MPS Compensation

December 1, 2009

By Steve Rolla and Teri Dunn

Dealers who have asked us whether or not they should have a Managed Print Services Specialist to sell their offering or just allow the entire Sales Force to sell Managed Print Services (MPS), quickly follow that question up with, “how do I pay them?” Like all other forms of compensation, there is a fair rate you should target for MPS compensation but there a number of ways to get to that fair amount.

We think it is important that first we understand a fundamental philosophical difference in the compensation that is earned by a Sales Professional who sells an MFP vs. the compensation that is earned by a Sales Professional who sells MPS. In General, the commission that is earned by Sales Professional for the lease or sale of an MFP comes out to be 10% to 12% of the net equipment revenue recognized in the transaction or 30% to 40% of the net Gross profit from the transaction. When compensation and all other selling related expenses are deducted from the equipment transaction, the equipment lease/sale should have a minimum 10% contribution margin to the dealer’s overall operating income. In an organization’s general ledger of accounts, the bookkeeping of this transaction is fully retained within sales expenses.

Managed Print Services revenues are obviously not equipment transactions but aftermarket transactions. The revenues associated with MPS in most cases are allocated 65% to supply revenue and 35% to service revenues. This is the exact inverse of the typical allocation for a MFP supply/service contract. Managing service margin has always been and will continue to be a focus of the most profitable dealer organizations, however, over the past few years, leading edge dealers have made total aftermarket gross margin, not just service margin, a key focus for operating improvement.

MPS commissions are an expense associated with the aftermarket and are most appropriately booked as an aftermarket line item. We don’t believe that where you allocate the transaction will lead to more or less success in MPS. However, we believe the allocation is a component of a solid management process for MPS that deserves consideration. This also is another “call to arms” for the dealer to make certain that their MPS financial model incorporates the new benchmarks associated with MPS as identified and taught by BEI PROS.

Many dealers are enticed by reports of 60%, 65% and even higher gross margins in MPS aftermarket. In most cases, when we took a closer look at these fantastic margins; we found the commissions that were paid for the sale of these MPS agreements were tucked in equipment sales related expenses. If you restate these MPS commission expenses, to associate them with the MPS aftermarket revenues, the overall MPS aftermarket margins are more accurately stated at a very respectable 55% to 60%.

The typical dealer principal who is razor sharp at managing his/her profitability has already deduced that MPS is therefore compensated at or around 5%-6% of the MPS revenues but don’t stop reading now! How you pay this 5%-6% to drive the maximum MPS results, retain these valuable contracts and keep your MFP sales growing, all at the same time, is the rubrics cube of MPS we will now address.

After talking to hundreds of dealers that participate in Managed Print Services and after 10 years of research and participation in MPS we have come to the following conclusions:

We endorse that if Sales Professionals can get a commission on print clicks they should also get a printer click quota. We suggest a printer clicks quota/ month for “down the street” MFP reps and a different printer clicks quota / month for Major Account Representatives. The quota could be ramped from start up over three months. If there is compensation, there should be quota. If a “down the street” MFP rep does not want the quota bearing responsibility for MPS, they shouldn’t in our opinion have the privilege of receiving the MPS compensation. Should this occur, the MPS opportunity in that territory should be turned over to an MPS specialist. A realistic and easily attained start-up quota might be 50,000 pages per month for “down the street” MFP sales reps and 100,000 pages per month for major account reps or MPS specialists.

CAVEATS:

  • To have the privilege of earning MPS commissions, there must be an MPS accountable quota
  • Commissions on MPS should only be paid for 50% of the contract term to assure proper nurturing of the account and extension of the contract
  • If a Sales Professional assumes an equipment quota in addition to an MPS quota, MPS residual commissions should not be paid unless the rep is 90% of equipment quota

For MPS we recommend using benchmark profit packed click rates as “Sales Out” costs. Benchmark would be defined as 44% GP on supplies and 52% GP blended into the click rate. The sales rep blends a rate based on volume of specific printers to get a blended cost per print (CPP). The sales rep’s job is to sell CPP as high as they can based on the discovery work they have done on the customers actual cost per page (cartridges, maintenance kits, service calls or contracts, added value, etc.) You would then pay the rep a percentage of the spread between blended out cost and blended selling price on actual monthly clicks each month for up to 50% of the contract term while still employed. You actually could give away the whole spread above out cost as a bonus if specific goals are achieved.

EXAMPLE:

If blended out cost is $.018/click and sales rep sells it for $.022/click and account does 135,000 pages/month.

Sales rep would make ( ( .022-.018) X .30 X 135,000) = $162/month for up to 50% of contract term when sharing 30% of the spread with the sales rep

OR

((.022-018) X .40 X 135,000) = $216/month for up to 50% of contract term when sharing 40% of the spread with the sales rep.

The objective is to inspire selling multiple contracts to build up income over time.

We have also been exposed to other intriguing compensation programs that we feel merit consideration. We also will tell you that our recommendation of any of these programs to other dealers would depend on the dealers MPS offering’s maturity and the ability of that dealer to administer the program. One such program associates the sale of an MFP and a printer on a Cost per Copy lease. In this situation, the Sales professional is paid a multiple of the base billing based on the number of years in the term of the lease. The multiple increased as a reward for tying the clicks into the lease for an extended period. The multiple goes up as the term of the lease increases. The key to this type of compensation is the incorporation of monthly or quarterly minimums combined with the “out cost” pricing model. Additionally, we would caution against making residual payments in any pay period that the sales person does not achieve 90% of their equipment quota.

Other organizations we have spoken to have asked for a model that simplifies the administration of the compensation and at the same time keeps the Sales Professional’s focus on retaining the MPS contract for multiple years. To this end, we recommend a plan that rewards the initial transaction and additionally, for the first time, offers a residual payment that is paid either quarterly or annually for some portion, but not the entirety, of the life of the MPS contract.

EXAMPLE

When a Sales Professional sells an MFP on a CPC lease and adds printer maintenance/supplies to the lease, the sales rep might get 2 or 3 times monthly maintenance payment on 3, 4, or 5 year lease up front or 5% of the monthly base for up to 50% or the contract term.

The printer service rate must be at printer service list pricing.

Printer service must have separate minimums and overages.

In the event that the Sales Professional departs the dealership, the residual payment is not forwarded to the succeeding Sales Professional. Paying for only a portion of the contract term, as well as, retaining unpaid residuals when a sales person parts employment increases the profitability of MPS contracts in the back end of the contract term when the cost to service the contract likely increases. Some of the dealers we have spoken with, who employ such a model, have also tied some level of achievement of an MFP quota to the payment of such a residual commission. We applaud the creativity that has led to the residual payment concept. We are thoroughly convinced that one of the tenants of a successful MPS program is the consistent coverage required by a Sales Professional to retain the contract. Residuals (another form of annuity) may be just the extra ingredient along with solid leadership and management skills to arrest some of the Sales Professional retention issues that have plagued our industry for too long.

THINK “CUSTOMER SHARE”
We believe that given the nature of MPS, sales professionals who assume both an MPS quota and an equipment quota will find themselves unable to manage the same geographic or assigned account portfolios they have been responsible for in the past, yet their hardware and aftermarket results will be significantly higher. As a result they will be earning more and your organization will be impacted by considerable growth. Currently, whether you realize it or not, you are in many cases sharing your accounts with competitors. As your sales professionals get deeper, wider and broader within their accounts you will experience an increase in “customer share.” As a consequence, as a dealer principal, you will then have an opportunity to increase your “market share” by adding additional sales professionals and increase your customer base.

If you would like more information on how to implement or improve your MPS compensation model, help is available to you from the Print Management Solutions Group.

Steve Rolla and Teri Dunn are senior consultants and facilitators for Print Management Solutions Group based in Ormond Beach, Florida. Print Management Solutions Group provides a complete suite of MPS consulting and dealer education services. Contact information: 800-403-9379.