A Guide to Typical Sales Commission Structures
You won't believe this - sales commissions can either make or break your business! It's true!
A sales commission structure can either be your best friend or your worst enemy. But don't fret, because, in this article, we'll discuss everything you need to know about typical sales commission structures.
Commission structures are a critical aspect of any business's sales strategy. They are incentive programs that motivate salespeople to work harder and sell more. The idea is to find one that can create higher profits.
Commission structures can vary widely. They can depend on the industry, company size, and the nature of the product or service being sold.
In this guide, we'll cover some of the most typical commission structures out there. Then you may be able to choose the right one for your business.
Let's get started!
The first of the sales structure options we'll discuss is a straight commission. This structure pays salespeople only on the sales they generate.
There is no base salary. Employee earnings are based solely on a percentage of the sales they make. This structure works best for high-ticket items with long sales cycles and larger profit margins.
A straight commission structure is ideal for companies that sell high-value products or services with long sales cycles. These types of products require significant time and effort from salespeople.
These company sales also need high profit margins. This is to justify the lack of a base salary.
In this structure, salespeople are solely responsible for generating their income. So the company does not bear any financial risk.
This structure also ensures that salespeople focus on driving revenue. This is because their earnings are directly tied to their sales success.
The second commission structure is a tiered commission. This structure rewards salespeople for meeting or exceeding predetermined sales targets.
As salespeople meet their targets, they move up to higher commission tiers. So they can earn a higher percentage of their sales.
This structure works well for companies that sell products with lower profit margins. Or for businesses that have a large sales team.
A tiered commission structure is suitable for businesses that sell products or services that have a lower profit margin.
In this structure, salespeople are incentivized to sell more products. Then as they reach their targets, they earn higher commissions. So it ends up being a win-win situation for both the salespeople and the company.
This structure also promotes healthy competition among salespeople. The reason is it makes them strive to achieve their goals and move up to higher tiers.
Gross Margin Commission
The gross margin commission structure calculates a percentage of the gross profit made on each sale. This percentage is based on the profit margin of the product or service being sold. This commission structure works well for businesses that offer a range of products with varying profit margins.
The gross margin commission structure is ideal for businesses that sell a wide range of products or services with varying profit margins. In this structure, salespeople are incentivized to sell products with higher profit margins. The reasoning is that these products offer a higher commission percentage.
This structure also provides the company with a way to control costs. It also ensures that the commission payout is aligned with the product's profitability.
Salary Plus Commission
The salary plus commission structure is a hybrid model that offers a base salary as well as a commission for each sale. This structure is great for businesses that sell products or services with lower profit margins. This is because it provides salespeople with a stable income while still incentivizing them to sell.
A salary plus commission structure is suitable for businesses that sell products or services with lower profit margins. In this structure, salespeople receive a base salary that provides them with a stable income. This can help reduce employee turnover.
The commission is an additional incentive for salespeople to sell more and increase their earnings. This structure can also help the company manage its costs. The rationale behind this is it provides a predictable salary expense while still providing the potential for increased revenue.
Draw Against Commission
The draw-against-commission structure is a unique one. It provides salespeople with a base salary that they can draw against their future commissions.
Once their commissions exceed their base salary, they begin earning additional income. This structure is suitable for companies with seasonal sales patterns. It also works well for sales teams that sell products with long sales cycles.
In a draw-against-commission structure, salespeople receive a base salary that they can draw from in periods when their commissions are low. Once they sell enough to exceed their base salary, they begin earning additional income based on their commission percentage.
The team commission structure works well for businesses with a sales team that works together to close deals. Salespeople earn a commission based on the team's total sales. Then the commission is then divided among the team members.
This structure is good for businesses that want to foster a collaborative and team-oriented culture. This structure can help to foster a collaborative and team-oriented culture. The reasoning behind this is that salespeople work together to achieve a common goal.
Learning About Sales Commission Structures
Choosing the right commission structure is crucial for any business's sales strategy. The commission structure should align with the company's goals. it should also align with the product or service being sold and the sales team's size and experience.
At Kinitro, we develop highly successful team incentive plans. Click here to request a demo.