Should there be a different commission rate on a "new" sale versus a repeat sale for an existing customer?
I am looking for advice on paying commission to independent sales reps. Should there be a different commission rate on a "new" sale versus a repeat sale for an existing customer?
I've been in sales for over 20 years and this type of mentality drives me crazy. Typically, independent sales reps earn a flat 8% - 12% commission on any and all sales.
While I agree with the others that it takes more effort to gain new business, I disagree with the assertion that it takes less effort to manage and maintain existing customers. I believe that is naivety on what a salesperson or organization does to manage, maintain, service and grow the business from existing customers.
It may take a longer period of time (weeks, months, years of sales calls and contacts) to turn a potential customer into a paying customer, the amount of time needed to manage, maintain, service and grow existing customers is in the hours daily, weekly, monthly. The amount of time required is dependent on the account needs and wants. If a sales rep doesn't have the appropriate reports and tools from you, it can take forever to learn the account's needs and wants.
Without the appropriate reports and tools, it can take a rep up to 18 - 24 months for completely learn their customer base and territory — and at full earning capacity. That also becomes your payback period. The more reports and tools you can give them the faster they will be at full earning capacity — and your profitability.
Does the rep have a single person to work with or multiple?
Do they have to manage inventory?
How many SKUs are being sold to the customer?
Do they have to expedite deliveries?
Do they have to collect receivables?
This last one is a huge issue for salespeople since most businesses are constantly changing the commission structure, policies and how it is being paid — and especially since most businesses don't pay commission until invoices are paid and collected.
If you truly want an aggressive salesperson:
1.) Allow them to make as much money as they possibly can.
2.) Don't be changing their territory, their commission structure or how they will be paid.
3.) Deliver your product on time without flaws.
The last makes it more difficult for the salesperson to do their job. The first two sour any goodwill and turn them from being aggressive go-getters to looking for greener pastures.
I agree with Jeff, it is a proven fact that 80% of your sales come from 20% of your customers, so it is very important to manage, service and grow those loyal clients. These people will usually have their favourite salesperson they want to deal with, being the one that built the rapport with them in the early stages and keeps it strong ongoing.They became loyal in the first place because of their initial experience but don't expect them to remain so, if that experience doesn't continue and they get 'taken for granted' instead.
I too have been in sales a long time, 22 years in frontline retail and 8 years in management consulting to retailers and suppliers. I have been the million dollar salesperson as well as the manager who has had to get the best out of my sales teams. If you want results, the only variable commission rates you should consider are tiered target percentages, (one rate for hitting target and then increasing the higher above it they get), otherwise they will see repeat custom as not being worth their effort unless there are no prospects floating.
In short, farming is just as important, if not more so, than prospecting and if you encourage your staff to pay less attention to repeat custom in preference to someone else who comes through your door, don't be surprised if your regulars start to no longer feel valued, (which is what it is all about), and quietly move on.
I should say that, in all of this, I am assuming that you allow your reps to manage their own clients; if you simply have a support team who take orders and the reps are no longer involved after the initial deal, then that would be a different story.
If you have a two tier structure you risk having current clients receiving less attention.
There are just so many hours in a week. Some clients require extra attention while others minimal. It all depends on what they are selling. Are there new products or services each quarter, half a year or year? Do they replace current items or services?
If they replace, then sales reps still have to work hard to sell current clients.
Independent sales reps should never make collections calls.
1. If you do, you risk having the customer avoid all calls, visits and communications from the sales rep in the future.
2.. They don't only work for your company they work for themselves. They may not want to risk losing the sales for the other companies they rep.
Instead of having two tiers, one solution is to pay a bonus for each new customer (once they have paid) in addition to the standard commission rate.
If you value the sale (as well as the person making it and the person receiving it) I believe that the commission should be the same. Otherwise you are creating a disincentive for the seller (and as a result, the buyer). Building loyalty with good sales people can have far reaching benefits for you, your sales folks and for your clients.
It really depends on whether you are front loading the commission or not. I agree with Ed that generally having a lower commission on continuing sales is a disincentive but if you have front loaded the commission to account for the additional prospecting time required and then reduced the commission on later sales because the sale person is not required to manage the day to day activities associated with the account but rather gets an annuity from future sales without much or any involvement, then that is a different story.
Do you have residual income set up with the commissions for repeat clients? I'd suggest setting up a rate for the residual income that is different from the initial commission. That said, its also important consider that the effort involved in maintaining clients is not more or less than the effort in getting a new one...it's different, and involves a cultivation of the relationship that is essential for keeping people as clients.
Here's a different approach.
Put the incentive where it should be. New Business.
If this is want you want to grow the business then place an incentive on it.
Like the song says, "It you like it put a ring on it."
So why not give the sales person the same commission for "All Sales"
they are earned. The sales person still has to service the existing customer, and maybe even find additional sales within the existing client. So there is more to just repeat sales, Plus they are keeping your competitors away.
But ON TOP of that, why not give an incentive / bonus for every new account the bring into the business, and a smaller bonus for maintaining that new business for 12 months.
Be good to your sales people and they will do over and above. Treat them like slaves or people who you can play around with and they will only do what's necessary.
I know of 1 owner who is happy if the sales person earns more than he does.
Can you figure out why that would be the case. I can.
It isn't a question of need, but rather something that's dictated by your strategy. Do you need a new customer commission rate? Not necessarily.
I've used new customer bonuses with great success, and they work well when you have a great product and service to back it up.
There should be some kind of time limit placed on how long the extra commission would be paid out - first order, first month, first year? You need to decide when a customer is no longer new. In my experience, the new customer bonus would apply for the first year of sales, but then I've worked in industries with long selling cycles.
HIRE GRAY MATTER
Yes, this is an agreement I have with my clients currently. I get X% for a new account and am incentivized accordingly and .5x% (or half) for an existing customer. The goal is the incentivize to develop net new business and expand the market, not farm. Also the higher commission reflects a higher level of difficulty for hunting rather than farming.
This really depends. If they are servicing that customer and taking care of everything, than it should be the same. If they sell, and its your job to keep the customer happy, then they shouldn't get same price for a renewal. I do 50% in that situation. Hope that made sense?
In situations where it is harder to get the first order than repeat orders, a two-tiered commission plan can work. It is a matter of rewarding those who will get new business while allowing those who just want to service existing accounts to survive.
My recommendation is that you have separate teams for new and repeat sales. For new sales you hire the hunter, the hungry salesperson that is motivated by the kill and the idea of fast money. For the account development and future sales you hire a different character, the caregiver, a person that enjoys building relationships and is good at identifying the clients needs as they arise. The first one you pay commission only as they thrive on the hunt and are motivated by money. The second group gets a salary and a small bonus for every repeat sale, They are not motivated by money in the same way as the first group and also you want them to take the time to get to know the client and be willing to spend time listening to their issues and finding solutions. Depending on the product, the average ratio of hunter versus caregiver is usually around 5 hunters = 1 caregiver
Generally yes. New sales is substantially harder than repeat sales and should be rewarded appropriately. I would first start with the total target compensation you want to pay your sales rep for a given amount of revenue. Then, shift the commission rate to be higher for new sales and lower for repeat sales so that overall the sales rep will still continue to make the same earnings overall. Easy-Commission dot com.
Consider the saying: 'Pay plan drives behavior'. From the management/fiscal point of view it doesn't seem right to pay these two types of sales a the same rate. Some companies have decided to pay commission in a split fashion, where a higher rate is paid for the first 12 months, and then a lower rate for the rest of the active contract.
Example: $10,000 with a 10% for 12 months and 5% there after. Of course goals would need to be adjusted respectively, however consider that whatever you do, your sales team has to see the benefit, so you don't have the risk of having a less than desirable retention rate of existing customers.
I look at it this way. New sales should be higher residual should be lower. After a point why would I want to pick up business if I can be comfortable on residual sales?
You need growth so this is important. Constantly picking up new business allows you to cover for lost business unless you are the very few that does not have competitors.
Best of success. Gil
if you would like to expand your business and motivate your sales reps. yes the best way is to make a higher commission rate for the "new" sales.
the reason is most of the sales reps do their best to get more commission, and in this case they will not only concentrate in how to get a commission, but also on the new comers customers :)
As I know so far yes there should be the same rate each tie of transaction , In some cases It can be less if the sale is done very often , But it depends on client s quality , the size of the sale too .
Great question Theresa. I think it depends on the strategy, if the company needs new customers then you should invest in acquire them. You have to calculate that the investment made could be recovered in the first 3-6 months of operations, so in the next periods you will only have the profits.
I think the commissions should be the same for both.. Customer retention is at the heart of your business .. Yes new customer are important and they eventually become existing customer and if you want to leverage your independent reps this is a great motivation.. Maybe add an incentive!!
No I do not think there should be a difference as long as you are consistent with your commission structure...For new business you might want to try a long weekend getaway as a prize, new clothes, a sporting event, a play in NY etc. I had good success with these