Advertising and Angie's List and Communications and Small Business

Angie's List alters pay formula for huge sales force

December 15, 2012

At fast-growing, cash-burning Angie’s List, the sales force is the backbone of the company.

Success is predicated on that staff’s selling ads to service providers in more than 200 markets around the country. The better job they do, the faster those markets mature and the closer the company comes to earning a profit.

Salespeople compose at least 600 of the more than 1,000 employees at Angie’s, which publishes consumer reviews of plumbers, pet groomers and other service providers.

Oesterle Oesterle

So it’s no small thing when the Indianapolis-based company, in a move to improve cash flow by an estimated $10 million a year, changes the way it pays its sales force.

Currently, most of them are paid on straight commission. They get paid when they originate an ad. Starting this quarter, Angie’s will begin paying those salespeople as the money comes in from the service provider over the year contract period.

To compensate for the delay in commission payments, the company is transitioning to a base-salary-plus-commission structure.

It’s too early to tell what effect the changes will have on Angie’s sales staff, if any.

“Angie’s has gone through and cut all the salespeople’s money by about 40 percent,” a man identifying himself as a former salesperson, told IBJ. “You’re going to hear a huge sucking sound of people” leaving.

Asked to comment on the pay change, Angie’s List spokeswoman Cheryl Reed described the issue as “minutia” and said the company would not talk about it further.

Yet during the company’s recent third-quarter earnings call, analysts asked Angie’s CEO Bill Oesterle to elaborate on the pay change. Oesterle told analysts the sales force “has been reacting very positively to this, actually.”

Those analysts also made note of the compensation change in their recent reports on the company.

We are “a bit concerned that this change could disrupt the sales force,” wrote Barrington Research analyst Jeff Houston in a Nov. 29 report.

Houston added that the effect will be that pay should be the same, however, “just paid out differently.”

Chicago-based online coupon company Groupon Inc. this year made news after its salespeople complained of changing pay calculations and other grievances. Hundreds of Groupon salespeople floated their resumes, to the delight of firms looking to hire them, The Wall Street Journal reported.

Compensation changes generally aren’t a big event if the sales staff takes home the same amount of money to satisfy their fixed expenses, said Rosann Spiro, a professor of marketing and executive director of the Center for Global Sales Leadership at Indiana University.

She also said sometimes there may be the potential to earn more money after introducing a salary component, assuming commission rates remain the same.

On the other hand, “in my opinion, there’s a danger in such a move,” said Richard Canada, Spiro’s colleague at the center and chairman of Indianapolis-based The Dartmouth Group, a sales research firm.

One advantage of straight commission is that it can be a powerful incentive for a salesperson to charge after a new client, Canada said. Salespeople can otherwise gravitate toward trying to drive more business out of existing customers. Angie’s List is trying to penetrate markets quickly, which means adding as many new service providers to the advertising ranks as possible.

“The risk that [Angie’s List officers] are going to run is churning and burning their telemarketing [sales]people. Then you’re going to increase expenses on the hiring side and then getting them up to speed,” Canada said.

Angie’s List has been incurring big expenses in sales, but mainly that’s come from adding salespeople to grow newer markets.

At Sept. 30, compared with the same quarter last year, it had increased the number of salespeople originating new advertising contracts and e-commerce transactions 72 percent—to 556 people.

More of its revenue in the last quarter was originated from first-year, or newly originated, service provider ad contracts.

New contracts pay higher commissions.

angieslist-box.gif“Our best performance this year has been originating first-year ad contracts and new advertisers,” Oesterle told analysts. “We pay higher commissions on this new revenue. We’re willing to do so because of its strong recurring characteristics. Ad dollars earned 80 points of incremental margin when they renew.”

Prepaid and deferred commissions were $17.6 million at Sept. 30, compared with $10.5 million at the end of 2011.

“You’re effectively providing loans to the new sales reps and that’s a working-capital issue,” Oesterle said during the conference call.

Paying commissions upfront but waiting for service provider cash over the one-year life of the contract was problematic, Canaccord Genuity analyst Michael Graham said in a report last month.

“This dynamic has been consuming working capital and contributing to the perception that Angie’s is headed for a cash crunch if it wants to maintain high growth,” Graham said.

In 2013, with the rate of growth at the company, it would have cost another $10 million in prepaid commissions without the changes, Oesterle said.

“By making this change, we can actually grow the ad sales force without growing that prepaid commission expense.”

The financial downside to the change in compensation is, for at least a few quarters, higher selling expenses. The company told analysts recently that it expects that selling expense for the fourth quarter to be in the range of $18 million to $19 million. That compares with $11.4 million in the same quarter last year.

Angie’s List went public in November 2011 at $13 a share, with net proceeds of $88 million.

The company hasn’t had a single profitable year in its 17 years in business. It wooed Wall Street with a business plan that achieves profitability once a sufficient number of its markets matures. A mature market is one in which a sufficient number of consumers write reviews on service providers, increasing the perceived value of belonging. That causes more service providers in a market to advertise with Angie’s List.

And with more members, Angie’s can, as time goes on, charge higher advertising rates and membership fees. Membership renewals increase while the cost of recruiting new members falls.

Some analysts that follow the company see the fourth quarter of next year as a potentially profitable one—with 2014 as the year of possible ascendancy to full-year profit.

Angie’s shares have been trading lately at about $2 below their IPO price, a reaction in part to “largely a knee-jerk reaction to the high cash burn” the company has shown this year, Graham wrote.

“We believe the company is in the process of shaking off the perception that it cannot grow without continuing to burn a lot of cash.”•

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