Finally, think about the salespeople you’re going to employ. These people are key to your early success if you need more than just you to do the selling. Even if the actual job is waiting tables, the real role is selling.
I think that, initially at least, you should avoid using share options as a way of attracting and motivating sales people unless it’s absolutely necessary. Under virtually no circumstances would I do this. It’s your business; so don’t give it away. If you accept this advice, you’re almost certainly going to need to have some other sort of bonus scheme to get your salespeople selling what you want them to. This is crucial.
It can be tricky if you’re in a business that has to negotiate discounts. If you make the bonus scheme a straight percentage of sales, you could have problems with the price at which sales are made. Most salespeople will happily make a sale by throwing in a ten per cent discount – for instance, selling something for £90 rather than working harder for the full price of £100. After all, giving things away is much easier than selling them. You’ll have to explain to them that by giving away ten per cent of the selling price they are actually giving away 33% of the profit – or even more. Work it out if you don’t
believe me. Here’s an example of a product with a low gross margin to illustrate the point.
The selling price may only have gone down by 10%, but the net profit has dropped by 66%.
I have seen owners of businesses do very well by giving the salespeople incentives to achieve the gross margin – sales price minus the cost of the product or service sold – rather than the actual sales price. That way the motivation is to sell at list price.
This may be a more expensive sales bonus scheme but could easily earn its costs. If there’s no share option to offer the people who are responsible for growing your business, then they’re going to be expensive. As usual, it’s a trade-off, but there is no point in being in business if you do not sell your products and services at a healthy price – so get it right.