The Different Types of Sales Commission
How You Get Paid
Sales and commissions go together like peanut butter and jelly. If you are in a sales position, expect that commissions will be a part of your total compensation. For those new to sales or confused about the different types of commissions, this article should get you caught up on key terms and considerations and get you back out and selling!
Everything sold has a cost basis which is simply how much an item or service costs to produce or deliver. When sold to a customer for a price higher than the cost basis, the difference between the two prices is gross profit.
Let’s say you sell computers for XYZ Worldwide. Each computer has a cost, often referred to as the “floor.” This means that you cannot sell the computer for less than the floor or you will be losing the money. You sell ABC a computer that has a floor of $1,000 for $1,400. The profit in the deal would be the difference between the selling price of $1,400 and the floor of $1,000, or $400.
Expect to earn between 10% and 50% of profit for your commission.
Another common form of commissions is revenue commission. Simply put, sales professionals receive a set percentage of all the revenue they sell. Sell $100,000 in revenue while working with a company that pays out 5% of revenue, and your commission check will be $5,000.
Revenue-based commission plans can be very profitable if you sell high-ticket items. It stands to reason that a revenue-based commission plan for a sales professional who sells custom-designed jets would be more attractive than the same plan for someone who sells sneakers.
Like commissions paid on gross profit, revenue commissions are often used in combination with other compensation forms.
Found most often in auto sales, placement fees give a set amount for each unit sold. Say you sell cars. If you are paid $300 for each car, that $300 is considered a placement fee. Placement fees are often added as additional bonuses in comp plans and serve to enhance other commissions that can be earned by sales professionals.
If you are considering a position with a company that pays only placement fees, you should be aware that the industries that pay exclusively for placement fees are very competitive. These companies also usually have a high turn-over rate with their sales employees.
Some commission plans are based on revenue or performance gates, and they can be the most lucrative for high achievers. They can also be complicated and hard to understand.
This sort of model is structured so that the more you sell, the more you earn per sale. To help clarify, let’s look at an example.
TTS Corporation uses a Performance-Based commission plan that pays out an increasing percentage of revenue and gross profit commissions. Their structure is as follows:
Revenues Sold Revenue Percentage Profit Percentage
$0-$10,000 1% 8%
$10,001-$20,000 3% 10%
$20,001+ 7% 13%
Understanding Your Commission Plan
These types of commissions are the most commonly used in plans for sales professionals and should be understood before accepting a sales position. The challenging part of most commission plans is that many use a combination of two or three of these types. In judging how good your or your potential commission plan is, you need to understand the industry the company is in. If the company sells primarily specialized products or services, gross profit heavy plans would be best for their sales teams. If the company sells inexpensive items, then placement fees and revenue gates would be more attractive. The worth of a commission plan is based on two factors: The products or services being sold and the sales professional who is doing the selling.