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What Is Commission Sales And Why It’s Lucrative?

by / ⠀Blog Finance / November 14, 2022

Usually, there are no complications involved in how an employee is compensated for his services. You decide the salary at the time of hiring, and that’s it! But it’s not so simple to decide on compensation for sales employees. And this is where the concept of commission sales comes in handy.

Let’s not forget, the sales department is one of the most crucial and valuable parts of a company. It’s the sales that generate your revenue. Hence, sales representatives have a lot riding on their shoulders. They are the ones responsible for attracting new customers and retaining old ones.

So how should they be compensated? You have to ensure the employees feel rewarded for their performance. At the same time, it’s also vital to ensure that you don’t set up too high expectations. Understanding how commission sales work can make things easier for you.

What Is Commission Sales: Everything You Should Know

commission sales important

Let’s start by introducing you to the concept of commission sales. Commission refers to the portion of your salary based on the number of sales you make. Or similar to other performance-based goals that your company has decided on!

Some positions remain completely commission-based. Employees only make money when successful in making sales. In other cases, commission sales solely mean an incentive. Employees get a flat pay rate along with a small percentage of commission for every sale they make.

How commission sales work tends to confuse many people. Typically, employers will calculate the commission depending on the sales during each pay period and include it in the salary check of the employee. Some companies follow a different approach wherein they deliver the commission sales at the end of the year or quarter.

How they are calculated is usually decided at the time of the job offer. Typically, most companies follow three primary commission sales structures.

Fixed Commission

This implies that the employee gets a fixed percentage of sales or a flat rate, irrespective of how many sales he makes. For instance, if he makes $10,000 in sales and gets a 10% commission, he will earn $1000.

In this structure, the sales representative can also be awarded a bonus every time he makes a sale. The worth of the deal or seal is irrelevant. This is called a placement fee.

Variable Commission

This structure is mostly followed by companies who want to encourage their employees to make more sales in lieu of rewards. Employees can earn a higher commission rate depending on how much they sell. For instance, if an employee was initially given a commission sale of $10 per hour, the amount is increased to $12 per hour if he manages to make sales of $2000 per week.

Sometimes, the employees can also be encouraged to reach increased sales goals. The company sets milestones, and if the employee achieves them, their commission percentage increases. For instance, the employee will get a 2% commission for sales up to $50,000 and 4% for sales over the amount.

Profit-Sharing

It’s pretty common for companies to pay a share of their gross profit as commission sales too. This usually happens in businesses following the practice of negotiable pricing.

Naturally, the salesperson will try to negotiate at a higher price. And as a reward, he will earn more profit in the form of commission. For instance, if the flat of a product is $6000, but you manage to sell it for $8000, the $2000 will be your commission.

Why Commission Sales Is Lucrative and How It Can Be Beneficial

You might be wondering why so many companies follow the commission sales structure. How does it benefit your business? It actually has a lot of positive aspects associated with it. Let’s take a look.

  • For one thing, you are basically paying for performance. They reward the good performance of your employees. When your sales team is enticed by the idea of getting a commission, they are encouraged to reach your financial objective. This also makes it easier for you to maintain your sales budget.
  • They enable you to attract the best sales representatives for your company. Most people go toward the idea of earning a high commission instead of a fixed salary. Top-performing people have faith in their talent, and hence they know they can generate enough sales, which will enable them to get high commissions.
  • Commission serves as a motivation and encouragement to your employees. Employees put their best foot forward at work to make more income. This also paves the way for friendly competition among your employees.
  • Understanding the commission system is pretty easy, and companies don’t have to struggle to implement it, either. Calculating how much an employee makes also enables you to gauge their performance better.
  • With commission plans, you pay your employees based on their sales. This is actually better for your company economically. If your company does not have a steady cash flow as it has just started, this payment method can actually help you save your startup capital.

Use Commission Sales to Enhance Productivity

Commission sales can benefit your company in so many ways. You attract top talent. All of your employees are motivated to excel in their jobs as they have something to work for. Implementing the structure in your organization will definitely make operations and sales more productive.

About The Author

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Tauseeq Magsi has been a writing geek for the past six years. He has written about Tech, Finance, Leadership, Business, and more. He loves helping others achieve their goals, and he hopes to continue helping people through his writing for many years to come. In addition to writing, Tauseeq Magsi loves to travel and learn new things.

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