What Should Our Commission Structure Look Like?

One of the most common questions involved with the engagement of independent sales agents relates to commission. “How should we pay our sales agents?”

Unfortunately, while there is no standard flat rate or easy answer, there are a few very important guidelines to keep in mind.

The most important thing to remember is that nothing motivates sales agents better than an attractive commission schedule.

A commission-only strategy is the best way to pay sales agents, with the best method being a straight percentage of the sales price. Adding in reductions and additions based on interpretations is likely to lead to strife.

While there are a few different ways to handle this, most sales agents tend to prefer a straight percentage based on the sales price. They make a sale of £100 and commission is 25%, they know that they will receive £25 – simple for everyone to understand and no interpretation needed.

Variations to this schedule should be agreed and documented hopefully in a formal agreement between the principal and the agent – for example extra commission on a new customer signup.

If there are no fixed prices involved, a company might decide to go with a percentage of gross margin. It is worth pointing out, obvious as it is, that independent sales agents are in fact independent. They don’t work for your company, and don’t have much of a stake in what price a product sells for.

If they have the flexibility to negotiate the final sales price, it makes sense to base commission on the gross margin, both to encourage your agents to try and sell higher, and also to prevent them from selling too low simply to close a sale. This is a way of providing your independent sales agents with a further level of investment in the well-being of your company and your products while maintaining them as independent. Obviously the sales agent needs to know what the cost price base amounts to.

Depending on the industry, commission ranges can vary wildly. Other things that can influence commission include:

  • How much customer service do your sales agents need to provide to customers?
  • Do your sales agents only provide leads, or do they close sales?
  • Does your product generate repeat business?
  • What types of expenses tend to occur for new businesses?

In general, most manufactured products prompt a commission rate of anywhere from 7 to 15 percent. For percentage of gross margin, (sales price minus direct expenses) a standard range is anywhere from 20 to 40 percent.

Most service based products that do not require manufacturing expense tend to have commissions that can run upwards of 50 percent. Companies need to be very careful in these instances, as this can have a significant impact on your business.

So as a final thought – commissions need to be capable of motivating the sales agent but keep an eye on the bottom line – you both need to prosper!

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