Sales Commission Plan Examples (for any type of business!)

Yes, you can use this sales commission structure for almost any type of business, including startups.

In one of my friend’s startup we experimented with different commission structures and concluded with a commission structure that not only kept the sales team motivated but also helped us in growing market share slowly but steadily.

That commission structure is pretty easy one and yeah, there are numbers, few tables involved in it but don’t worry they aren’t that intimidating intellectually, YEAH PROMISE! (winks!)

Yes! It may take a little time of yours to understand the whole thing but nothing comes without effort right ?

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So don’t skim and don’t get sleepy and if you can’t go through the whole thing in one shot, just read it bit by bit, though keep in mind reading alone won’t help you, you need to understand it and by understanding I mean, getting clear, complete idea of the whole article.

So without further ado let’s get to it, I am starting with commission structure for startups, I have given logical and objective reasons for each recommendation so PLEASE DON’T SKIM!

And yes! If a certain step in this article doesn’t make sense to you, it will, you just need to read and UNDERSTAND the whole thing, that is a must!

Sales Commission Plan Example Specifically For Startups

Step One: Calculate Total Per Unit Cost

By total per unit cost I mean, if you are in manufacturing business, where you produce a given product/service, what you need to do, is to calculate the total cost of manufacturing that product from a2z that includes things like:

1.      Raw material
2.      Production machines cost,
3.      Power cost,
4.      Cost (Rent) of the factory building,
5.      Workers cost,
6.      Product/service design, packaging costs,
7.      Vehicles used to move products to different warehouses, their costs
8.      Warehouse costs,
9.      Security costs
10.  Stock management system costs, like computer data about stock stored in warehouse, person or persons who manages these systems, their costs like their salaries etc.
11.  Warehouse power costs
12.  Warehouse any other costs
13.  Marketing costs (print media, electronic media, billboards, flyers, emarketing etc) etc etc

Now let me give you a simple example with above costs to calculate total cost per unit of a given product/service.

Cost type	Cost
Raw material	1$ per unit
Production Machine costs	1$ per unit
Power cost	1$ per unit
Rent of the factory cost	1$ per unit
Workers cost	1$ per unit
Product/service design, packaging cost	1$ per unit
Vehicles used to move products/services cost	1$ per unit
Warehouse costs	1$ per unit
Security costs	1$ per unit
Stock management system costs	1$ per unit
Warehouse power costs	1$ per unit
Warehouse any other costs	1$ per unit
Marketing costs	1$ per unit
Total Unit Cost	13$ total unit cost

Now as I have calculated total per unit cost, let’s assume we are selling this item at the following prices to the following buyers & consumer.

Buyer Type	Unit Price
Wholesaler	18$ per unit
Retailer	20$ per unit
Final Consumer	30$ per unit

Step Two: Setting Sales Commission

Now you can either set different commission structure for different buyers or a similar commission structure for all buyers, for instance consider the following table that further explains the above example in terms of setting sales commission.

Total unit Cost	Buyer Type	Unit Price	Commission per unit	Per Unit Gross profit
$13	Wholesaler	18$ per unit	1$	$18 minus $14= $4 gross profit
$13	Retailer	20$ per unit	1$	$20 minus $14= $6 gross profit
$13	Final Consumer	30$ per unit	1$	$30 minus $14 = $16 gross profit

In Gross Profit column the $14 amount was calculated by adding Total Unit Cost in first column with Commission per unit in fourth column.

Note : Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. [1]

I have added these two because both of these two (total unit cost, commission per unit) are costs, thus to get per unit gross profit you need to subtract total unit cost from unit price.

The above table shows a commission structure where you keep commission same (1$) for all types of buyers.

Now in case you want to increase or boost sales for a specific type of buyer you can increase commission for that buyer and so your sales team will work more on that buyer to get the sales done.

Remember: In case of startups, it is wise and essential to give high commission to your sales staff, because new businesses are like new born babies, with little identity and a lot of crying, screaming, disturbance, sleep deprivation ;d and that’s the reason most sales guy don’t like to baby sit babies except when you offer really healthy commission.

Plus you need to hire experienced guys instead of novices that not only cut down your training costs but also give you that essential sales to rapidly achieve your break even.
 

Yes hiring experienced sales guys, who may want high commission plus healthy base pay, is tough but you can do it really easily, read the following article if you want to know how to do it…

How to hire sales staff for your startup that won’t quit ever!

Also remember: Just increasing commission won’t boost up sales that much, you also need to motivate that specific buyer to buy, in that case you have to offer some discount, freebies or anything reasonable that will get the job done plus you also need to work on your marketing to get that essential market visibility, brand exposure to make your brand presence felt.

One more thing you need to remember is, if you are offering discount to a given type of buyer, make sure it doesn’t hurt the price balance in the market, by price balance I mean, if you offer discount to a specific type of buyer make sure all other types of buyers don’t get upset or complain about it or if they do, make sure you can give them a valid, just explanation.

Also make sure you have made clear it to your sales team that:

1.      Given sales commissions will be changed once given level of growth is achieved or as per company policies, whatever that may be!

2.      Or when a sales person achieve essential market share, relationships with target markets (wholesalers, retailers).

3.      Or the given commission is valid for such and such time, months or part of the year.

Why you need this? Because once you get growth, capture substantial market share, you need to maximize your gross profits consequently increase in net profits and one way to do that is to cut down commission as then your sales guys would be making really big easy money and you don’t want that happen to you, do you ?!

Plus since you won’t be a startup anymore then, so the sales guys won’t mind babysitting your business even when commission is not as healthy as it was in newborn days, as in newborn case sales require some really real effort which most sales guy dread.

But that changes once a business gets old, gets essential market exposure, brand visibility, trust etc

Remember: I have used the above example to give a you a method as to How set commission structure when it comes to startups, I have not included base pay salary because that is not commission.

So in case of base pay you will have to adjust it in total per unit cost to calculate unit gross profit, for instance if you have two sales guys, with base pay of $1000 per month, you produce 10000 units per month then it means it cost $0.1 of base pay to produce one unit.

So you need to adjust $0.1 up there in all those costs mentioned above, to calculate gross profit per unit.

Lastly I haven't included commission structure for different buyers types like wholesalers, retailers, agents etc because in that case this article would have become way too lengthy to read, so if you are doing wholesale, retail etc then your per unit cost will be the cost at which you get the product from manufacturer (or wholesaler) to end consumer.

Such costs may include, product price, supply charges, workers working in supply, warehouse charges, stock management system charges etc etc and once you get per unit cost, then you can add commission as per our discussion above.

Let me repeat that one, Once you calculate per unit cost, rest of the rules are the same for setting commission, for any business model type, so just follow the above method, already discussed!

Sales Commission Plan Example For Any Business Excluding Startups

Since businesses (excluding startups) involve a long list or number of products/services therefore it becomes really hard to set commission for each product/service and if you do that, your sales team mostly focuses on those products/services that offer great commissions which means your sales team focus becomes narrow and so you don’t get sales for the rest of the products/services consequently low sales, low return on investment (ROI).

Plus if you keep on changing sales commission from time to time to get your sales guys focus on other products/services as well, this will be really time consuming and will annoy your sales team.

That is why instead of offering a different commission on each product/service, you should offer a similar commission on all products/services so that your sales team focus on all products/services you offer and so you get the maximum sales.

Step One: Calculate Semi Gross Profit

Now to do that you would need to first find semi gross profit (excluding sales guys salaries (base pay + commission) etc) for every month.

Semi gross profit (SGP) is similar to gross profit except that your sales guys costs (base pay + commission) are not yet deducted from it.

It is not deducted because you want to set a commission structure plus base pay which at this instant is not set yet.

So you can have SGP by either not adding base pay plus commission of your sales guys in total expenses that you use to calculate gross profit or by subtracting both base pay plus commission from those total expenses in case they were already added to total expenses.

By total expenses I mean the expenses I mentioned in the above commission structure for startups.
 

Now since you have been running business for some time now (for at least couple of years) you will surely have the data from where you can calculate semi gross profit for each month.

If you are dealing in products/services which are not affected by seasonal demands, are being offered and utilized throughout the whole year then you should calculate semi gross profit for each month for at least two previous years.

Here let me give you an example:

Year 1

M1

M2

M3

M4

M5

M6

M7

M8

M9

M10

M11

M12

Sales

$20K

$22K

$17K

$20K

$21K

$19K

$21K

$23K

$22K

$19K

$19K

$20k

SGP

$7K

$8K

$5K

$7K

$7.5K

$6K

$6K

$9K

8$K

$6K

$7K

$7K

Year 2

M1

M2

M3

M4

M5

M6

M7

M8

M9

M10

M11

M12

Sales

$21K

$23K

$22K

$19K

$19K

$20k

$20K

$22K

$21K

$19K

$20K

$22K

SGP

$7K

$9K

8$K

$6K

$7K

$7K

$7K

$8K

$7.5K

$6K

$7K

$8K

M indicates Month thus M1 means "First Month"

SGP indicates Semi Gross Profit

K indicates One Thousand thus for instance $22K would mean $22000

Step Two: Eliminating the Exception/Exceptions

Now as you can see, in above table I have total sales plus SGP for couple of years, there is one instance where Sales is minimum along with SGP, that is in 3^rd (M3) month of the first year and since such thing hasn’t happened in all other months that means something like war, global market disruption, climate disruption, employees picket, raw material supply disruption etc could have been the reason for such low level sales and SGP.

So leaving out that low sales & low SGP as an exception (do this for all other unlikely exceptions as such, make sure they are exceptions, not regular occurrence), you should find a monthly sales & SGP that is better than this exception but still lower than the rest.

Why you need to do this? because you have to find the least possible SGP per dollar spent which will give you the least SGP you can have by spending one dollar, that would mean your return on investment (in this case SGP) won’t get any lower than that.

And so you can use that to set same commission for all of your products without being worried about financial loss etc

Step Three: Selecting Better Than “the Exception/s”

Okay by looking to the table we can see that such situation occurs in M6, M10, M11 of first year and in M4, M5, M10 of second year, where sales is $19000 and SGP is $6000, that means you earn (by dividing $6000 by $19000) $0.31 in SGP by spending $1.

That is 31% SGP per dollar spent, now you can set a certain percentage of this SGP as sales commission, for instance if you set 7% as sales commission, then you will be giving $0.07 per dollar as sales commission and you will surely get at least $0.24 or more (you won’t get anything lower except when an “exception” occurs) as a gross profit per dollar sales.

Remember: Make it your business policy that commission will be paid after 30 days of sale, so that bad apples in your sales team don’t make a fool out of you by making fake sales that are later returned while they have got their commissions.

Make it your business policy that any returned sales would mean no commission and any commission paid on returned sales would also be returned by the employees or even ex employees.

Make it your business policy to not pay commission on sales that have happened on credit unless you get that money in form of hard cash and have it under your possession for at least 30 days.

The 30 days limit is just for example, you have to consider your products/services guarantee warrantee, return policy etc and then set a time limit accordingly, I mean for instance if you have return policy that states that the customer can return product within 15 days if they find it unsatisfactory.

You can’t set a 10 day limit for sales commission becoming liability for your business to be paid to your sales guys because they can just make fake sales most of which will be returned within fifteen days and you will end up paying commission for fake sales.

So make sure you consider all these angles while setting up commission structure, policy.

One More Thing!

I also talked about “If you are dealing in products/services which are not affected by seasonal demands, are being offered and utilized throughout the whole year then you should calculate semi gross profit for each month for at least two previous years.”

I didn’t explain this point there because it would have become too confusing; missing the key point of that discussion but now let me explain.

If you are dealing in seasonal items, then surely you shouldn’t compare sales & SGP of for instance winter with that of summer because you are dealing in two different types of items.

So in that case you have to compare Sales & SGP of first year summer with second year summer and sales & SGP of first year winter with second year winter.

And then in those months, use the same logic of finding out exception/exceptions, leaving out those exception and then finding sales & SGP that is better than that exception but least when compared to the rest of the months.

And then setting commission structure for both seasons (summer & winter) etc

That’s it, over to you guys, if you have any questions, anything you would like to add, just let me know in comment section below and YEAH DON’T FORGET TO SUBSCRIBE for more actionable handy tips!

  

References:

1.      http://www.investopedia.com/terms/g/grossprofit.asp type/full