What is sales commission and how to calculate commission rates?
Sales commission is an amount paid to the sales agent or rep agency based on either a percentage of the value of the sale or on a percentage of the gross margin.
While there is no set formula for calculating commission rates payable to freelance sales agents and the fact that sales commissions are always negotiable, it's ok to play around with the figures until you hit that sweet spot.
Typically commission rates for physical products will be slightly lower than those of service providers. This is generally because the costs associated with manufacturing physical products are much higher than the overheads of a service provider.
Typically we see sales commission levels for manufactured products sit somewhere in the region of around 7 - 15% on the sale value, or 20 - 40% on the gross sales margin; which is calculated by subtracting the direct expenses associated to each sale.
On average, services pay a much higher commission percentage due to much lower overheads. You'll see commissions of anywhere between 20 - 50%+ offered, especially when selling online SaaS services for which expenses incurred per sale are negligible.
You might think those figures are high, but what you have to bear in-mind is that independent sales reps not only incur their own expenses while selling your products and services - especially if developing their own territories - but they are potentially giving you access to networks of contacts that have been nurtured over a number of years, and this comes at a price.
Podcast: 3 Essential Elements to Effective Sales Compensation Plan
You're going to love this podcast that Jessica Magoch just recorded with Vincent Roazzi. Jessica is an expert sales coach and trainer and Vincent is THE expert on sales compensation planning who has built billion dollar companies from flailing to public.
You'll learn the three essential components to consider in a sales compensation plan. WARNING: Listening to this podcast may entice you to completely overhaul your sales compensation plan.
Here are some rookie mistakes we uncovered during the call:
● ROOKIE MISTAKE #1: Thinking you need to keep salespeople "hungry" to get them to perform.
● ROOKIE MISTAKE #2: Viewing sales as a cost center instead of a profit center
● ROOKIE MISTAKE #3: Not incorporating long term (5+ years) incentives from day one.
The other thing that independent sales reps can bring to the table is absolute value and a wealth of experience in your particular industry.
Typically reps that are self-employed have come from a long background in sales and have many years experience selling in a particular Market or industry.
By partnering with independent reps with pre-existing contacts, your company can potentially reach new Markets and clients much faster than you would have otherwise.
Another thing to note is that you should always offer a recurring commission payable to the sales rep on any repeat orders from the clients they bring to you as in the reps eyes, their clients belong to them.
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