Managers looking to increase the bottom line on sale ought to consider reallocating their resources, according to AED's compensation report.

The future of new equipment sales can be summed up in two words: product support.

That perhaps was the most compelling finding of AED's just-published Sales Compensation Report, which surveyed construction equipment distributors about their sales-management policies and practices. Supporting the findings of other AED studies, the 2001 Sales Comp verified the higher profit margins to be realized in the product support business and strongly suggests that dealers ought to rethink their resource allocation.

"As crazy as it sounds, the best way to improve dealership profitability is to transfer resources, including people, from sales to parts and service," says Mike Marks, principal with Indian River Consulting Group, the organization that conducted research for the report. Marks also authored a perspective, included in the report, which analyzes the data and offers suggestions on how distributor managers can improve the performance of their sales teams.

AED sent survey forms to 650 U.S. and Canadian members in midsummer and received responses from 120, for an 18% response rate. Of the total respondents, about 55 percent were heavy equipment companies, 35 percent were either light or general dealerships and the remaining 10 percent were a combination of engine and other niche dealers. The surveyed distributors cut across all sales volumes, from less than $5 million to more than $100 million.For the first time the report included separate sections analyzing the success factors for excellent rental reps and product support sales reps. All data for the report was based on 2000 W2 forms.

The numbers back up Marks' contention that the road to higher margins is paved with parts and service.

For example, survey data revealed AED members pay new equipment representatives about $66,177 in combined compensation for $2 million in sales that produces $280,000 in gross profit. However, those same dealers pay their PSSRs about $49,870 for $1.5 million in sales that produces $463,383 in gross profit.

The reality that product support is the business to emphasize is a difficult pill for many distributor principals to swallow. But that love of the iron business, Marks contends, is one of the problems hurting the profit picture in too many distributorships.

"There is a herd mentality in the equipment distribution business," Marks says. "By and large everybody is doing the same thing the same way. The large-scale industry practices stay the same year after year.

"But there isn't a guy out there who wouldn't be financially stronger if he got rid of a couple of new equipment guys-and that could mean redeploying them-and switching the focus to parts and service. You will improve the ratio of gross margin dollars generated vs. payroll dollars invested to get it."

AED publishes its Sales Comp report every other year. The 2001 edition builds on the key findings of the 1999 edition and further analyzes the personal traits and sales skills that separate A reps from their C and D counterparts. Also new for 2001 is a section exploring the differences in sales-management practices between Top Growth and No Growth dealerships.

The report strongly suggests that AED members ought to take a ground-zero approach and rethink their sales management and compensation practices. "AED members' sales management practices continue to lag other industries in sophistication," says Marks, whose consulting practice connects him to hundreds of distributor businesses in dozens of industries.

The 2001 report verified the 1999 finding that too many AED members are overpaying their C and D reps and underpaying their A reps. And while there was a time when distributors made enough profit to afford this industry wide practice, that is no longer the case.

Part of the problem, Marks says, is that too many equipment distributors have compensation plans that reward volume rather than being strategically driven. The result: Reps who spend their time looking to bag the next big deal rather than building the long-term customer relationships that generate ongoing revenue streams.

The issue is becoming more clouded now that rentals and parts and service are emerging as larger factors in the overall revenue picture. "Dealers are searching for a better way of structuring their compensation plans," Marks says. "But their tendency, influenced by manufacturer pressure, of course, is to continue rewarding new equipment sales."

This view was backed up by the AED Cost of Doing Business report, which indicates that distributors continue to look to new equipment sales as the solution to an ailing economy and slumping equipment markets. But the Sales Comp clearly suggests that dealers ought to begin thinking of ways to shift the emphasis to product support and rentals, both of which generate higher gross margins.

Other key points that emerged from the study:

Stress goals and time management. Sales executives from both Top Growth and No Growth companies listed closing skills and product knowledge as the two most important sales characteristics of an A sales rep. But No Growth dealerships cited prospecting skills and opportunity awareness as the next most important skills, while Top Growth companies selected goal orientation and time management.

Indeed, those companies that selected time management as one of a rep's two most important skills had an average growth of 30% in 2000. Those that picked goal orientation as one of the two key skills experienced 35% growth.

Executives from Top Growth companies are three times more likely to use call budgets and twice as likely to use call plans when managing their sales reps.

Manage your top five accounts carefully. A sales rep generating more than 75% of his revenues from his top five accounts is 50% more likely to be working for a No Growth company. Similarly, if he is generating less than 25% of his revenues from the Big Five, he is 69% more likely to work for a No Growth dealership.

Reps from Top Growth companies generate between 25% and 75% of their revenues from their five biggest accounts.

When it comes to sales calls, focus on quality, not quantity. Reps for Top Growth companies have 25% more accounts but make 22% fewer sales calls daily.

"The implication is that the better reps are more tuned in to their customers," Marks says. "They are able to discern that magic moment when the customer decides he's had it with his old machine and decides it's time to buy a new one. The No Growth reps are still in the habit of dialing around just in case a customer is looking for a new machine."

Rental reps are no longer second-class citizens. The salary gap between new equipment reps (median salary of $66,177) and rental reps ($62,243) is rapidly closing. But remember that the gross margin on rental transactions, as with product support work, is about 30% vs. 14% for new equipment sales. Again, those numbers are ominous for dealers who remain emotionally married to the new equipment side of the business.

About half the companies surveyed are compensating their rental reps on utilization and return on assets; the other half on transactions. The marketplace ultimately will decide which approach is better, although Marks believes those dealers who favor the utilization approach have an edge.

"Once the customer makes the decision to choose me as his supplier, he'll keep renting all his equipment from me, and I'll reap a revenue stream two years after the initial relationship is created," he says.

Distributor managers clearly don't see their rentals reps as clones of their new equipment people, for whom they ranked closing skills and product knowledge as the two most important skill sets. Asked to rate the most important qualities of an excellent rental rep, opportunity awareness was ranked first by 22 percent of the survey's respondents, followed by interpersonal skills (19 percent), time management (18 percent) and product knowledge (14 percent).

PSSRs are playing a larger role. Nearly half-49 percent- of all surveyed respondents have reps who focus exclusively on generating revenue from the sales of parts and service. For heavy equipment companies, the majority of AED's membership, that number is even higher-66 percent.
And PSSRs are playing a growing role in their employers' overall revenue picture, with median sales of about $1.54 million. What's more, they produce a median gross margin of 30 percent compared with 14 percent for new equipment sales reps. That's not too shabby for employees who are averaging just under $50,000 in salary.

Asked to rate the most important qualities of an excellent PSSR, product knowledge was ranked first by 31 percent of the survey's respondents, followed by interpersonal skills (19 percent), opportunity awareness (16 percent) and time management (15 percent).

BLUEPRINT FOR SUCCESS

There's an old saying that it's easy to be brave from a distance. But the relatively slow rate of change in the construction equipment industry does present significant opportunities for innovative sales managers willing to be different.

Although AED has published the Sales Compensation Report for decades, most of those books were stand-alone products. The 2001 version is the first to track specific results over a period of time, correlating them to the 1999 study. It examines the differences in sales practice between companies that are growing and those that are stagnating, with specific recommendations on how to improve results.

More than any previous version of the report, the 2001 edition is a blueprint sales managers can follow to increase the performance of their teams.

"If your growth is flat and you disagree with a high-growth practice, then you are wrong," Marks writes in the analysis section of the report. "Essentially you are holding a data-free opinion that is not backed up with business results. I can't make it any plainer than this."