Determine your prices

Each company needs to determine its price policy before dealing with sales representatives and distributors, and the commission structure for these sales agents. In all cases, it is necessary for the manufacturers to know the minimum sales price they can accept.

4 examples of prices and commissions

Example 1: constant net price

• The company wants a revenue of $100 for a product.
• They sell the products to distributors for $100. These distributors resell the products at the price they determine.
• In the case of sales representatives, the company sells its products to the final customer for $115 and give a $15 to the sales representatives.
• In all cases the revenue from the sale for the company is $100.

This method presents the advantage of guaranteeing a constant revenue.

Example 2: constant sales price

• The final sales price is fixed to $100.
• The final customer will pay the same price of $100 whether they buy the product directly from the manufacturer or through a sales representative or distributor.
• If the manufacturer sells its products directly, it generates a revenue of $100.
• If they use a sales representative, the final sales price will be $100 but the company will pay a commission to the sales representative ($15 for example) and the final revenue will be lower ($85).
• It is not recommended to use distributors in this case, because nothing guarantees a final sales price of $100. The distributor can buy the product for $85, and he can choose to resell it for $100 or for $200. The manufacturer does not have any control over the final price.

This method is the best method in those cases where the same product is sold on the same territory through different sales channels (for example a sales representative selling to a territory where the manufacturer can sell directly).

However this method presents risks for the company's margin. The margin will depend on how many products are sold directly by the company (at a higher margin) versus how many products are sold by a sales representative (with a lower margin for the manufacturer).

Example 3: split the benefits

• The manufacturer defines a net minimum revenue of $100.
• The sales representative has a fixed margin of $10. The price to offer the final customer would be $110.
• The company sell their product to the final customer for $130. The sales representative has a negotiation margin of $20. The company and the sales representative share what is left of the negotiation margin after negotiation. For example if the final sales price is $120, the company gets $105 and the sales representative gets $15.

This method allows the company to control a minimum price. It is important to define this clause precisely in the contract with your sales representative.

Of course this method does not work with distributors as they buy your products at a fixed price.

Example 4: adaptating to market prices

• The sales price is determined by local sales prices
• The company sell their products at a price determined for each market or each particular sale. It is the case when prices can fluctuate according to many criteria (options sold, local competition, seasonal variations,...)

It is absolutely essential in this case to know the minimum admissible sales price - and to know precisely the cost of goods sold.

It is also essential to trust your sales representative. He knows the local market best, as well as local constraints, negotiation margins,...

Be flexible

It is illusory to think that a company can sell with only one type of sales representatives and to apply only one of the abovementioned methods. In most cases, the contract with your sales representative is the result of a negotiation. Being flexible and open to discussions is one of the keys to success when selling through sales agents.

Avoid double commissions

A double commission occurs when a company pays a commission to the sales representative, and the sales representative resells the product to the end user with a second margin. This may seem silly, but it happens very often. It comes from not making a clear distinction between sales representatives and distributors.

The choice is the following: you either sell your product through a distributor, which resells it at the price it wants to; or you have a sales representative, and in this case you have to demand that the contract be directly between the manufacturer and the final customer.