How to Build a Sales Commission Program: Which Type is Right for Your Business? (Part 2)
This is Part 2 of a 2-part series on building a smart sales commission program. Part 1 includes a list of 10 rules you should follow when creating your plan.
As discussed in Part 1 of this series, sales commission programs must be simple to understand. The old rule applies – make it as simple as possible, but make sure it aligns with the complexity of the sale. In this article, we put together 3 different examples of how to build a sales commission that jibes with the sales scenario, arranged in order from simple to … not so much.
But first, it’s important to remember that you need to start by figuring out the healthy ratio of commission to salary, regardless of the work involved. The more commission, the hungrier the salesperson. The more salary, the less likely they are to push things with customers.
Type 1: Low Complexity – Hot Dog Stand
What a perfect opportunity to bring back the HTB.com hot dog stand! For this and similar types of businesses, a good incentive structure is 65% commission and 35% salary. This makes your sellers hungry, but not so hungry that they scare the patrons away from coming back later.
How it works:
Chips, drinks and cookies have high profit margins, but hot dogs don’t. Using that logic, the big money-maker here is your combo meals, which include a mix of high and low-profit items. Offer your employees a reasonable hourly wage, along with an incentive program that looks something like this:
- 10 combos sold in a day = $10 extra dollars in their daily pay
- 20 combos = $25
- 50 combos in a day = $100
- This month, every time they sell the most expensive combo, the double-chili-fries-dog-with-extra-cheese and a 2-liter bottle of Pepsi, they get a bonus $1
Want even more motivation? Add a button on the cash register that tells each salesperson how many combos they’ve sold for far each day. Who’s not motivated by a chance to level up and beat the high score?
Why it works:
It’s easy. The salespeople know exactly what they’re going to get and when they’re going to get it. They’re incentivized to sell the items with the highest profit margins, and they get a special bonus at the end of the month as thanks.
Type 2: Moderate Complexity – Software Licensing
Theoretically, hot-dog stand employees can sell a million combos in a day. But what if the product you offer is one and done? If you sell something like software licenses, for example, you’re not building long-term relationships with your customers. Your salesperson will make the connection, make the deal, and move on.
It’s unlikely in this scenario that a customer will be turned off by an overly aggressive salesperson, so my recommended mix here is 80% commission vs. 20% salary.
How it works:
In the case of selling software, annual contracts make the most money. Month-to-month purchasers usually peace out after about 9 months, so the ideal sale is a one, two or three-year agreement, along with some add-on options. Here are some examples of commission agreements that work:
- 10% of the total sale on the first $10,000 in monthly sales. If they sell a month-to-month agreement for $200, they get $20 (sad trombone). But, if they push a 3-year agreement for $200/month ($7,200 over the course of 3 years) they get $720. (Talk about a reason to push that customer to “lock in long-term savings now!”)
- 12% of the total sales if the rep exceeds $15,000 in monthly sales. In this team-based scenario, you’re telling your sellers that their combined sales are even more valuable if they sell at least $15,000.
- 15% of total sales if they go over $25,000.
- A 2-day trip to Vegas if they go over $50,000 in a month in total sales. (Make this number a big stretch goal so it’s truly a reason to celebrate!)
Why it works:
The key to all of the above is “total sale,” because it encourages your sales reps to sell various add-ons as well. (A $10 a month upgrade on a 3-year contract feels like $10 to the customer, but it’s $360 to the seller.)
Type 3: Complex Sale – Airline Control Software
Let’s visit software sales again, but this time on a much larger scale. In this scenario, your company is one of three major players in the aerospace industry that sells flight-control software to global airlines. An initial sale is usually more than a million dollars, and could be tens of millions if it’s one of the big five names, like Delta or United. After that, annual maintenance contracts range from hundreds of thousands of dollars to millions, depending on size.
It’s true that the higher up you go the smaller the circle gets, and at this level – where there are maybe only 1,000 potential clients – reputation is everything. That means your sales force should make enough in salary to view commissions as a party bonus. I’d recommend a 75% salary and 25% commission split. This balance ensures that a seller who has a lean month may not be able to fly first-class to Mexico, but they’ll still be able to pay their mortgage and get the creamy cilantro dip at Chuy’s.
How it works:
For six-figure, complex sales, the incentive structure might look like this:
- Software sale to a customer with 100-200 airplanes: $20,000
- For customers with 200-400 airplanes: $30,000
- For customers with 400+ airplanes: $50,000
- For each year of maintenance sold as part of the initial contract, they earn 10% of the total price of the package
- If they sell more than three new software contracts in any quarter, their earnings are increased by 25%
- If you want to spend a quarter focusing on selling your Aircraft Engine Maintenance Aging Report Package add-on. So for each package sold that includes that report, they get to park in your awesome, close, covered parking spot right in front of the building for an entire week – and you’ll park in the back 40.
Why it works:
Yes, that’s a lot of zeros. But sales of this caliber can take months, and it’s realistic that a salesperson might only close one or two deals a quarter. Large incentives, especially if they come infrequently, make up for the lag time in between paychecks.
The Bottom Line
If all three scenarios feel familiar, it’s because they are. The zeroes change to accommodate scale, but the concept doesn’t. The only difference between the hot dog slinger and the software sales executive is their level of experience and expertise at selling increasingly complex things.
No matter the widget, your goal when building a sales commission is to incentivize your sellers to work for their commission (but not necessarily lose sleep over it) and focus on products that will earn you the most return for your business. It’s a win win!
Related content:
How to Build A Sales Commission, Part 1
Should I Offer Profit Sharing With My Employees? In a Word – No.
The zeroes change to accommodate scale, but the concept doesn’t.