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Does Your Business Measure Up?
By: Leslie Joseph and Rick Ebel
Issue: 2009apr
How good were the “good times” for industry distributors before the economy made a U-turn late last year? The PPAI 2008 Distributor Business Survey, conducted last fall, gives some clues to benchmark business profitability and to guide companies’ aspirations once economic recovery is under way.
Executed for the Association by LJ Market Research in San Diego, the triennial study enables distributors to compare their performance and practices against norms established by other reporting firms in their sales classification. The 2008 study aggregates distributors into four groups by size, ranging from firms doing less than $250,000 in sales to companies with promotional products revenues exceeding $5 million. The data were collected last fall, just as “bail-out” was becoming the most-used compound noun in the nation’s vocabulary.
As a measure of performance, exactly half of distributor respondents in 2008 reported net income before taxes as being more than 10 percent of sales. Three years earlier only 43 percent of distributors were found in that comfortable spot.
About six in 10 distributors reported their cost of goods sold was no more than 60 percent of net sales. This figure corresponds closely with findings in the 2005 study.
The highest growth sectors of the distributor population are represented by companies with sales exceeding $1 million, a fact consistent with findings in PPAI’s annual distributor sales estimate. Double-digit growth rates over a three-year period are reported by 46 percent of firms with sales in the $1 million to $5 million bracket and by 44 percent of companies with revenues more than $5 million. Twelve percent of respondents admit their sales have been flat during the past three years, a situation reflected in all four size categories.
Salary And Compensation
As one might expect, compensation for owners and CEOs correlates well with company revenues. Among distributors with sales of $250,000 or less, 81 percent of firms paid the boss less than $60,000 in salary, commission and bonus. So maybe big is good. Compensation exceeded $150,000 for 43 percent of the top execs at firms with revenues more than $5 million. Also reported in the survey were salary averages for sales managers and customer service representatives.
Long a staple of the industry’s sales force, independent contractors are engaged by 45 percent of the distributors. For the rest—employee salespeople—28 percent are classified as commission sellers, 21 percent as salaried and six percent are assigned to “other.”
What percentage of their gross profit do distributors pay their sales force? Tabulated answers to this question appear in Table 1.
Table 1: Percent Of Gross Profit Paid To Sales Force
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Firms w/ Independent Contractors |
Firms w/Commission Salespeople |
Firms w/Salaried Salespeople |
| 45% Or Less | 18% | 28% | 22% | | 50% | 39% | 26% | 12% | | 55% Or More | 4% | 2% | 4% | | Sliding % Based On Volume | 5% | 8% | 6% | | % Based On Gross Sales | 1% | 6% | 16% |
Another compensation issue addressed is employee benefits. Health insurance continues to be the benefit cited most frequently: 50 percent of distributors make it available to principals, 34 percent offer it to office personnel, 27 percent to employee salespeople and two percent to independent contractors. These figures represent a small decline from 2005. As in other industries, the trend toward having individuals pay for all or part of the premiums continues.
Sales Force
Referrals remain the favored method of recruiting new salespeople, with 46 percent of respondents reporting that choice. Once on board, new salespeople are pretty much left to their own devices in terms of training. Only 16 percent of distributors reported having a formal training program, and when such training is offered, it is most likely to be provided by larger distributors.
About seven of 10 distributors say they encourage their salespeople to contact suppliers directly. Generally, the larger the distributor, the more favorable the firm is to this practice. Larger firms are also more likely to permit salespeople to attend industry shows.
Speaking of shows, The PPAI Expo in Las Vegas continues to be the event most attended by distributor principals (see Table 2).
Table 2: Show Attendance By Principals
| |
2005 |
2008 |
| The PPAI Expo | 71% | 65% | | Traveling Shows | 43% | 52% | | Regional Shows | 56% | 55% | | Premium/Incentive Shows | 14% | 21% | | ASI Shows | 37% | 32% | | Other | 6% | 5% |
Where do distributors turn when they want information about products? Industry shows are only one of the options for product research that distributors use. The most frequently cited product-research choices in 2008 were SAGE and the internet. Table 3 indicates considerable changes in preferences for the top five options.
Table 3: Top Five Product Research Methods
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2005: Frequency Of Mentions |
2008: Frequency Of Mentions |
| SAGE | 34% | 43% | | Internet | 49% | 41% | | ESP Online | 33% | 37% | | ASI Register | 45% | 28% | | Industry Shows | 34% | 28% |
Clients
Twenty-three percent (same as 2005) of distributors say they get at least one-fifth of their business from new clients each year. Distributor methods for landing new accounts appear to be changing (see Table 4). Response to a question offering 13 client-acquisition methods shows diminished reliance on referrals from existing customers, on networking and on cold calling. The trend is to develop contacts at business organizations and clubs and to generate internet e-mails and website inquiries.
| Table 4: Distributors’ Top Five Sources Of New Clients |
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2002: Frequency Of Mentions |
2005: Frequency Of Mentions |
2008: Frequency Of Mentions |
| Referrals From Clients | 85% | 87% | 74% | | Networking | 40% | 53% | 43% | | Business Organizations/Clubs | 21% | 27% | 36% | | Internet: E-mail/Website Inquiries | 9% | 15% | 24% | | Cold Calling | 33% | 31% | 21% |
In rank order, the three best places to network for new clients, say distributors, are special events, chamber of commerce mixers and trade associations.
How did distributor respondents land their top three accounts? Again in rank order: referrals, networking and cold calling.
When it comes to self-promotion methods, distributors are definitely the shoemakers who stick to their lasts. The biggest group by far—81 percent—say they use promotional products to curry favor for their businesses. The next most-mentioned method of self-promotion is the internet, followed by exhibiting at tradeshows/fairs and direct mail.
Which of 17 methods listed do respondents think is the single most effective option for promoting their businesses? Once again the winner is promotional products—by a wide margin.
About two-thirds of respondents say they broadcast e-mail specials to their customers, but only seven percent say they hammer away weekly. Nearly half (48 percent) report they generate art for their e-mails in-house.
If you are captain of a large distributorship, chances are your firm’s average order size in terms of dollars is fatter than orders placed with smaller companies. Fifty-seven percent of distributors with sales exceeding $5 million reported order sizes averaging more than $750. That level was claimed by only 27 percent of distributors doing less than $250,000 in sales.
Despite skinnier order sizes, smaller distributors are getting more activity from their accounts. Sixty-seven percent of distributors under $250,000 say their active customers comprise more than half their account list (vs. 60 percent of distributors in the $5 million-plus bracket). For reasons not readily apparent, though, upper mid-range distributors ($1 million to $5 million) hold the highest plurality. Almost three-fourths of that group reports an active customer ratio of more than 50 percent.
Services
Asked to check off all special services (from a list of 13) that they offered clients, respondents gave artwork the most mentions among services they executed in-house; screen printing and embroidery were the most mentioned of the outsourced services.
Table 5a: Top Five Special Services Offered In-House
% Of Mentions |
| Artwork | 76% | | Warehousing | 37% | | Fulfillment | 36% | | Layout/paste-up | 33% | | Online company stores | 32% |
*Because of multiple choices, percentage totals will exceed 100 percent.
Table 5B: Top Five Special Services Outsourced
% Of Mentions |
| Screen Printing | 76% | | Embroidery | 76% | | Engraving | 56% | | Imprinting | 55% | | Printing | 51% |
Twenty-three percent of respondents say they operate at least one company store (vs. 16 percent in 2005).
Transactions for many distributors involve more than selling merchandise; they include creative services and idea generation. Do they charge for this service by adding a fee to the price of the merchandise? Half of the respondents say they don’t; responses from the other half fall into three categories: “yes,” 22 percent; “sometimes,” 21 percent and “only if client uses our idea but does not place order with us,” six percent.
The 2008 Distributor Business Survey serves as a measuring stick and learning resource for distributor companies of all sizes to discover how other similar businesses operate. Among the advantages, the 2008 Distributor Business Survey can be useful in helping a distributor prepare a business plan. The problem is, about seven in 10 distributors say they do not have a formal, written business plan. Today’s sour economy may provide a test as to whether or not this omission really matters.
Leslie Joseph has tabulated the Distributor Business Survey since its inception in 1987.
Rick Ebel, former PPAI marketing communications director, is principal of Glenrich Business Studies, a business writing and research firm in Corvallis, Oregon.
Methodology
Mailed to 4,045 distributor members of PPAI, the 2008 Distributor Business Survey comprised 132 questions relating to eight subjects of interest to distributor owners: Business Organization, Employee Benefits, Sales Organization, Meetings/Training/Recruitment, Technology, Commissions, Special Services and Financials.
Completed questionnaires were received from 446 respondents—an 11.2 percent response rate. LJ Market Research, the San Diego firm that has executed the survey every three years, calculates the margin of error of the survey at +/- 4.38 percent at the 95 percent confidence level. This statistic meets normative standards of survey research.
Full survey results are available to PPAI members only for $45. To order, call 972-258-3087 or e-mail your request to resource@ppai.org.
The More You Know
As the data indicate, the PPAI Distributor Business Survey can offer guidance in making choices to the curious distributor. You can find answers to questions such as:
Which kind of spec sample is more likely to produce an order—actual or virtual samples?
Twenty-six percent of respondents say actual samples result in an order “most of the time”; only 13 percent make that observation for virtual samples.
Are my accounts receivable in line with the rest of the distributor population?
Slightly more than half (52 percent) of distributors report the average age for their accounts receivable runs between 30 and 45 days. In 2005, 54 percent said “less than 30 days.”
Which sales aids are likely to be the most important to my firm?
You are in tune with your peers if you use catalogs (reported by 76 percent of respondents), random samples (46 percent) and supplier websites (27 percent).
What artwork software should my firm use?
Two-thirds of distributor respondents say they favor Adobe Illustrator.
My firm doesn’t have a website. Are we in the minority?
Definitely. Only 14 percent of industry distributors do not have one. And six of 10 distributors use it to take customer orders.
Can I assume my terms of sale—net 30—reflects the standard for the industry?
Net 30 remains the practice for two-thirds of your peers.
Distributor Reveal What Works For Them
Tom Miller, President, The Miller Company on new business:
“I don’t think there is any magic formula for getting new business. We have a multi-faceted approach. The best thing we can do is help our customers make good decisions about their business. We spend very little time selling specific products. We spend a lot of time trying to understand what our customers are doing with their brands. One question we always ask is, ‘why are you buying that? What are you trying to accomplish?’ That always leads to a stronger discussion about the marketplace.”
Randy Spring, MAS, President, Cedric Spring & Associates on self promotions:
“We won a distributor self-promotion Pyramid award a few years ago using a three-part direct mail program, and we’ve kept that in play. The promotion talks about how promotional products can help budget cuts and we include a Band-Aid. The key thing is to try to build name recognition beyond your current client list. We’ve found that this works well.”
Karie Cosden, MAS, President, Connect The Dots Promotions LLC on new business:
"I am a one-woman show so I find that networking is the best way to mine for new business. I love being around people so getting involved in one or two trade associations has worked really well for me. I don't just join—I get involved in helping with events and monthly luncheons. I help check people in at the front desk so I can meet all of the attendees and they become familiar with me and my company name. Working with others in a professioanl setting builds the trust I need."
Ryan Kubat, Owner, Corporate Recogntion, Inc. on new business:
“We do a four-hour end-user show every other year that has gotten people talking. We invite all of our customers, they bring their friends and the manufacturer reps come—we’ve had as many as 150 people there. It’s a ton of work but very effective.”
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