Margins are getting squeezed in this industry and everyone has started to look at reducing all and any costs. According to the PIA, industry ratio studies, the cost of sales can range anywhere from 6% to 15% of revenues. I have even heard that at some companies it got up to 20% of revenues. In an industry running on 2% to 4% profit margin before taxes across North America, the cost of sales can be the difference between a profit or a loss.

When margins first started to really tighten in this industry after 9/11, a lot of companies thought the answer to profitability was just to add more volume or more sales at any cost if necessary. The result was higher volume but lower profits because the cost of sales was more than the extra volume brought in. I know of one printer who gave signing bonuses to new sales reps that came on board and brought some of their customers with them. The company is no longer in business.

The problem seems to be in the sheetfed market a lot more than the web market (web printers have lower cost of sales to start out anyway). So how do you bring down costs without losing a lot of sales in the process? Some companies like NEBS (short-run stationery and forms), Davis + Henderson (cheques), COMDA (advertising calendars), and most of the corporate Christmas card printers use direct marketing.

Transcontinental Printing’s sheetfed division has tried adjusting commission rates for sales reps based on new accounts versus continuing business. The jury is out on how well it will work.
Quebecor World simply sold off its sheetfed operations and solved the problem. One printer who did not want me to use his name (when it comes to sales reps, a lot of printers do not want me to use their names) has hired outside customer service reps to service accounts. They are paid salaries and some bonus if certain levels are reached. The owner and his sales manager are the ones who get new accounts then turn them over to their outside CSRs. He claims his cost of sales has almost been cut in half. Another printer who is in the $5 million range has no sales reps but operates only with inside CSRs. He advertises like crazy to his target market and is growing by 10% to 15% per year. VistaPrint sells over the Internet, has no sales force and spends a lot on Internet advertising. It is growing at a rapid rate, has gone public and started turn a profit.

How sales reps are being compensated is starting to change. Commissions based on total dollars is changing to pay based on profitability. A couple of firms are paying on gross profits. A few are paying on value added (selling price less materials and outside service), but you need a fairly sophisticated costing system. One said he paid a higher rate for new accounts in the first year and a lower rate in following years. Great for long-term accounts; not so good for one offs. Another got rid of his sales rep, shrank the business and claimed he is making more profit than before. This does create a problem if you want to grow the business down the road.

The interesting thing is, companies are finally starting to analyze their sales cost and find ways to bring it down in order to fix the bottom line. With most other cost areas having already been analyzed to death, it was only a matter of time before sales was looked at. The debate is what will work and what won’t work in bringing down the cost of sales.