Commissions are a tricky thing in sales. When offered too low, you may not get the desired results from your reps, but can affect your business if offered too high. You’ve to find the right balance.
But here’s the thing. What seems like the perfect commission for other businesses may not be the right one for your organization. Your business goals, where you stand as an organization, your product/service, your industry, and many other factors play a major role in determining your commissions. There isn’t an easy or straightforward approach to this.
Let’s start with the most basic metric in defining commissions: commission rates.
What are Commission Rates?
In simple terms, commission rates are the percentage of sales or a fixed amount that you pay your reps for the sale they make.
Here’s an example. If the commission rate is 8%, and the total sale your rep made is $12, 000, then,
Commission = 12000 * (8/100), which is $960.
Hold on. It isn’t going to be as simple as it looks. It majorly depends on the sales commission structure you choose.
What is a Sales Commission Structure?
The total amount that a rep gets paid is determined by on-target earnings, which include a fixed amount and variable pay. Sales commission structures determine how much rep’s variable pay will be.
Commission structures not only define how reps get paid their variable incentive pay, but also give clarity to them on how much sales they’ve to make to achieve their financial goal.
In this way, reps would also know how fair and accurate their commissions are.
Below are the different types of sales commission structures.
- Base salary plus commission plan
- Straight commission plan
- Tiered commission plan
- Territory volume commission plan
- Gross margin commission plan
- Base rate only
- Draws against commissions
Get to know about these different commission structure types in detail, their pros and cons, and how to structure sales commissions.
Average Sales Commission Rates by Industry
Now you would’ve gotten a fair idea of commission rates, sales commission structure, and the need to get them right. What next? Research to get to know the average commission rates of businesses of similar nature.
There’s no one method to determine the commission rates & structures, but analyzing commissions of your industry is always a good place to start.
Here’s a list of average commission rates by industry:
Note: The commission rates can be based on either total sales or gross profit depending on the industry.
Final thoughts
You need driven sales reps to bring in new customers and take your business forward. This is why it is crucial to set up the right sales commission structures, thereby attracting the right talent. Get started with the basics, be open to experiment, keep fine-tuning the structure based on the results you get. As time progresses, you’re sure to figure out the rates and plans that work best for you!
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