Definition: It is the percentage of value that a salesperson can receive to compensate for their efforts in promoting a product and making a sale.
Explanation:
One good strategy to increase sales is to get other people to market your products online or offline.
Companies often apply this marketing strategy to encourage their salespeople to drive more sales in the company.
The Most Common Sales Commission Structures
There are different types of sales commission structures that most companies have for their sales team.
It can be a 1-digit commission or a 3-digit commission that motivates them to make more sales.
Below are five of the most common commission structures that big and small companies use:
Straight Commission Plan
This structure gives 100% commissions to sales representatives from their sales.
It’s also a very powerful structure since it easily sets your brand out there
Some companies may not put a commission cap on this structure since sales reps don’t receive a base salary on a regular basis, and are only considered as independent contractors.
To put it simply, a sales rep will earn through commissions, so if they aren’t able to make a sale, then they aren’t earning anything.
Base Salary + Commissions
This structure is very common in the marketing industry since a sales representative gets to earn commissions as bonuses while receiving a base salary.
The base salary plus commission structure is ideal for companies who are interested to hire the best salesperson who can get their products or services out there while increasing sales.
Revenue Commission
Another common structure that’s also quite similar to base salary plus commission, but with a flat commission rate per sale.
For example, a sales representative in the company successfully sold a product worth $10,000.
This means that the sales rep can earn $500 (5%) in commission for selling that particular product.
Rates may vary depending on the company’s commission rate structure.
Gross Margin Commissions
This particular commission structure is calculated on the gross revenue, which means that sales reps can earn a percentage of the profit.
It works similarly to revenue commission, except that they wouldn’t earn from the total sale price.
So if they were able to sell a product or service worth $100,000 and the total amount that cost to complete the transaction was $80,000, then they can earn a percentage of the remaining $20,000.
Tiered Commissions
This commission structure motivates sales reps to perform well in the market to rank high and get higher commissions when they reach a certain quota.
For example, if they close 10 sales in a week, they can get a 5% commission on all sales, and if they close 25 sales the next week, they can receive a 12% commission.
Benefits of Sales Commissions for Companies
Other than giving bonuses to salespersons for their hard work, developing a sales commission structure can contribute to the company’s success.
Boosts Productivity
Receiving sales commissions can boost the productivity of your employees.
Since one of their goals is to close a sale, this motivates them to be more productive in their job and maximize their efforts to generate more income.
Motivation
Most of the time, companies that use commission structures motivate their employees to drive more sales since they know that if they keep selling more, then they can receive more.
Although sometimes it can depend on the salesperson, especially if they love their jobs the most, receiving bonuses from sales is already enough to increase motivation.
Tips for creating a sales commission structure
When building a sales commission structure for your business, always remember not to take too much risk as it can negatively affect your company’s reputation.
Be Supportive
Support your salespeople by not capping salaries that take away their motivation to make a sale as this can only make them develop grudges over your company and leave.
If you think they’re earning more than what they’re supposed to, let them be.
Do it Right
Get your sales commission structure right the first time by making sure that you’re not always making changes that could affect the performance of your salespeople.
Unless it motivates them more especially if it is a change that’s highly beneficial for them, such as an increase in commission rates for example.
Set Clear and Simple Rules
Setting clear and simple rules is already enough to have a clear commission structure that you’re planning to implement.
Let them sign an agreement to let them know what they should do and understand their limits more.
Who knows, they might have been getting client information for their personal gain and damage the reputation of your company by calling a prospect nonstop to make a sale?
Despite the fact that your sales people are fully responsible for driving more sales, create a structure that doesn’t encourage them to do the impossible.
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