What is residual commission?
Pros and Cons of using a residual commission structure
Advantages of using residual commission:
- Steady income: Residual commission can provide a steady monthly residual stream of income for sales professionals, even if they are not actively selling.
- Motivation: It can motivate sales people to maintain long-term relationships with customers, as they continue to receive commission pay on their ongoing purchases.
- Loyalty: Residual commission can also encourage customer loyalty as they are incentivized to continue buying from the same representative.
- Passive income: As the sales representative builds up a customer base, residual commission can provide a source of passive or residual income, allowing them to earn money without actively selling, thereby getting them higher commissions.
Disadvantages of using residual commission:
- Cost: Residual commission can be costly for the company, as they must continue to pay commission on ongoing sales, even if the representative is no longer actively selling.
- Incentives: Residual commission may not provide sufficient incentives for sales representatives to actively seek out new business, as they can rely on their existing customer base to generate income.
- Dependence: Sales reps may become too dependent on residual commission and not focus on other aspects of their job, such as prospecting new customers or developing new products.
- Calculation: Residual commission can be difficult to calculate and manage, especially if the commission structure is complex or varies based on different factors.
When to use residual sales commission?
Residual commissions can be beneficial in a variety of industries and situations, but they are particularly useful in the following cases:
- Subscription-based businesses: Residual commissions are commonly used in subscription-based businesses such as software as a service (SaaS) companies or insurance agencies. Sales representatives receive a commission on each recurring payment made by the customer.
- Long-term contracts: If your business involves long-term contracts with customers, such as real estate or financial services, residual commissions can motivate sales agents to maintain strong relationships with their clients.
- Repeat customers: If your business relies heavily on repeat customers, residual commissions can encourage sales representatives to provide excellent customer service and build long-term relationships with their customers.
- High-value sales: Residual commissions can be particularly effective for high-value sales, as they provide an ongoing incentive for sales representatives to maintain a relationship with the customer and ensure their continued satisfaction with the product or service.
Overall, residual commissions can be a useful tool for incentivizing sales representatives and building long-term customer relationships in industries where recurring revenue is common.
How to calculate residual commissions?
Let's say you work for a SaaS company that sells a subscription-based product for $100 per month. You have John, who works a sales job and has sold the product to 10 customers. Your company has a residual commission structure of 10% for each recurring payment made by a customer.
To calculate John's residual commission payment for the month, you'll need to follow these steps:
- Calculate the total monthly recurring revenue (MRR) generated by John's 10 customers.
MRR = $100 x 10 customers = $1,000
- Calculate the total amount of residual commission earned by John for the month.
Residual commission = 10% x $1,000 = $100
So John's residual commission for the month would be $100. If all 10 of his customers continue to pay their monthly subscription fee, John would continue to receive $100 each month as his residual commission.
It's important to note that residual commission structures can vary depending on the company's policies and the terms of the sales representative's contract. In some cases, residual commission rates may increase or decrease based on certain factors such as the length of the customer's subscription or the number of customers the sales representative has sold to. It's important to have a clear and transparent commission structure in place to avoid confusion or disputes.
Residual commission examples across industries
Here are some examples of how residual sales commissions can be used in different industries:
- Real estate: A real estate agent who sells a property earns a upfront commission on the sale, but they can also earn a residual commission if the property is rented out, thereby increasing his earning potential. The agent can receive a commission percentage of the monthly rental income as their residual commission as long as the property remains rented.
- Insurance Sales: An insurance agent who sells a policy can receive a residual commission as long as the policyholder continues to pay their premiums in their pay periods. The agent receives a percentage of each premium payment made by the policyholder as their residual commission.
- Affiliate marketing: Affiliate marketers earn a commission when someone clicks on their affiliate link and makes a purchase, but they can also earn a residual commission if the customer makes recurring payments. For example, an affiliate marketer for a SaaS product can earn a residual commission for each month that the customer continues to pay their subscription fee.
- Network marketing: Network marketers earn commissions not only on their own sales, but also on the sales made by the members of their downline. As long as the members of their downline continue to make sales, the network marketer can receive a residual commission on those sales.
- Music royalties: Musicians and songwriters can earn residual commissions on the royalties earned from their music. Each time their music is played on the radio, streaming services, or in other public settings, they earn a percentage of the revenue generated by those plays.
Overall, residual sales commissions can be used in a wide range of industries and situations where recurring revenue is common. By providing an ongoing incentive for sales representatives or other professionals, residual commissions can help build long-term customer relationships and ensure a steady income stream.
How automating residual commissions can help your business
Calculation and deployment of commissions can consume a lot of energy and resources, which can instead be put to use to perform more critical tasks that offer significantly better business outcomes. This especially makes sense for large scale companies with mammoth sales teams, where a lots of manual grunt work has to go in behind the scenes to get commissions administered.
To overcome this, businesses can make use of sales commission softwares, which can help automate the entire commission process, right from designing complex compensation plans, processing them, to deploying them at scale within no time.
Sales commission platforms can offer end-to-end visibility into commission calculation helping businesses ensure transparency with their sales force, eliminate all the manual busywork that operations and finance teams are burdened with, and offer insightful reports for the leadership to better understand their org’s financial health, while giving back substantial ROI for the investment made.
In conclusion, residual commissions can be an effective tool for incentivizing sales representatives and building long-term customer relationships in a variety of industries. By providing an ongoing incentive for sales performance for reps, residual commissions can help increase customer loyalty and provide a source of passive income. However, the cost and complexity of managing the commission structure can be significant, and it's important to have clear policies and procedures in place to ensure transparency and fairness in calculating and payout of residual commissions.
Overall, residual commissions can be a valuable addition to a company's compensation structure, but it's important to carefully consider the pros and cons and develop a commission plan that works for both the sales representatives and the company.