A MANA member offered us this guest blog post, with the understanding that it would remain anonymous. One person’s perspective on taking a commission cut to close a deal follows.
There are occasions when a principal will ask a rep to give up part of his commission to make a sale due to the fact that the price in the market at that point is lower than the principal’s price list.
The question is, to what extent a principal can ask a rep to give up part of his commission? And, what are the implications of it?
Two considerations are important to make:
- A rep does not have any input in the principal’s cost or price; consequently a rep has no information on that matter.
- It is the responsibility of the company to manage its cost and maintain the prices competitive in the market. If the price of a company is not competitive, that product either cannot sell in that market – or someone will have to give up to make up for the price.
A strong impact in income
If a principal decides that a rep must sacrifice part of the commission it is important to note that every point (%) in commission represents a substantial decrement in the rep’s income.
Let’s take the most common rep’s commission, which is 10%.
Every 1% of commission that a rep does not collect is equivalent of a 10% of negative income.An ex ample of a principal that is asking a rep to sacrifice 2% of the commission implies 20% of the total income that the rep does not get.
Incentive
When a principal begins asking for a sacrifice in the rep’s commission due to the fact that the price is not competitive and they want to match the conditions of the market, the message that the principal is sending is “you need to pay the price of my inefficiency.”
If this situation happens once in the blue moon, a rep may understand it.
What about the opposite case? If it becomes part of the routine, the message the rep receives is “You will never get the expected income out of this business” which could lead to two decisions.
- One is, forget that specific business where I have to sacrifice my income. The rep will never pursue that business where he knows it will lead to a partial income thinking that it will lead to more cases and on the end it could become the norm.
- The second is, “I might be better off working for a different principal with whom I will get the entire compensation for my work.”
Who is responsible?
When you are dealing with a product that is very much market dependent, then the manufacturer should know that they are dealing with price fluctuations as the nature of the business, in such case is the manufacturer’s responsibility to adjust accordingly to the market.
But, what if a rep finds a business, that is interesting for the principal, but price has to be dropped to meet market conditions, and let’s assume that this is not a very significant amount for the principal but it is interesting because there is still profit to make.
The principal could survive without this business but would rather sell it.
Since cost and margin is private information and is only the principal’s, the rep will never know how much is the principal’s real sacrifice, and because of this asymmetry of information questions will raise in the mind of the rep.
Since the rep will never know the real situation of a manufacturer, during those events when a rep is asked to cut down the commissions, he will be reluctant to give up part of his income, except for the odd cases when he knows that is better to get something out of a business particularly if the business is significant.
Let’s not forget that, even in the case that the manufacturer makes a minimum margin (it also applies to the rep), the contribution to the business could have a positive and important impact as it will be helping to pay part of the fix cost, which at the same time will help to produce other products that can be sold at a better price.
Yes, in every instance that a rep is asked to sacrifice his commission, the rep will make an income, the question is at what point it became a downgraded commission?
The contract
Although it is recommended not to have any paragraph that will open this door, there are occasions when these clauses are present and usually they will require the consent of the rep.
If you find that a principal is pushing for a clause like this, be aware that it is in the principal’s intention to push for it at any point of time and there is not such a “just in case” justification.
The question is, Is this clause (in the contract) built because the principal has experience in using it to his advantage? or has it been written only for the odd cases?
It is absolutely clear that the abuse of this clause will break up the relation principal- agent.
Now, maybe it is a matter of defining what abuse is? And it will pretty much depend on the rep tolerance, sense of fairness, the importance of this product in his portfolio, etc.
Conclusion
Except for the very exceptional occasion when a rep has to sacrifice his margin, reps will never be satisfied or happy with the concept of giving income for the sake of a business.
Reps understand that is the responsibility of the manufacturer to remain competitive, so the rep can continue working without worrying about their income, considering that each lost point (%) in their income becomes a heavy burden for them.