Last month, I talked about the difficulties involved in raising prices to maintain or restore profitability. A workable approach to price improvement, of course, is just one part of a successful profit-protection strategy. Another is effective cost reduction. For vending, amusement and music operators, commissions are a major cost. Nearly all businesses grapple with pricing and cost containment. Commissions are a less widespread issue, but certainly not unique to us. Concessionaires confront a problem that is almost identical to ours.
Many operators view vending commissions as a financial burden and a prime obstacle to cost-reduction measures. Frankly, I have often wondered why commissions ever were paid to location owners in the first place. If vending and amusement operators are providing a service to the location’s personnel, shouldn’t the operator charge for that service, rather than offering to pay for the privilege of providing it?
Discussing this topic with colleagues and readers has given me better insight into the question, and the legitimate and illegitimate uses of commission. A legitimate issue is that installing full-line vending equipment, or anything else that uses electricity, is going to impose some expense on the owner of the premises. The vending machines also will contribute to litter and solid waste; if they include a coffee or cup cold drink machine, there will be spills, too. Offering a commission to offset the cost of energy, the use of the floorspace and the increased demand on janitorial services seems only fair, if you accept this argument.
The illegitimate use (which has been far more harmful over the long haul) is to obtain an unfair competitive edge by offering something other than better quality and service. In many industries, like coffee service, this edge is sought through price-cutting. In vending and concessions, it takes the form of offering a commission higher than the account’s profitability can justify. This has been a problem for as long as anyone can remember. While no one really cares if somebody wants to put himself out of business, the practice of offering excessive commissions causes extensive collateral damage. At best, it arouses unrealistic expectations among prospective clients. The disreputable operator offers very high commissions; after he goes out of business, everyone else has to go back into a corrupted marketplace and explain that they can’t pay that kind of commission because, if they try, they will go out of business too.
What may be worse is the effect that this practice has on the reputation of the industry. Someone who has secured a client by offering an unrealistically high commission is tempted to cheat, by under-reporting sales. Word gets around, and honest operators find themselves under suspicion. This creates a host of problems, most of which can be grouped under the heading, bad public image.
The analogous bad practice in coffee service, price-cutting, similarly distorts the market and encourages foolish or malicious practitioners to cheat, historically by providing lighter packages than promised, and/or fewer packages in the kit than specified. Again, these ploys make it more difficult for the great majority of honest operators, and injure the long-term health of the industry.
During the height of the coffee service revolution, there were serious industry observers who argued that inferior product and light pack weights, if not misrepresented to customers, had a respectable place in the market. There were clients who did not want, or could not afford, anything better. Similarly, I suppose there are decision-makers who are rewarded for granting a contract specifying an exorbitant commission, even though the actual payments almost certainly will be less than would result from a lower rate, but better equipment, more professional service and a menu more carefully designed to maximize sales revenue. The reality is, as long as there is free enterprise (and management companies are vying for a piece of the pie), commissions aren’t going away any time soon. In what follows, I am speaking about honestly calculated commissions on accurately reported sales, at rates within contemporary industry norms.
Naturally, the main objective of any business is to earn adequate profits to attain a return on assets that not only permits the business to survive and grow, but provides an adequate reward for the effort and risk of running it. In these industries’ formative days, equipment, labor and fuel were cheap, margins were high, and the return was ample to provide some flexibility in designing commission program. But, as we all are keenly aware, in today’s economic environment, the preconditions for that comfortable situation no longer exist. Even operators with prime locations and modern equipment kept “clean, filled and working” may struggle simply to break even. At a recent Profit Improvement seminar led by Brad Bachtelle and Gary Terrell for the National Automatic Merchandising Association, the speakers reported that average operating-company profit in 1999 was 5.6%, and the average commission rate was 6.2%. By 2006, average profit had plunged to 0.9%, while the commission average went up to 7% (see VT, March). It’s a new world that requires innovative strategies for success.
Imaginative operators always have recognized that a flexible and creative approach to commissions can reduce the burden and increase account satisfaction. It certainly is something to keep in sight, on the table, when striving to adjust to higher operating expenses and increased cost of goods. Adjustments to commission rate can be offered as options from which clients can choose when faced with the need to increase prices or impose a surcharge on fuel.
But even if we were to do away with commissions, would all our financial perplexities be resolved? I doubt it. We would still need to increase management efficiency and reduce operating friction to get the best results. Cutting down on vending commission is not enough, and more often than not, it isn’t even an option in today’s competitive environment. We need change our mindset and explore ways that commissions can be used as a tool to reduce costs or improve profits (or both). And we need to analyze our overall management practices and revisit our marketing strategies.