Cost of Sales
Companies in the process of establishing a North American representation are usually surprised by the cost of sales on this continent. Compared to Representative Offices in other areas of the world, the cost appears more or less outrageous.
So why can’t a North American Representation survive with the same commission paid elsewhere?
The answer to this question is quite complex. Key factors are:
- The size of the continent! If you’re in Boston (Massachusetts), Los Angeles, (California) is farther away than Europe, and thanks to the airlines’ cumbersome rate policies it’s up to four times more expensive to get there. Even once you’re there, this story won’t end. California itself is bigger than Germany, and you’ll still have to pay excessive airfares to just get around there, whereas your South Korean Rep can probably reach all of his customers by car within a day and combine appointments.
- The lack of loyalty. Loyalty between business partners is less developed than it is in Europe or Asia. If you have successfully convinced an important customer, you’ll better get there frequently. If you don’t, somebody else will.
- The different market structure. Many companies dealing with one or two major competitors in Europe find themselves competing against two dozen locally operating smaller companies in North America. Compared to other regions in the world without any local competition, this will force you to provide and manage more market-specific adaptations. If you don’t do it, somebody else will.
- Personnel cost. Personnel cost is on average about the same as in central Europe, but it’s not as evenly spread. You can get someone to fill a simple job for not too much money. For highly skilled personnel, however, you’ll pay much more.
Numerous approaches have been tried to get this cost of sales down, we’ve yet to see one that really works without jeopardizing the business:
- People have tried to work with a Representative willing to accept a low commission just to find out later, that he was either only working in his local area while accepting windfall orders from other parts of the country, or he and his personnel were unwilling / unable to spend the time and resources required to sufficiently understand the products.
- People have tried to work with half a dozen locally operating Representatives coordinated from Europe directly, just to find out later that as soon as larger customers come into play, their representatives start to compete against each other in order to get the big fish’s business thus ruining any price structure while the only coordinating authority is 5000 kilometers away.
- People have tried to establish their own affiliate in North America, before they were ready to provide the required funding, and implemented a transfer price structure similar to their other Representatives operating on lower cost. In this case, the truth comes to surface as soon as the entire company’s P&L reports are consolidated.
The answer is a product or a line of products that sells through technology leadership, providing margins allowing for the associated cost of sales and appropriate planning.