost back loaded and not on the front end when cash is tight.
• Manufacturers’ Rep Know Where the Bodies Are: The whole idea behind recruiting a manufacturers’ rep is that he already has a customer base to which he is selling the products of his other principals. Reps do not have to prospect or develop relationships with customers and prospects. They already have an established customer base, and they should be able to look at your product and immediately determine who among their account base are the best prospects.
• They Can Integrate Your Products with Sympathetic Products from Other Manufacturers: The really sophisticated manufacturers’ reps will actually create integrated solutions for their customers, bringing them a package of parts or products to meet their needs.

Drawbacks of Manufacturers’ Reps: Many businesses have switched from manufacturers’ reps to a direct sales force for several reasons.
• You Only Get Part of a Rep’s Time: Since every manufacturers’ rep has multiple principals, you will only get part of his time, attention, talent, energy and resources. It does not take a math wiz to figure that if a manufacturers’ rep has eight principals, you will probably get about one-eighth of his time. That’s just five hours out of a 40-hour selling week!
• They Can Get Expensive: While reps are only paid for what they sell, we have a client that pays out over $200,000 a year in commissions to just one rep! For that money you could hire three full-time company salespeople. On the other hand, those three company reps might never have landed the millions of dollars in new business that the rep did!
• Manufacturers’ Reps Are Independent Businesses: You will not get sales reports or call reports from manufacturers’ reps. In fact, understand up front that when you forward a lead to a rep, you will probably not even get back any feedback on the lead!
• Reps Require Support: A manufacturers’ rep is the classic example of the Jack-of-All-Trades/Master-of-None. While some of the reps that sell industrial parts and components, especially custom-made parts and assemblies, are degreed engineers, they will know just enough about your products, your technology, your company and your capabilities to identify a good prospect. Much of the technical interchange–as well as pricing, speccing and proposal development–will have to be done by your company personnel.

Businesses That Are Well Suited to Selling through Manufacturers’ Reps: There are many businesses for which a network of manufacturers’ reps makes a lot of sense.
• Your Competitors All Sell through Reps: If ALL of your competitors are using manufacturers’ reps, that tells you something!
• You Sell Parts and Components That Are Integrated with Other Parts and Components: This is the type of selling for which manufacturers’ rep offer the most value and get the best results.
• You Need a National Sales Force, and Right Now: If you simply cannot afford to hire the 15 to 20 salespeople it will take to give you national sales coverage, a manufacturers’ rep network is a very attractive and affordable alternative!
• The Selling Cycle Is Relatively Short: If selling your products requires identifying a need, getting out a sample, specs and/or a quote, and then going back and closing the sale, that is what manufacturers’ reps do, and they do it very well.
• There Isn’t Enough Business in a Sales Territory to Support a Full-Time Salesperson: A manufacturers’ rep will take on a product line that only produces $40,000 or $50,000 in commissions.

Businesses That Might Want to Have a Direct Sales Force: There are other businesses for which manufacturers’ reps are not going to work.
• All of Your Competitors Have a Direct Sales Force: If NONE of your competitors are using manufacturers’ reps, it may be a concept that’s been tried and failed. On the other hand, it may just be that it was never attempted by any of them.
• You Sell Technically Sophisticated Products and Systems: The more technical and sophisticated the products you sell, the more sense a direct sales force makes since it can be trained to understand, demonstrate, apply and explain your product line.
• Your Customers and Prospects Are Fairly Close Together: If your account base is in fairly close proximity, a direct sales force can be very efficient. For instance, 95% of all the brokerage houses in the US are in just three cities. All the pharmaceutical companies are in the New Jersey-Philadelphia corridor. All the glass plants are in Western Pennsylvania and Ohio.
• The Selling Cycle Is Long: If the sales cycle for your product extends to months, few manufacturers’ reps will stay with a prospect that long, so a direct sales force may be necessary.

Businesses That Should Consider a Hybrid Direct-and-Rep Sales Force: There are still other businesses for which a hybrid of both company salespeople and manufacturers’ reps makes a lot of sense.
• Selling to Totally Different Markets: We have a client that sells to power plants, paper mills, refineries and food processors. We recommended they use manufacturers’ reps to sell to the power plants and paper mills, but a direct sales force to call on the refineries and food plants, and the structure has been very successful for them.
• You Need to Test Both Sales Forces: If you cannot really determine which is best, you can recruit manufacturers’ reps to cover part of the country or to call on one or more vertical markets, then hire a direct sales force for a different geography or industry, and the see how the two concepts work.

Recruiting Manufacturers’ Reps: You do not advertise for a manufacturers’ rep as you would advertise for an employee salesperson and, unfortunately, there is no central database of manufacturers’ representatives. A very good resource for businesses that sell through reps or are considering selling through manufacturers’ representatives–as well as for manufacturers’ reps themselves–is the Manufacturers’ Representatives National Resource Center at www.manufacturers-representatives.org.

Hiring just one salesperson and recruiting just one manufacturers’ rep are both expensive and time-consuming–but totally necessary–investments, so each must be considered very carefully to make sure the investment produces a healthy return.

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