ADVERTISING, DISTRIBUTION, & SALES
In staffing a medtech company, its executives confront the questions of what type of sales force to employ and where to find the needed sales representatives. It is not unusual for a company to lack a clear perspective regarding the available options. But it probably knows that it must generate solid market share in multiple market segments in order to survive and thrive. Successful application of effort in building a sales force can provide the company with the competitive advantage it seeks.
This article reviews four common sales force structures: direct reps, independent reps, dealers and distributors, and hybrid sales force models. The structure that is most appropriate for a given medtech company depends heavily on such factors as the company's size, available cash, sales objectives, and need to establish a market share.
Direct sales representatives are employees of the company whose products they sell. Sometimes called W-2 reps after the nature of their paychecks, they typically receive a base salary and, most of the time, are also paid commissions and bonuses. These reps represent exclusively the products and services of the company that employs them.
They can be further categorized as inside or outside sales reps. Inside reps almost always operate from within the company building, performing sales calls and sales support functions. Naturally, outside reps perform their duties outside the company, often working from home or from company-provided offices in their territory. Having a dedicated sales force focused on promoting only the company's own medical products or services can be a luxury. But this luxury, like most luxuries, comes at a cost.
The true expense of a W-2 rep in the medical industry today probably begins with a fixed cost of $100,000. This figure may be shocking to some medtech industry executives. Others will find it simply impossible to afford. The cost of adequately staffing a direct sales force with vertical market specialists is prohibitive for all but large companies, because the fixed costs are too high. And this fixed expense provides no performance guarantees, either.
Good news for large medical device manufacturing companies is that the pool of potential entry-level device sales reps continues to grow, as many college graduates are attracted to the opportunity to get a foothold in the lucrative medtech market. These new reps bring little or no experience to the job; however, they do have a desire to prove themselves to their first employers, who will be companies that can afford the cost and time required to train them.
Independent Sales Reps
Independent sales reps (ISRs), because of their self-employed status, are sometimes referred to as 1099s. ISRs perform a sales function similar to that of direct outside reps, but they work independently of any company they represent. They sell a number of related products, called a portfolio, on a straight commission basis. Other designations for sales reps of this type include manufacturer's representative and sales agent.
Being essentially business owners, independent reps absorb virtually all expenses themselves. Because they assume these expenses, companies that contract for their services pay them commissions at a higher rate. Independent reps' territories are often larger than those of direct reps. That is because greater geographic coverage may be necessary for achieving adequate compensation.
An independent sales rep will typically represent five to eight complementary product lines. Each line will have its distinctive price point and buying cycle so as to assure the rep a steady flow of income throughout the year. The rep will devote his or her time to the product lines that stand to pay the most over the long haul while requiring smaller investments of time.
Most ISRs are paid a commission between 10 and 30%. While these commissions are higher than the typical 2 to 5% paid to direct employees, the manufacturer nevertheless sees savings in this arrangement. Benefits such as medical, dental, and vision insurance, life insurance, disability insurance, unemployment insurance, 401(k)s, and annual bonuses are not offered to independent reps, nor are such perks as a company car or car allowance, laptops, cell phones, and expense accounts extended to them. For many companies, these savings can be substantial.
And not only do independent sales reps assume all expenses themselves; they also get paidcollect their commissiononly after they have sold something, and in many instances only after the manufacturer gets paid for the product the rep sold.
Different commissions are paid for different products, depending on volume demand and repeat orders, or turnaround. Medical disposables, for example, often bring lower commissions of 5 to 14%, owing purely to the volumes usually characteristic of initial and repeat orders. Commissions for most medical equipment fall between 15 and 25%. Usually, commission rates will exceed 25% only for new product launches requiring some marketing work as well as selling, or if the rep is expected to warehouse inventory. This commission formula is particularly attractive to the smaller company with annual gross sales of less than $50 million. In fact, it is standard for the vast majority of medical device manufacturers starting out and in need of a sales force, which will naturally fall below the $50 million threshold.
A company that finds itself investing the same $100,000 in an ISR that it would in salary for a direct rep, through payment of a 25% straight commission, is assured of at least $400,000 in sales with none of the overhead or associated costs of an employee. This is ideal for companies looking to cut expenses while gaining a competitive edge.
Independent reps are generally proven top performers. Nearly three-quarters of the independent medical sales reps in the networking database of Global Medical Alliance (Middleton, WI) have had substantial medical sales experience, and two-thirds of them held positions in medical sales management before starting their own business.
Dealers and Distributors
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Figure 1. When direct and independent sales channels provide imperfect market coverage, dealers and distributors can fill the gaps. Here is a case, where market 3 lacks intensive coverage and market 4 is an insufficiently addressed opportunity, or perhaps even a hindrance.
In addition to direct and independent sales reps, dealers and distributors can play a role in a medical device company's sales efforts, too. They provide an additional option for selling products over a large expanse of territory.
Most dealers and distributors will buy products for somewhere between 35 and 55% off the list price, depending on price point and the volume purchased. Their compensation is derived from the margin of sales price over cost price. More often than not, they have a team of salespeople representing their lines.
Reasons for concern about selling exclusively through either dealers or distributors include the lack of selling time devoted to any one product line by any one person, and nonexclusivity: these operators are free to sell products similar to each other in a kind of open competition.
This business model, like that of the ISR, has proven effective in areas where it is not cost-justifiable to hire additional direct reps (see Figure 1).
Hybrid Sales Models
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Figure 2. A hybrid sales channel utilizes both direct sales reps and independent sales reps. By capitalizing on hybrid sales channels, a medtech company can penetrate 'middleman companies' such as outsourcing firms, contractors, and distributors, who in turn sell to dealers. This practice achieves a more complete sales mix among such intermediary companies that ultimately sell to end-users.
The medtech industry has also seen a trend among midsize and larger companies toward a hybrid modelthe use of independent sales reps and distributors in conjunction with a direct sales force (see Figure 2). Utilizing such a combination of sales channels can enable companies to meet their sales objectives without sacrificing differentiation in the medical device marketplace. Ideally, a hybrid sales operation should open up prime market opportunities that afford the company the best chance for profitable penetration.
The hybrid model is generally suitable when the medical device manufacturer's product or market mix is quite diverse, when its existing sales network does not adequately cover a targeted market, and when specialized reps are available. To establish a smooth-functioning hybrid system requires first developing a clear sales channel design concept covering the full market reach. Then, management should adjust the design for each trading area according to its distinctive features. The contracts negotiated should include market exclusivity clauses or should achieve that end through customer assignments.
Once regarded as a solution reserved for small start-up companies or small divisions within large companies, the hybrid model with its incorporation of independent reps has become increasingly popular with larger companies. The reason is that ISRs complement the direct sales force's efforts in rural areas where the territory is expansive and where long-standing relationships are necessary to move product. Also, when maintaining such relationships requires more attention than a distributor can provide, the independent rep offers that capability.
Criteria for Selecting an Approach
To determine which type of rep to use to sell its products, an organization needs a clear understanding of itself, of the market environment in which it is operating, and of the factors likely to significantly influence its business in coming years. Management style, expense, and strategic needs are criteria a company should consider when deciding what type of sales force to create.
Management. If company management requires close control of the sales force, then a direct sales approach is to be preferred. Independent sales reps, true to their name, are not likely to accept close management. Regular communication via e-mail, voice mail, and conference calls are best suited for managing a direct sales force, while phone calls are the best means for communicating with independent reps. If management has a need for regular reporting, forecasting, and other weekly exercises such as clinical feedback and data gathering, then direct sales representation is optimal for maintaining fullest control over the sales force.
Cost-Benefit. When the expense of having a direct rep in a sales territory is not sustainable, using an independent rep may provide an economically advantageous alternative. The same goes when the issue is selling a particular product that is not the primary focus of the company. Cost directly assignable to the ISR sales channel is defined as variable cost. This means that the cost is zero at zero sales volume. Taken all together, manufacturers have a much better cash flow position when they use independent sales reps rather than a direct sales force.
Strategic Approach. If a company believes that well-established relationships and technical expertise are necessary to sell its device or service, then independent sales reps should in theory provide an edge over direct reps in terms of strategic advantage. This is not to say that direct reps cannot offer tenure. Many can, but they command a high base salary most of the time, increasing the liability of the company. Often, this kind of salary is out of reach for smaller companies and small divisions of larger companies, where large fixed compensation is typically reserved for owners or executive managers.
Another factor is that direct reps often require more-extensive training than independent reps do. One reason for this, of course, is that many companies hire direct reps straight out of college; these beginners have very little or no sales experience or knowledge or experience of the medtech industry. On the other hand, when a company hires an independent rep, that rep probably already has a relevant background. Such a rep can have an impact on the bottom line much sooner.
Different medtech companies have different needs when it comes to finding customers for their products through the sales function. A variety of approaches are available to them. Careful consideration of the options in the light of self-understanding should reveal which sales force strategy is most likely to deliver the competitive advantage each company seeks.
John C. Zimmer is president of Global Medical Alliance LLC (Middleton WI), a networking consultant firm that aligns medical device manufacturers with independent sales representatives.