This is probably the most common question we get asked.
Commission rate percentage rates are not always particularly important. Often it is the amount of actual money that this equates to that is more important.
One way to think about an appropriate commission rate is to estimate how many hours it will take a self-employed commission-only sales rep to achieve the average sale. Then work on the fact that sales agents are looking to earn lots of money! Most sales agents probably earn between £50k – £150k pa (gross) from about 3-5 agencies.
This is a very imperfect science. My aim is to give you an appreciation of the variables involved, and the complexity of any ‘formula’. Setting commission rates is of course more art than science, and is vitally important to the success of the project.
There are many variables. Any assumptions I make may be way out. You need to do work on this, and arrive at a commission percentage figure using a mixture of maths and realistic judgement. Bear in mind that assumptions about average order value and performance levels may often be overly optimistic, at least initially. There is often a build up of residual commission income from repeat orders, providing the client is retained and re-orders as expected. This could make lower commission rates more attractive in the medium to long term. Also the number of new accounts opened will decrease as the agent picks off more and more. These are some of the reasons why any model for calculating commission rates is imperfect.
Elements and considerations include:
- competitors rates / the going rate
- your profit margin
- actual money earned per hour spent on an average sale (including unsuccessful presentations)
- minimum order value
- average order value
- likely repeat order frequency and amount
- time input needed for repeats
- rate of loss of existing clients
I have known sales agent commission rates to vary from 1% to 150%(!), although it’s fair to say that the average is in the region of 10%-25%.
The simple rules:
- KISS: KEEP IT SIMPLE (a single, flat rate)
- CASH NOW
- PAY AS MUCH AS POSSIBLE
- PAY IT AS SOON AS POSSIBLE
Note: Sales agents used to be known as ‘ten percenters’. This harks back to the days when most sales agents worked directly for British based manufacturers who typically had a gross margin of around 30%. Things have obviously changed. However it is still quite a useful guide to have as a starting point the idea of paying your sales agents approximately 1/3 of your gross margin. But still adhere to the general principle of paying as much as you can afford.