What I'm going to share with you today is the single most powerful trick I know for supercharging your bottom line.
At some point in time, if you are going to grow your construction business beyond $2 million, you are going to need someone working on sales full time. Now, maybe sales is your thing and you want to do that full time. Fantastic. It's almost always best when a business owner is committed to selling. But even if you sell successfully, you may still end up wanting to add another salesman.
If sales isn't your thing, then you will definitely need to hire a salesman. Either way, you are going to be faced with a critical decision. How should you pay your new salesman?
Draw (salary) plus commission? Bonuses for sales generated? Increased commission with increased sales volume? A higher commission for new customers? Straight salary?
All of these are commonly used approaches. Not one of them is likely to produce the profit results you seek. If you let your salesman have his way, he will want a draw plus commission. Most will ask for a pretty stout draw and a relatively modest commission based on revenue sold. Don't agree to that!
Draw plus commission lines the pockets of your salesman regardless of whether he is making you any money. The purpose of draw plus commission is to drive sales volume. Don't fall into the trap of thinking sales volume is important. You need your salesman to focus on PROFITABLE work. Let your competition sell the unprofitable work. That's work you don't want and you certainly don't want your own salesman bringing it to you.
How do you get your salesman to chase profitable work? You align his pay to profit. Put in place a pay plan that rewards him for profitable work and punishes him for unprofitable work. Basically, make him a pseudo-partner. It is surprisingly easy to do and I'm going to show you how.
- His entire compensation should be based on commissions on gross profit (a commission rate often in the 20% range).
- He should be guaranteed a minimum income, whether his earned commissions surpass it or not.
- His commission rate should stay the same regardless of sales volume or profit generated.
- If he doesn't earn his guaranteed minimum income within a reasonable time period, say 18 months, you replace him.
With this approach your salesman will be highly motivated to ask for the highest price possible. He will not leave $100 on the table, because with a 20% commission, he would be leaving $20 behind. An example will drive the point home quite clearly.
Let's say your salesman has estimated a job's direct costs will run $10,000. Let's look at how the usual approach, draw plus commission, compares against my recommended approach for driving desired sales behavior.
The salesman being compensated with the standard salary plus 2% of sales has little incentive to risk losing a sale by raising price. If he sold the job at cost, he would earn a $200 commission. If he sold the job for $15,000, he would earn a $300 commission. He only makes an extra $100 for substantially increasing the likelihood of losing the job.
He will not raise the price to $15,000 just to earn the extra $100. Of course, you lose money if he sells the job at $10,000 but he doesn't care. It's all about volume, right?
Now, let's look at my recommended approach.
Your salesman earns nothing if he sells the job at $10,000. He earns $1,000 if he sells the job for $15,000 and he earns $2,000 if he sells it for $20,000. How motivated will he be to pursue the highest price possible? Very, very motivated.
Due to the potential windfall he can earn, he will become a master at qualifying customers. He will not spend time on price sensitive customers. He will aggressively pursue the customers who value your company's superior services and are willing to pay for them.