Sales and commissions are two inseparable things, like peanut butter and jelly. If you’re in a sales job, expect commissions to be a part of your total compensation. For those new to sales or feeling confused about the different types of commissions, this article should help you understand key terms and basic considerations, getting you back to work and selling!
Gross Profit
Everything sold has a base cost, which is simply the amount it costs to produce or provide the item or service. When sold to the customer at a price higher than the base cost, the difference between the two prices is the gross profit.
Let’s say you’re selling computers for XYZ Worldwide. Each computer has a cost, often referred to as “the minimum.” This means you can’t sell the computer for less than the minimum or you will lose money. You sell a computer to ABC with a minimum of $1,000 at a price of $1,400. The profit on the deal is the difference between the sale price of $1,400 and the minimum of $1,000, which is $400.
Expect to earn between 10% and 50% of the profit as your commission.
Revenue Commission
Another common type of commission is the revenue commission. Simply put, sales professionals receive a specified percentage of all revenue they sell. If you sold $100,000 in revenue while working with a company that pays 5% of revenue, your commission check would be $5,000.
Revenue-based commission plans can be very lucrative if you’re selling high-value items. It makes sense that a revenue-based commission plan for a sales professional selling custom-designed airplanes would be more attractive than the same plan for someone selling athletic shoes.
Like commissions paid on gross profit, revenue-based commissions are often used in conjunction with other forms of compensation.
Employment Fees
Employment fees frequently occur in car sales, where a specific amount is set for each unit sold. Let’s say you sell cars. If you are paid $300 for each car you sell, that $300 is considered an employment fee. Employment fees are often added as additional bonuses in compensation plans and bolster the other commissions that sales professionals can earn.
If you’re considering a job at a company that only pays employment fees, be aware that industries that exclusively pay employment fees tend to be very competitive. These companies also often have high turnover rates for their sales employees.
Revenue Gates
Some commission plans depend on revenue gates or performance, which can be the most lucrative for high-performing individuals. They can also be complex and hard to understand.
This type of model is structured so that the more you sell, the greater the revenue you earn per sale. Let’s look at an example for clarity.
TTS Corporation uses a performance-based commission plan that pays an increasing percentage of revenue and commissions on gross profit. Their structure is as follows:
Revenue Sold Revenue Percentage Profit Percentage
$0-$10,000 1% 8%
$10,001-$20,000 3% 10%
$20,001+ 7% 13%
Understanding Your Commission Plan
These types of commissions are the most commonly used in sales professional plans and should be understood before accepting a sales job. The tricky part of most commission plans is that many use a mix of two or three of these types. When evaluating how good your commission plan is or a potential one, you should understand the industry of the company you’re working for. If the company primarily sells specialized products or services, heavy gross profit plans will be best for their sales teams. If the company sells low-value items, employment fees and revenue gates will be more attractive. The value of a commission plan depends on two factors: the products or services being sold and the sales professional doing the selling.
Source:
https://www.thebalancemoney.com/different-types-of-sales-commission-2918474
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