When it comes to sales, commission rates can be a hot topic. A commission is a fee paid by a business to a salesperson in exchange for its services. The most common type of commission is a percentage of the sale, but commissions can also be based on the number of sales, the profit margin of the sale, or a combination of these factors.
There is no standard commission rate, as it will vary depending on the industry, the product or service being sold, and the salesperson’s experience. The commission may be even higher in some cases, especially for high-ticket items.
A lower commission rate may be offered as an incentive to close deals for new or inexperienced salespeople. No matter the commission rate, it is important to remember that salespeople are only paid when they make a sale. Therefore, businesses must ensure that the commission rate is high enough to motivate salespeople to sell their products or services.
Average Commission Rates by Industry:
Determining a fair commission rate for your sales team should involve a slew of variables. The commission is typically lower if your company generally pays a bigger base wage. However, sales reps working on commission-only are more likely to be larger.
A bigger commission might make you competitive, depending on how much research and technical knowledge is required. The commission rate is proportional to the amount of technical understanding required.
By BLS Occupational Employment Statistics (OES), industry sales commission averages vary considerably, with the following being the most common:
- Wholesales and Manufacturing, Technical and Scientific Products: $99,680.
- Real Estate Sales Agents: $62,990.
- Insurance Sales Agents: $69,100.
- Door-to-Door Sales: $36,740.
- Retail Sales: $30,940.
How to calculate commission for sales:
Calculating the sales team’s commission can provide you with a good indication of your team’s average wage, ensuring that your business is competitive.
Here’s a step-by-step procedure for determining the commissions for your company:
Set Up a Time Period
Payments are paid on a bi-monthly basis or monthly. If you’re seeking an average, compare different times of the year. For example, the holiday season may be hectic for retail salespeople, but summers are generally quieter.
Keep in mind that your commission period varies depending on your policy.
Some businesses, for example, wait until they have received full payment from the customer before paying out any commissions. In this case, they may not receive their commission for weeks.
Calculate the Total Commission Base
Add the total amount of products sold after deciding which periods to evaluate. Calculate each one separately if varying commission rates depend on the item.
Multiply Commission Rate by the Commission Base
Multiplying the commission rate by the commission base will provide you with total commissions. Calculate them separately before combining them if commission rates vary depending on the product or service being sold. If you charge a 5% commission for selling $100,000 in a product, then:
$100,000 x .05= $5,000
It’s as simple as if your company operates on a traditional commission system. To get an idea of what your team earns regularly, add it to any bonuses or base compensation.
Variable commission rates, on the other hand, are not uncommon. Although this is the case for many businesses, several provide varying commission rates.
Some products and services are more difficult to sell than others; thus, the commission rate may be different from one product or service to another. For example, if your staff receives a 10% commission on Product A (which was $100,000) and a 15% commission on Product B (which was also $100,000), their commission would be:
- Product A will be $100,000 x .1= $10,000
- Product B will be $100,000 x .15= $15,000
To determine the net result, add all of the variables together. For example, in this case, the total commission would be $25,000.
How To Structure Your Sales Commissions:
There are different ways to structure your sales commissions. The following are some common approaches:
Base salary plus Commission:
Pay a base salary plus a variable commission rate based on sales volume, profitability, etc.
Commission only:
Some companies choose to forgo paying a base salary altogether. In this case, employees are typically only paid commissions.
Salary plus draw:
This is similar to the base salary plus commission structure, except that a draw is given upfront against future commissions. For example, if your salespeople earn 10% commissions and give them a draw of $1,000 per month, they’ll essentially be working for free until they’ve generated $10,000 in sales.
Commission plus bonus:
In this case, employees receive a commission on sales plus a bonus for meeting or exceeding certain targets. This approach is often used to motivate employees to reach higher performance levels.
Tiered commission structure:
This structure typically features lower commission rates for lower sales volumes, with higher rates increasing as sales increase. This approach is often used to encourage employees to sell more.
Variable commission structure:
As the name implies, this structure features commission rates that vary depending on the sold product or service. For example, a company may offer a lower commission rate for selling less expensive items and a higher rate for selling more expensive items.
Group commission structure:
This type of structure rewards employees for working together as a team. For example, a company may offer a certain percentage of the total sales generated by a team.
Spiff:
A spiff is an incentive paid to employees based on their regular commission. For example, a company may offer a $100 spiff for every 10th sale an employee makes.
Overrides:
An override is a commission paid to employees based on the sales generated by the people they’ve recruited or managed. A company may offer a 5% override on all sales generated by an employee’s team.
Royalty:
A royalty is a commission paid based on the sales of a product or service. For example, a company may offer a 10% royalty on all new product sales.
Profit-sharing:
Profit-sharing is a commission paid based on the profits generated by a sale. For example, a company may offer a 10% profit-sharing bonus on all sales that result in a profit.
Draw against Commission:
A draw against commission is an advance paid to an employee against future commissions. For example, a company may offer a $1,000 monthly draw to an employee expected to generate $10,000 in sales per month.
Things To Consider When Reviewing Sales Compensation Plans:
When reviewing sales compensation plans, there are a few key things to keep in mind:
Your sales representatives’ motivation:
What motivates your sales representatives? Make sure that your compensation plan aligns with what motivates them.
Your company’s goals:
What are your company’s goals? Do you want to increase sales, market share, or profits? Make sure that your compensation plan is aligned with your company’s goals.
Your budget:
How much can your company pay sales representatives? Make sure that your compensation plan is affordable and sustainable.
Your competitive landscape:
What are other companies in your industry doing? Make sure that your compensation plan is competitive to attract and retain the best talent.
Your sales cycle:
How long is your sales cycle? Make sure that your compensation plan takes your sales cycle into account.
Your product or service:
What are you selling? Make sure that your compensation plan aligns with the type of product or service you’re selling.
Conclusion:
So, what is a good commission rate for sales? This answer will vary depending on the product or service you are selling. Generally speaking, you want to find a commission rate that compensates your salespeople fairly while also providing your company with a high-profit margin. By considering all of the factors involved in setting commission rates, you can create a system that benefits your team and your bottom line.
