Is commission based on sales or profit?

Is commission based on sales or profit?

Base salary plus sales commissions

The percentage commission can be paid on a straight percentage basis: I set a fixed amount (20,000 euros per year, for example) plus a 10% commission (i.e. 2,000 euros more) if you reach 300,000 euros. This would be the linear percentage commission. The ratio for each sale would be 0.66. This linear percentage rate can also be set as a percentage of the customer’s turnover.

The problem is that veteran salespeople may be tempted to live on rents, serving their good customers and not developing new business. It is advisable to supplement commission systems with incentives that reward the salesperson who meets the objectives set.

Here is an example: “In a boutique, salespeople receive 2% of all sales they make. As they have now entered the footwear sector, the managers have decided to incentivize these sales with a target for clothing and another for footwear, so that whoever manages to exceed both targets will receive an additional 1%”.

Commissions are set on the basis of tranches or targets achieved. If your quota is 300,000, from 0 to 50,000 you pay this commission, from 50,000 to 100,000 you pay that commission, and so on. And you can also combine this with the percentage per margin.

Percentage of sales commissions

Commission is a portion of the total value of a transaction. They are usually used in salesperson salary structures. From the customer’s point of view, it is a charge, an amount to be paid when a particular transaction is completed.

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Commission is often used as a mechanism to incentivize employee effort. Thus, for example, in the commercial area, salespeople usually have a salary made up of two parts: a fixed part and a variable part based on commissions on what they are able to sell. In this way, the salesperson is expected to make an effort to make new sales operations so that his or her commission grows.

The commission is also the charge made to the customer for a given transaction. Its value should be related to the costs of carrying out the transaction, but this is not always the case. Commissions are usually determined by the degree of competition in the market and the amount of information available to the customer.

Types of sales commissions in Colombia

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How to design a commission scheme

Within companies, commissions reflect possibly secure sales by salespeople and, in turn, employees encouraged to close more sales, visit more prospects and recover customer portfolios, i.e., generate more cash flow for the business.

The greatest advantage of the commission system is that it rewards employee success and productivity and, in turn, gives workers an unlimited amount of income. This is usually present in motivated employees, who are willing to work longer hours.

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A major disadvantage of this system is that consumers prefer not to work with commission-based salespeople, because salespeople who are interested in making a sale can become aggressive and imposing, even if the customer shows no interest.

Another disadvantage is that some employees earn little or no income other than their commissions, so if they do not sell your product, they may not receive any income, which makes the work environment stressful and tense.

Is commission based on sales or profit?
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