Driven by Sales...

"Nothing happens in a business until a sale is made ~ Anonymous

The third Tuesday of each month is reserved for a happy-hour get together with three of my close friends who also happen to be business owners.  None of us are competitors in any way and our group comprises of a retail business, a service provider, a custom software solution provider and a manufacturer (me).
 
We typically spend the first hour discussing with one another, the changes that have taken place in our lives since our last meeting, interesting observations and/or commentaries about current events. 

The second hour is spent dissecting a single business topic that is general enough to span all of our various business interests and industries.

These topics might include:

• How do we attract more customers to our businesses?
• What is the most effective tool that our businesses are currently employing?
• How are we using the Internet to support current and potential customers?
• How can we be more efficient with our time?
• Where can we find alternative financing in today banking environment?

The topic this month was most interesting in that it was timely for me as well as two others around the table.  Our discussion item this month was "what is the best way to compensate sales people...a high salary or high commissions"?

This is a topic that I’ve struggled with ever since hiring my first sales person over twenty years ago. 
  
The Salary Model

There are some schools of thought that say that in order to attract and motivate a top sales person, a company must pay a high upfront salary.  This will incentivize a true sales professional to perhaps move from their current position and join your company.  The formidable salary also will attract those people who have very specialized knowledge and training.  

The positive side to this type of structure is that the sales person being hired is an identifiable sales professional with existing product and market knowledge.  Many times they are highly skilled and hold advanced degrees.  They may have existing contacts, an extensive rolodex and have a proven track record indicating that they are truly capable of creating new sales.

These types of sales people are found in industries such as pharmaceuticals, semi-conductors, factory automation, medical devices, aerospace, defense, and control systems where very specialized knowledge is required and the sales-cycle is extended.     

The downside to this theory is that it can take a lot of time to identify this supposed sales professional and a lot of money to convince them to leave their current situation.  Regardless of their industry knowledge, a decent amount of additional product training is most likely warranted.

Additionally, the high salary does not provide any real incentive to work hard as they are being paid whether or not they are creating new sales or not.  Typically the sell-cycle is long so a company must wait several months or years to determine if the sales person is actually effective or not.  By the time a company figures that the sales person is really not doing a good job, they have moved on to another opportunity at another company.

Lastly, the targeted sales person may really not have been such a star performer at their last company in the first place.  They may have some success in the past; however those past successes may not be indicative of future performance.  It’s quite possible, in fact, that you’re doing your competitor a favor by hiring away their problem and making it your own.

The bottom line is that hiring this type of sales person should be viewed as a long-term investment for a small company.  It typically does not pay dividends immediately but could be extremely rewarding if the sales person is successful.  However it could also be an expensive and time consuming proposition for the company if an ineffective sales person is hired because the guaranteed salary is generally paid far in advance of actual revenue to the company.

The Commission Model

The second idea is to pay a sales person a very small salary and backload the program with a rich commission.  Since the earnings potential in this scenario is theoretically unlimited, if the sales person is successful, they can potentially earn far more than if they were paid a guaranteed salary.

Certain companies are attracted to this type of compensation structure because the supposed upfront risks are low for the company.  They hire a sales person on the hope that they will sell something and if they don’t it doesn’t matter because it really didn’t cost anything.

There are several industries that use this model including real estate, vehicles, financial services, furniture, time-shares, and insurance.

While it is true that a company doesn’t pay much salary upfront, there are still hidden costs that a company must consider.  There are costs to advertise these positions, interview and hire these sales people.  Sales managers must also be hired to provide training and supervision.  There are also overhead costs of housing and equipping these sales people.

Although there are big commissions paid to the most successful sales people in these fields, the typical sales person is paid peanuts in comparison.  Many of them would be financially better off working at McDonalds or Wal-Mart.  In a very short time, these sales people soon realize that they are not making enough money to cover their living expenses and soon leave to seek employment in another field.

The high turn-over leads to instability especially at those companies who rely on returning customers and long-term relationships.  Customers become frustrated when they are constantly being handed off to new sales people and the relationship between the company and the customer can suffer.  The net result could be a loss of business rather than the generation of new business.

The Blended Model

The two models discussed above are the two poles of sales compensation.  The realistic approach for many companies is a blended model that combines a salary with a commission program.

The guaranteed base salary allows a sales person to pay their living expenses while the commission program provides them incentive to develop new business at new and existing customers.

This also will help create stability for a company instead of rotating through a number of different sales people.

As the four of us left the restaurant that evening, we agreed that hiring the right sales person was one of the hardest decisions that a small company must make.  A good sales person may be the difference in the company’s success or failure.

My friends and I concluded that there is no easy answer to this age-old question that haunts small business. 

In order for a company to make money and survive it needs new sales, in order for a company to acquire new sales they need sales people, and in order to attract, hire, train, and manage sales people, a company needs to make money...

Regardless of what other company departments believe...sales are the engine that drives every successful company.

Thank you very much for your support of OptiFuse where we always want to be a part of your solutions not your problems. 

Life Can Be a Breeze...

The end of daylight savings time occurs the first weekend of November.  This is also the same time I typically hang my bicycle up on hooks in the garage.
 
My legs welcome the "off-season" as a time to heal and rest.  No riding for me until daylight savings time starts again in mid-March.

Well...that was the plan at least...

In the days just before Christmas, I was having lunch with my friend Robin.  We were discussing our plans for 2012 when the subject of bike riding and centuries arose (a "century" is to bike riding what a marathon is to running).
 
I told her that I wasn’t planning on going on any long tours this year (I had ridden down the coast of California the previous two years) but that I had the goal of doing a few sanctioned century rides over the upcoming year.  These weren’t races but just endurance rides to use as a training benchmark.

Robin shot back at me. "Well then you’ll have to do the Tour de Palm Springs with me in February!!...the weather there is perfect that time of year and unlike most century rides...this is almost all flat...plus it’s Valentine’s Day weekend...you can bring Susan out to Palm Springs for a fun and relaxing weekend!"

I told her that I would think about it but she was unrelenting in the days to follow.

I finally signed up for the ride a few days before the beginning of the year. 

With only six weeks before the ride, I needed to work myself into riding shape again.   Two long rides each weekend and two more evenings spinning indoors on a trainer would probably suffice.  It was a flat course after all and the weather in February wouldn’t be a real factor.

Last Friday I drove to the desert with my girlfriend Susan, who thought a weekend in the warm desert was indeed a good way to relax. 

The weather on Friday was perfect...83 degrees and sunny.  We checked into the hotel and lounged around the poolside until Robin and her date arrived.

Robin and her date arrived shortly thereafter and we all went off for an early dinner.  Upon our return to the hotel, Robin and I decided that we would meet downstairs at 6:30 am and ride over to the starting line, just a few blocks away.

The next morning I got up early to dress and eat a hearty breakfast.  I poked my head outside of the room to discover that the overnight temperatures had dropped to the low 40’s and that there was a brisk wind blowing.

I met Robin downstairs a few minutes later.  As we rode to the starting line it was apparent that the wind was now really blowing hard...really hard from the west.

We arrived at the starting point just as the first century riders were leaving.  The ride was expecting over 6,000 riders for the 100-mile portion and some 10,000 additional riders for the lesser distances.

As we rode north out of downtown Palm Springs, the taller buildings no longer provided any screening from the wind.  The winds were now blowing desert sands across the road and into the first group of riders.  The sand stung the sides of our faces, arms, and legs as we rode through the cloud of dust.

This wasn’t the fun easy ride that I had signed up for.  This was miserable. 

I continued riding as I watched several people turn back for the starting line or walk their bikes along the side of the road.  Five miles into the ride and cyclists were already calling it quits.

At the seven mile point the route turned west taking us directly into the teeth of the biting winds.  I estimated that the winds were gusting at speeds of well over 40 miles an hours.  Typically I travel on flat roads at a speed of 16-20 MPH but today I was limited to less than 8 MPH as I needed to use my "hill gears" to fight the strong head winds.

It took us nearly 2 hours to reach the 15-mile point and I felt as though I had spent more energy than I normally might have spent after riding 50 miles. 

Based on the present conditions, there would have been no shame in heading back early.  However a commitment had been made to myself and I wasn’t about to let the course conditions get the better of me.

As I rode, I wondered about other times that I had ventured into something unknown, thinking that it would be very doable only to find out it was turning out to be much harder than I first had anticipated. 

I thought about the different businesses that I incubated over the years.  I began these ventures with the thought that it would be fun and easy.  Later I would discover that it was really the unexpected that created the most difficult challenges for me.

I also thought about relationships, marriage and raising a family.  How often do we start things with the best intentions thinking that we know more than we really do...only to later discover the difficulties that stand in our way?

As we hit the 21 mile point, we suddenly veered easterly.  The wind was now at our backs as we sailed down the road, traveling nearly 40 MPH!!  The downwind section lasted for some additional 37 miles which we covered in slightly less than a single hour. 

Sometimes this also happens in our lives.  After struggling for what seems like eternity, the road suddenly gets much easily to transverse.  The wind is at our backs.  What was hard is now simpler.

I knew with all the downwind travel that harder peddling lie ahead of me soon.  And my expectations did not disappoint me as we neared the 60-mile point where we once again turned north and west to battle more winds.

One of the more interesting things that struck me was how the riders began to group in packs.  This allowed the weaker riders to ride in the wake of the stronger riders in front.  Each of the riders took turns riding hard in the front, battling the winds for the others behind them.  Working together enabled us to reach our goal of crossing the finish line.

We did complete the ride...in a time much longer than I had originally anticipated. 

I am quite certain that we would not have finished if it weren’t for the help of other riders we met along the way.
 
My experiences last weekend helped to demonstrate that no one really finds success on their own.  We all need some help from time to time.

No matter how much one prepares there will always be the risk of unexpected head winds ahead.  Life can sometimes be a breeze...or sometimes a hurricane.

Every day we need to find a way to continue to push ahead... keep moving... and finding our way to the finish line.

Thank you very much for your support of OptiFuse where we hope the wind is always at your back and if not we’ll be there to help. 

Leading the Way...

This last week I found myself in a passionate discussion with one of my sales people regarding a pricing strategy for one of our top customers.

As it so happens, this particular customer was, at one time, one of our largest but for whatever reason their purchases were now significantly lower.  While it is true that the recent economy has had some effect on this company, it is also true that this particular company has begun to source some of their components directly from overseas sources.

The net result is that their purchase volume was down and therefore the fixed costs associated with doing business with this company suggested that a price increase was inevitable.

My salesman argued passionately that this was the wrong time to raise prices and in fact we should lower pricing in an attempt to entice the customer to abandon their efforts to source their components off-shore and purchase more of their products from us.

I argued back that this was exactly the right time to raise prices in that we were being "cherry-picked" by the customer, while still offering them low pricing for products that they were simply unable to find elsewhere.  In addition, the total sales from this customer were now relatively insignificant so the risk of losing their remaining business would not greatly impact our bottom line. 

This exercise was a healthy exchange of ideas between two people who wanted to do what is best for the company but saw the problem in two divergent ways.  It was one of a thousands of small decisions that are made each year by me and others at our company.  The results of some of these decisions turn out good while others turn out not-so-good.

Making hard decisions and taking responsibility for the results of those decisions requires leadership.

A leader is someone who can set a course for an organization, company or department and then make the difficult decisions along the way to keep focused on the destination.  Leadership is not about being the most popular person in the room but rather it’s about the relentless pursuit of an organization and those within the organization to become better at what they do.  At best it’s difficult...at worst it’s impossible...

People start businesses every day because they believe that they have what it takes to be successful.  They believe in their product...their service...their ability to enlist others in their crusade...and their skills to convince customers that they have the best solutions to their problems.

Although a person can go to school to learn business fundamentals like accounting, marketing, and operational management, rarely can one go to school to learn organizational leadership.

So where does one turn to in order to acquire the elusive leadership skills needed for effective management?  Over the past 30 years, I have found a variety of invaluable resources to help provide me with both training and feedback enabling me to develop new skills and ideas.

Advisory Boards

As I began my first company, one of first things I discovered was that I didn’t know as much as I thought I knew about business and leadership.  It was then that I decided that I needed to surround myself with a group of advisors, with specific knowledge, who could help educate me in several important areas of business.

These areas included:  insurance, accounting, legal, human resources, IT, and facilities.  I took the time to assemble a group of experts in these areas who I could look to in order to give me solid advice and help me to navigate the complexities associated with these issues.

I didn’t waste valuable time and effort trying to become an expert in these areas because I already had experts working on my behalf (although ultimately I did become very knowledgeable in these areas over the course of time due to the great training provided to me by my board of advisors). 

Mentors

Throughout my life I have sought out people who have amassed a great deal of experience in both business and in life.  These are typically older people who, as they approach the fall of their lives, are looking to share their vast array of knowledge and experiences with a willing listener.  These people have been invaluable to me as friends and confidantes.  Although they might not be versed on the latest technologies, they do understand people and understanding people is one of the key attributes of a leader.

Coaches

Coaches are very different from mentors.  Whereas the main focus of a mentor is to share their experiences and skills with me, the main focus of a coach is to keep me accountable.  They help me to set reasonable goals, expectations and desired results.  They don’t focus so much on the "why" but rather on the "how" and the "what".  It’s their job to keep me focused on doing the right things and providing me with feedback in areas to improve.

Peer Groups

In my experience, the greatest amount of my personal leadership development came from my participation in peer-to-peer organizations.  Peer groups are formal or informal organizations of like-minded individuals who have a common interest with others within the group.  This could be a professional society like IEEE or AMA.  It could be a group of entrepreneurs who meet regularly to share ideas and issues.  It might be a civic-minded group or service club like Kiwanis, Lion’s Club or Rotary.

Many years ago, as my first business was struggling to get off the ground, I had the opportunity to join the Entrepreneur’s Organization (EO).  This is a phenomenal international organization where small business owners can meet with like-minded individuals from around the world to discuss like problems and issues, discover resources, explore new ideas and share best practices with other members in a safe and confidential environment.  In addition, EO uses international conferences and university events to bring together entrepreneurs throughout the world to meet with global leaders and connect with one another.  Many of the fundamental ideas I write about each week are byproducts of those I developed while a member of EO.

Although I am no longer a member of EO, I still regularly participate in several un-moderated peer groups that help to create and foster new ideas and methodologies.

I believe that leaders are not born but rather developed over time.  No amount of training will truly prepare us for every situation that may arise.
 
Many people along the way helped to make me a better person...and a better leader.

Despite spending years honing my skills, each day I still wrestle with making difficult decisions, creating and implementing a clear vision and strategic plan, as well as dealing with difficult people. 

Each day I am challenged to learn something new... each day I succeed... each day I fail... such is the way of a leader... 

Thank you very much for your support of OptiFuse where we hope to always lead from the front rather than push from behind.

And Old Tale for a New World...

"Character is doing the right thing, even when nobody is looking" ~ Anonymous

I recently took my car to the dealer to have a few minor problems evaluated. When I arrived at the service department, I was greeted by a service specialist who wanted to know if I had an appointment. I explained that I didn’t have an appointment but there were a few items that needed some attention before the car’s warranty expired at 50,000 miles. He explained to me that they were extremely busy that day and hoped that I could schedule an appointment for next week.

Trying to help the service tech with his scheduling difficulties, I agreed to wait until the following week to have my car examined.

When I arrived at the dealership the following week, I went through the three or four areas of concerns with the technician. He explained to me that these were very common warranty repairs and that they could get them repaired that same day. We went back into the office so he could get some information from me and enter the service order into their system.

This is when he discovered that my car’s warranty was 50,000 miles or 4 years whichever came first. As it so happens, the 4-year period had elapsed 3 days ago and that the car’s warranty was no longer in effect.

I tried to reason with him and explain that I had actually brought my car in last week but out of deference to their scheduling issues, I waited until this week. He was understanding but unsympathetic to my plight.

Rules are rules...and your car is simply beyond the warranty period.

I asked to speak with the service manager and after a brief conversation, I was told that there was nothing that could be done. The warranty period was very specific...4 years or 50,000 miles whichever came first. It was my sole responsibility to make sure my car was there before the 4 years expired. Regardless of the situation, those were the rules.

An Old Tale:

There was once a poor family in the hills of ancient Greece who had saved their money for years to buy a mule to help plow the fields of their family farm. When they had saved 100 Drachma (the cost of a good mule), they sent their oldest son, Christos, into the town to buy the animal from the local mule trader.

When he got to town, Christos met with the mule trader who told the young man to give him the money and return the following day to collect the mule.

The following day, Christos went to see the mule trader. The two of them walked into the stable to get the mule...when they arrived at the stall they found the mule...dead!
          
The mule trader was mortified. Young Christos simply asked the mule trader to give him another mule but the mule trader explained that he had no more mules and on top of that he had invested all the money in a new business venture so he had no money to refund to the boy.

The mule trader promised to refund the family’s money but it might takes a few days or even several months for him to raise the cash.

"Ask anyone", the mule trader pleaded, "my word is my promise".

Christos finally agreed not to call in the authorities.  He furthermore told the mule trader that he wanted to keep the dead mule in addition to the forthcoming refund.  The mule trader agreed.

After about a week, some good fortune came to the mule trader and he was able to raise enough money to pay back the poor family.

He traveled to their farm and refunded all of the money to the family. As the mule trader was leaving, he met up with Christos in the front yard and inquired about the status of the dead mule.

Christos replied, "I used the dead mule to make 998 Drachmas".

The mule trader was astonished. "How is it that you were able to profit from a dead mule?"

"Well...I decided to hold a raffle with the prize being the mule...I sold 500 tickets at 2 Drachmas each", said Christos.

"Wasn’t everyone upset when they found out that the mule was dead?", asked the mule trader.

The boy responded, "The only person who was upset was the winner...so I gave him his 2 Drachmas back".

...This story has been retold in many different forms for centuries.

The moral of the story might be seen by some as a person who created fortune out of misfortune (i.e. making lemonade out of lemons). However I tend to see it a bit differently.

Personally, I see the boy as a swindler...a con man...a person who justifies his misdeeds by rationalizing that no one really got hurt because technically they didn’t actually win the raffle. He is a shyster who lives by technicalities rather than by integrity.

This is the exact same mentality that prevails in Washington and in lower Manhattan today. These are the people who profited handsomely from recent economic bubbles, helped to create the great recession, and then went looking for bail-outs. They will argue that they really didn’t do anything wrong and they technically operated within the letter of the law.

Is it any wonder then as to why we have such disdain and distrust for Washington and Wall St.?  They have broken the trust and have become all self-serving.  They are our trusted financial and political leaders but have continued to enrich themselves at the expense of others rather than providing for the common good.

There was a time when business was conducted with a handshake. ..a time when a person’s word meant more than a piece of paper.  There was integrity behind a promise and integrity was the measure of a person and/or a company.

As I’ve grown older, I have come to believe that success isn’t measured in terms of dollars and cents...it’s about helping others...being true to your word...and adding to society...being a part of our community.

Some people have created great wealth for themselves, but they have ultimately used that wealth for the betterment of our shared world whereas others have amassed great wealth at the expense of others.

The true hero of our story is not the boy but rather the mule trader who could have pointed to the fine print and wash his hands of any personal liability...but he chose to take responsibility and return the family’s money...ultimately absorbing the loss himself.

The mule trader was a man of character...a business person of integrity...

...a person who did the right thing even when no one is looking...

Thank you very much for your support of OptiFuse where we always choose integrity over profits.