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There's a well-known story circulating in foreign markets: back in the late 1940s, just before the patent for oxytetracycline was approved, John Smith, who was on his deathbed, made a serious request to his successor. He emphasized that if the successor continued to develop the antibiotic using soil-based methods, they should avoid repeating the same mistakes made with penicillin products. Instead of handing the product off to others for sale, Smith urged them to sell it directly this time.
Why sell your own products? The answer lies in the significant profits that can be earned and the critical importance of maintaining direct contact with consumers. Taiwanese entrepreneur Shi Zhengrong’s "smile curve" model has drawn attention from economists, management scientists, and business leaders alike. This model highlights why selling your own products is essential. With profit on the vertical axis and the product lifecycle stages on the horizontal axis—ranging from research and development to production, distribution, sales, and branding—the curve reveals how profits are highest at both ends and lowest in the middle, resembling a smile. When applied to the industrial chain, this concept shows that the global economy now sees the highest added value in R&D and marketing segments, while manufacturing processes typically offer lower returns—a pattern often depicted as a "V" shape.
This observation is supported by extensive global trade data: in today's global industrial chain, high-end segments account for 90-95% of total product profits, whereas low-end segments contribute only 5-10%. Currently, many Chinese processing firms earn mere 1-2% profit margins. On this curve, R&D/design and sales/marketing represent the high-margin sectors, while production and manufacturing fall in the low-margin middle. Typically, these two high-margin industries enjoy profit margins between 20-25%, compared to the mere 5% margin in mid-range manufacturing. Thus, innovation and R&D are fundamental to a company’s survival, and establishing your own brand through a dedicated marketing team is crucial for sustainable growth. Overseas companies, whether innovators or imitators, almost always build their own sales and marketing teams. In contrast, few Chinese firms prefer outsourcing their product sales to others. Instead, they tend to invest in product development.
Why do Chinese companies shy away from selling their own products? Often, it's due to a lack of proper sales force management education and a fear of managing such teams effectively. Professor Huang Dehua observed that there’s a similar "smile curve" in the realm of management. When plotting industry chain activities against management costs (or difficulties), the curve reveals that managing R&D and marketing is challenging, while production and processing management is relatively easier. Huang spent a year in production, another year in research institutions, and 14 years in sales, concluding that executives and production staff are simpler to manage than developers and marketers. Developers and marketers are highly independent and rely heavily on intellectual pursuits. Researchers might take weeks or months to see tangible results from their work, while salespeople operate outside the office, making their work processes unpredictable. Managing these individuals requires higher costs and presents unique challenges.
Many entrepreneurs shared with Huang that once production stabilizes, managing it becomes straightforward. But sales management remains complex and costly. Outsourcing products to foreign-owned businesses or relying on investment channels can distance companies from consumers and markets, leading to slower responses to changing demands. This reliance on intermediaries poses significant risks during economic downturns. Companies with long-term visions typically combine their own sales teams with external distribution channels. Such "sales envoys" directly influence customer purchasing decisions and provide continuous feedback on consumer needs. Meanwhile, logistics and distribution tasks are handled by dealers. The key is improving sales team management skills to better understand consumer preferences and market trends, laying the groundwork for creating strong, loyal brands.
Unfortunately, very few Chinese companies capitalize on the profits from the right side of the smile curve. This is an area where Chinese enterprises must focus their efforts. Some successful domestic firms have ventured abroad, building extensive sales networks, which has significantly raised sales management costs. This suggests that China’s sales team management practices still lag behind global standards, lacking replicable scientific theories and relying more on experience than on robust methodologies.
The ability to conduct business well does not equate to strong sales team management. Just because someone excels at selling passively doesn’t mean they can actively engage customers and close deals. Mastering active sales force management is the true skill. One critical aspect is designing effective sales compensation structures. A Hong Kong executive once devised a compensation plan for sales staff, comprising base salary, commissions, and bonuses. The rules were intricate: different products had varying sales targets; exceeding these targets resulted in bonuses calculated at fixed amounts per unit, uncapped; sales below 70% qualified for no bonus; between 70-100%, bonuses depended on the completion rate; above 100%, bonuses were calculated at 100%. Bonuses were distributed monthly, starting from the next quarter.
What impact did this compensation scheme have? Imagine a quarterly sales target of 600 units with an initial market baseline of 400 units per quarter. In practice, this could lead to uneven performance: 30 units in the first month, 50 in the second, 70 in the third, and so on, culminating in a "hockey stick" effect. This phenomenon was disastrous for the company. Despite stable cumulative sales, the company ended up paying excessive bonuses. For instance, if a salesperson achieved 1200 units over three quarters, averaging 400 units per quarter, no bonus should be paid. Yet, in reality, the salesperson received zero bonuses in the first and third quarters but earned 35,000 yuan in the second quarter. This encouraged gaming the system rather than consistent effort.
Through studying foreign enterprises in China, Huang Dehua noticed they rarely outsourced sales. They relied on their own teams to build reliable, professional, and efficient sales forces. After all, the sales team is the frontline force driving growth, and without them, capturing market positions is nearly impossible. As the saying goes, "a thriving sales team equals a thriving company." Successful future firms will focus on optimizing their sales team's scale structure, setting realistic sales targets, planning territories, designing fair compensation systems, evaluating performance, and grooming successors. By addressing issues like the ratchet effect and the hockey stick phenomenon, companies can achieve breakthroughs on the right side of the smile curve. Chinese enterprises must excel in sales force management to thrive globally. (Huang Dehua)
June 18, 2025