Commissions: What Good Are They?
Most vending machine operators acquire locations by offering proprietors the best deal in terms of service and commissions. Commissions are a portion of vending machine profits given to the proprietor in exchange for exclusive rights to a specific vending location. However, with 75% of vending machine operators earning a 3.8% return on assets (ROA), the standard 7% commission is a financial drain.
What if all vending machine operators chose to do away with commissions?
Aside from the legal ramifications, doing away with commissions would not necessarily solve the financial burdens of struggling vending machine operators. In fact, the top 25% of all vending machine operators earn an average 22% ROA and pay higher commissions than the lower 75% of vending machine operators. This reflects the fact that success in the vending machine industry should be blamed on poor management, and not high commission rates. A smart vending machine operator will first ensure that their anticipated profit will cover their return on assets requirement. Any expected vending machine profit beyond the ROA can be offered as commission.
However, let’s imagine if there were no commissions. What would happen to the successful vending machine operators? With a 22% ROA, in 10 years an invested $1 million would become over $6 million! Returns this high would not last in a free market economy. Instead of offering commissions, vending machine operators would necessarily be forced to find other ways to invest their money to retain their clients. For example, a vending machine operator would offer the vending machine location owners other incentives like newer or more modern equipment, additional services, or lower sale prices on beverages in soft drink vending machines or candies and snacks in candy snack vending machines. The net effect of these incentives could well result in a lower ROA than the payment of commissions.
So, how do the top vending machine operators use commissions to their advantage?
Vending machine operators can often increase their share of the vending machine market by offering higher commissions. An increase in commission rates can be covered by a unit price increase in vending machine items. For instance, if a vending machine operator wanted to offer a 5% increase in commission rates, they may also negotiate a $.25 unit price increase on all beverages and candy snack items in soft drink and candy/snack vending machines. Therefore all candy snack vending machine items would be priced at $1 instead of $0.75 and all soft drink vending machine items would increase from $.75 to $1 or more. Increasing vending machine prices and commission rates often please proprietors who will eventually more than double their profits. Although some vending machine operators are hesitant to raise prices, studies have shown that while sales drop off at first, they will come back once customers adjust to higher prices. An increase in unit prices also means that each machine serviced will have higher revenues and profits, which will help to cover route costs.
Contrary to conventional wisdom, commissions are not the Achilles heel of vending machines. Instead, they are a tool used by savvy vending machine operators to increase their market share. Vending machine operators who struggle to pay commission rates because of low of a low ROA rate should take a look at their overall management. Market research based product choices, higher vending prices, modern equipment, proper inventory control, and excellent technical service are all critical components of a high return on investment and a vending machine company’s profitability
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*Vencoa is an authorized distributor of USI vending machines and is not an authorized distributor of Selectivend products.