Commissions: The Good, The Bad, & The Ugly
Sales and commissions go hand in hand, right? The more you sell, the higher the commission. That’s what draws people to sales, isn’t it? But things are never usually that black and white. There may be times when you have to take a tough call on commissions- and who really deserves them.
CONSIDER THE PROFITS BEING MADE
Some companies believe that every salesperson should get a commission on every sale made. But what if it is costing too much to make a sale in the first place? Then is it worth giving an extra pat on the back in the form of a commission? You need to look at the profit, not just the revenue. In the race to meet targets, some sales representatives do whatever they can to close a deal. And they end up spending more than the budgeted amount to gain a customer. When you overspend on customers, then the more you sell, the more you lose. So, analyze commissions on the basis of total profit brought in by the salesperson.
KEEP COMMISSIONS WHEN…
When there is a direct bearing on the time spent with a customer and sales, then it makes sense to offer commissions. If you are dealing with a product or service, where a physical demo can increase chances of sales, then allow your salesperson to make more visits. As they translate into profit, give them a commission.
The launch of a new product is also a good time to incentivize with commissions. It may be difficult to get customers to buy a product that is completely unlike what they are used to. In this case, it is upto the salesperson to make an impact with his or her selling skills.
DITCH COMMISSIONS WHEN…
Wait! Is this ever a good idea? Last year I met a sales person who had a product that would only be sold to companies with $1 billion in annual revenue. There were only 103 possible buyers in the world and the sales cycle was at least 2 years. He was well compensated for his talent in navigating such a unique sales process.
When your sales cycle is long, arduous and involves too many salespeople, kill commissions. Why? Because you are already investing excessive manpower and time to tie down the customer and get him to commit. The longer the sales cycle, the less likely it is that a commission will drive a salesperson’s efforts- they will be happy to just close the deal and be done with it! Also, when there are several people strategizing, planning and executing a sale, commissions can take a backseat. Commissions work better when a single individual’s efforts and impact on the sale are recognized.