How should I set my commission rate for independent sales reps?
I want to know what a good commission rate is for an independent sales rep. They would be a distributor of corn, beans, soy, nuts, and other grains for human consumption. Of course volume matters too, but what's the general rule of thumb for setting a commission rate?
Commission rates depend on a couple of factors
1) Is the Independent rep solely representing your company or also representing other companies (non competing lines)?
2) Is the independent rep expected to stock your products (stocking rep) or sales only?
In my experience where the rep is a sales agent only and reps several lines (non-competing), the straight commission is 15%, plus additional commission for achieving growth sales goals. This commission was paid when the customer paid the invoice. As the volume sold was high, the reps usually were able to earn approximately $100K gross. Sales training was provided by the Company.
Independent reps who only represent your product would earn a higher rate. especially if there was heavy prospecting and cold calling involved. They could be on a base + sales commission, or 100% commission.
Some things you might want to take into consideration when structuring a commission rate would be:
- ask your reps what it would take to get their attention. Being independent most reps will push the product that yields the largest paycheck.
- Are you expecting these reps to cover their own travel, operating and payroll taxes? If so, you should willing to offer them somewhere in the the 40-60% range on the total revenue to the company.
- You can back into this equation by calculating what your net profit would be if this sales rep was a w-2 employee that received a base salary plus a commission. Let's assume that your entire overhead including salaries yielded a 30% gross margin on sales. Now take out the building overhead and drill down to the cost of the rep, travel expenses, payroll taxes, phone, computer allowances etc and you will come up with a total cost of sales specific to that rep, probably somewhere in the 30-45% range.
You get what you pay for and if generating sales / revenue for the firm is a top priority pay more and expect more.
Independent sales reps are in business and, as such, they evaluate opportunities...like the opportunity to represent you...just as you'd evaluate any business opportunity:
What is the average deal size you expect?
What is the time to money? (average time to signing; paid at signing, invoice, or cash received?)
How much money per deal? (Commission)
Out-of pocket (e.g., travel)
Difficulty to close (Am I starting from having to create my own cold call list or a warm lead? Is this a simple sale or one with multiple decision-makers and influencers?) Essentially - how many hours do I have to spend per deal?
Enablement - Do you have standard products? Standard presentations? A price sheet? Ready answers to objections like security audits or references? Do you have standard contracts? A lawyer on retainer to help with contract changes? If you answer "no" to any of those, the sales rep's cost is higher.
With that list, the sales rep can easily figure out how good a deal they're getting from you and, importantly, compare it to other opportunities they have in their new-client pipeline. (They're not very good sales reps if they don't have a pipeline for their own business!) That's what you're up against if you want the best reps.
So how do you handle this? Big commissions are great but 50% of a $1000 transaction that took me 10 hours to close is not worth it. Look to reduce the reps' cost - create a lot of warm leads, enable sales. Look to reduce their risk - retainers instead of straight commission.
And what if you still can't get the equation to close? Then consider if your sales model is the right one for your business. Maybe direct sales isn't "it." Or maybe you're too young as a company...still finding the right products, pricing, pitches, etc. In such cases, look for business development instead of sales...someone who can hunt for partnerships, create channels, sell betas. But anticipate a very different pay scheme than straight commissions.
If it's high dollar orders that get you thousands or more per order, 10% is probably good. If it's lower like up to $1000 give them 12-15% based on volume.
Janet, it depends on how involved you want the reps to be, the volume of the account, and how much service or merchandising will be needed. In my experience, if the rep is going to manage the account, then around 3% is appropriate. If they are going to manage the account plus add retail service then 5%-7% may be more in line. If you are a new player, you need to get to the top of the rep's list, so a slightly higher commission should do that for you.
In my experience, the best way to establish a commission rate is by giving a percentage of the sale to the Sales Rep. Depending on the actual cost of the item, the higher the percentage the harder the rep will work for his commission rate.
Set a go-target that would give you 80% ROI reach then start sharing the revenue into equal halves upon exceeding the target. Sharing the success is fair and easy, you just have to be reasonable in slicing the pie.
That depends on many factors: revenue, margin, other work benefits. length of sales process...In my experience of 10 years of sales team management, these things are important to sales reps:
- commission works when it comes to the pocket fast, so choose the shortest period possible like month or quarter
- SRs should be able to calculate the commission on each deal they are working on themselves, so the scheme cannot be too complicated or provide them with a tool to calculate it.
- it works best when it's up to them as much as possible, so it shouldn't be connected with numbers they have no influence on (like company overall performance, exchange rates, etc.)
- it's good when it has no top limit, if you can afford it.
The system that worked best for me was: minimum fix money + commission.
Tips for the boss:
- returning clients are "easier", so pay more for the first deal (or 3 deals)
- train them on your product, values, competition, sales, even if you hire them as pros
- also learn from them about your product, values, competition, sales!
Janet the best solution for defining commission for distributors is to perform research on what other companies (your competitors are offering) for products that are of food consumption of the same or similar kind. Then you can develop a base line to accommodate your companies needs and have a competitive advantage. Keep in mind that you want to consider the profit or financial model that you have established for the product revenues against expenses you may incur from the cost to sell the product.
I don't know much about your industry, but I would first look at the competition. There are sites like Glassdoor that could provide you with some insight of what a good pay range might be for a rep in your industry. I would actually work backwards and look at what you'd be willing to pay someone versus the amount of revenue they'd generate. What would you be willing to pay for someone who generates $100K in collections?
After that there are quite a few things to think about. Will there be a bonus structure? What are the metrics the reps are expected to hit? These areas you could use volume as an incentive for increased pay. Ex. If you collect on $50K of invoices in a pay period you get an additional percentage bump or a flat bonus of $1000.
Obviously, you'd also want to examine what revenue you will get from the range of sales/products and how much you'd be willing to give up to pay your team. Ex. If you make $500 off of a $2000 sale, can you live with giving up $250 or would it be more feasible to give up a $100.
These are just a few of the things that I'd think about if I was looking at creating or changing a pay structure for a sales team. Good Luck!