The way your sales organization determines commission is an important consideration in building a sales compensation plan. Two popular methods base commission on either revenue or gross profit. While these two appear somewhat similar to the untrained eye, they feature some important differences.
If you’re deciding between revenue or gross profit margin commissions, there are a few things to take into consideration. Since we’ve worked with organizations that have employed both methods, we know a thing or two about these plans.
Depending on what motivates a sales force, commission based on either revenue or gross profit can be effective.
Revenue-based Commission Plans
At a very basic level, when commissions are based on revenue, salespeople earn a portion of the revenue generated by their sales. For instance, a salesperson earns 10 percent of the revenue they produce through sales over the course of a year. If that salesperson manages to drive $250,000 in revenue that year, they take home $25,000 in commissions.
For organizations that prioritize increasing revenue, this plan may work best. Competitive salespeople will look to drive as much revenue as possible. Though it’s important to consider the average cost of a sale when it comes to revenue.
Higher-priced products, like software subscriptions or houses, will drive more revenue and earn more commission. If your salespeople only have the ability to sell smaller ticket items, like clothing or office supplies, revenue may not be a motivator.
Gross Profit-based Commissions Plans
The bones for this type of plan look similar to revenue-based commissions. However, in this scenario, salespeople earn a portion of the gross profit they generate instead of the revenue. Of course, the amount of profit generated through the same amount of sales will be lower than the revenue. However, rates involved in a gross profit commission method run a little higher, up to 50 percent in some cases.
For organizations that emphasize profit over revenue in yearly goals, this plan would be a wise method to choose. It refocuses your entire sales team toward increasing that metric and looking to sell products at the highest profit possible.
Salespeople tasked with selling products with mid-ticket prices may still be motivated by this method. Even though products may not drive as much revenue and profits might be lower, a higher commission rate balances out expectations.
Best Practices for These Commission Methods
Whether you choose to base commissions on revenue or gross profit, it’s generally a good idea to combine these plans with other incentive programs. Incorporating bonuses, sales competitions, and other additional options can keep salespeople motivated throughout the entire year. In fact, as we’ve discussed before, incentivizing sales behavior is a good complementary method to either of the above strategies.
However you decide to determine and dole out commissions, we can simplify and automate the entire process for you. Shoot us a message for more info or set up a free demo with us and we’ll show you how it works. We hope to hear from you soon.