Determining Commissions for Independent Sales Reps
One of the most common questions involved with the hiring of independent sales reps relates to compensation. “How do we pay our manufacturer’s reps?” Fortunately, while there is no standard flat rate or easy answer, there is a very important guideline to keep in mind:
Nothing motivates sales better than an attractive commission schedule.
A commission-only position is the best way to pay sales reps, with the best method being a straight percentage of the sales price. While there are a few different ways to handle this, most sales reps tend to prefer a straight percentage based on the sales price.
If there are no fixed prices involved, a company might decide to go with a percentage of gross margin. It is worth pointing out, obvious as it is, that independent sales reps are in fact independent. They don’t work for your company, and don’t have much stake in what price a product sells for. If they have the flexibility to negotiate the final sales price, it makes sense to base commission on the gross margin, both to encourage your reps to try and sell higher, and also to prevent them from selling to low simply to close a sale. This is a way of providing your independent sales reps with a further level of investment in the well-being of your company and your products while maintaining them as independent.
With any sales rep you should enter into a marketing agreement which, among other things, should clearly define the commissions to be paid to the sales rep to eliminate disputes and hard feelings.
Depending on the industry, commission ranges can vary wildly. Other things that can influence commission include:
- How much customer service do your sales reps need to provide to customers? If you expect your sales rep to provide functions beyond simply training, assisting with installation, testing, and so on, you should raise your commission rates.
- Do your sales reps only provide leads, or do they close sales? Plenty of companies only require sales reps to bring in leads, and prefer to close the sale themselves, and act as account managers. This preference should probably reduce the commission rate to reflect the independent rep’s level of involvement in the actual sale.
- Does your product generate repeat business? When a principal’s line is disposable or consumable, meaning that repeat business exists, commission can often be lower unless it takes time to service the account, generally because the customer does not need to be sold on the product every time. You also have the option of offsetting the lower commission by paying a higher percentage or a bonus for the first sale to a new customer.
- What types of expenses tend to occur for new businesses? In many cases, the front end costs of acquiring new customers can be fairly high, and commissions should reflect this to ensure that sales reps receive an appropriate return on their investment.
In general, most manufactured products prompt a commission rate of anywhere from 7 to 15 percent. For percentage of gross margin, (sales price minus direct expenses) a standard range is anywhere from 20 to 40 percent. In the interest of increasing the incentive, often a principal will include a sliding scale based on the volume of business that is generated by any given sales rep. You will want to be careful to factor in support services. If additional business necessitates additional support services or inventory, that can play a role in the sales rep’s return on investment.
Most service based products that do not require manufacturing expense tend to have commissions that can run upwards of 50 percent. You’ll want to be very careful in these instances, as this can have a significant impact on your business! For service based products, reps can sometimes be under the impression that as there are no manufacturing costs, there is very low overhead. You need to make sure that you factor time expenditures into your commission schedule such that your business has a good return on its investment.
Commission splits are another important consideration. Sometimes territories are divided by geographical location, or by industry type. You need to define any provisions on commissions that come into effect if the independent rep sells to a customer outside of their territory. You should also define what sort of commission split your independent reps should expect if someone else sells within their territory. You can’t always anticipate these issues in advance, and it is very important that all independent sales reps always have adequate incentives to continue performing up to the expectations of their employers.
I am an artist and have created a line which specifically markets to wineries and residential wine lovers. The average cost of my main item is between $700-900. I have an interested sales rep and am trying to decide on compensation. My thought is to pay 10% of direct gross sales. What I am unsure of is what are the common expectations (besides the final sale) of her to achieve? She would be independent so would I also need to compensate additionally for any computer/social media developments she could assist with? Is the commission usually just based on her direct approach to potential customers & her travels? Also I would provide all the printed materials and samples she would need for contacts. Would REALLY appreciate feedback soon, I am new to all this marketing biz.
My first impression is that there are two separate services you a seeking from this rep:
1. Sales
2. Consulting
The sales portion of the engagement would fall under the normal concept of commission. But if the rep is helping with social media developments, that seems to me to be something outside of the usual sales representation arrangement. For example, you could hire a consultant to help you, and you would have to pay for that service. I am not thinking that the rep should provide that service “for free” along with the selling that you expect.
It is typical for you to provide sales materials. However, the commission would depend upon whether part of the incentive you are offering includes an “exclusive territory”. If so, then the rep gets paid for all sales in that territory. The idea of an exclusive is that it motivates the rep to work for you. If the rep gets $70 – 90 per sale, then would that be enough to pay for the portion of the reps time that is dedicated to you? If sales are sufficiently high, perhaps the answer is “yes” and you don’t need an exclusive arrangement. Otherwise, you have to sweeten the deal to make it worth the reps time.
Jas,
Thank you for your words of wisdom, I will put your advice to use. One more thought/question I have..Let’s say I do offer the “exclusive territory”, would you recommend 10% as a base commission regardless or offer a lesser commission (say 7%) if I am the one that would end up closing the sale? Thank you!
Setting your commission is something that we cannot easily do because we are too far removed from your specific situation. However, you should be aware that 10 – 15% is considered a normal commission level across many industries and markets. Lower rates would not be typical until you get into very high dollar volume situations. These considerations are even with exclusive territories.
How much total commission do you think the rep can earn from representing you? ( A rhetorical question – no need to respond!) Start from that thought. Is that amount something that then can create part of making a living for the rep?
I want to bring a couple of people onto my team who would visit bars, liquor stores, introduce our vodka, and provide leads for the sales reps who work directly for the wholesaler and take the actual orders. I’m having difficulty determining how to determine a commission for these guys. Any thoughts? Thank you!
I cannot be sure but it sounds like you are part of a rep agency, as you refer the wholesales as apart from your team. So in effect it seems to me at first glance that the people you are seeking are working for the rep agency. Or it could be that you could think of them as sales assistants to the reps. If this is so, then you would have to figure out how much of the total commission on you are willing to pay to these assistants, or even a rate that is not based on sales but rather on effort for the lead gathering.
So my initial response addresses some of the possibilities, but cannot be more specific with more info on the details of the relationship.
I would like to hire reps for our perfume company to go to independent retail stores/boutiques and give our samples/PR info to store managers. What would be a reasonable commission when wholesale orders are placed?
Most reps on our database receive a commission between 5-15%. However, since we deal with every market available, it is best if you communicate with others in your specialty to understand what the acceptable commission is in the market that you are going into, so that you are not only fair to the rep or rep agency, but also to yourself.
I am starting a new home party business selling jewelry and if someone wants to do the same thing, by working for me, what kind of percentage should I give? If she (“Jane”) wants to also hire someone else (“Mary”) to give parties also, would “Mary” be making a percentage from “Jane” or from me? Right at the moment, it makes more sense to me if they both work for me, commission only. But, this is not the way home parties are done.
Also, I’m really confused on this!!! If “Jane” hires “Mary” and “Mary” hires “Betty” and “Betty” hires whoever, this line is getting long and pretty soon who will be getting money? I’ll still be making money from “Jane” only. Right?
Sure hope you can clear me on this. I’m starting my business real soon.
You are on the path of “multi-level” or “network” marketing. While such a channel is quite viable, we don’t specialize in that area. There are many other websites that cater to that type of channel, so I suggest that you search further.
You could use search terms like “party plan”, “multilevel marketing”, and “network marketing.”
I hope this helps!
I wanted to know what is the average commission percentage for independent sales rep that only provides leads/set appointments (company closes sales), for monthly service based product.
Unfortunately we don’t have specific insights into industry averages of the type you are seeking. However, it would seem to me that as the type of service you are seeking is really lead generation. As such you could view it as a portion of the total commission. So as a guideline, say your “full-service rep” commission is 15%. But that includes follow up with the customer, incentivizing new sales, building your line, and many other contributions to your success.
It would seem reasonable to me to say the a much smaller fraction of the total commission is due to the “lead generation” part of the effort. The specific size of that fraction depends upon the dynamics of your industry, and what that lead generator is expected to do, and how much those leads contribute to the overall result. I can imagine cases where “the lead generation is everything”. And also cases where the lead generation is almost a clerical task, a commodity easily replaced. So between these extremes you could go anywhere from the bottom of the range up to a good portion of the 15% of this example.
While I have not answered by giving you a number, I hope my comments help you analyze your situation to come up with the answer that works for you and your reps.
Hi,
thanks for your great article. I am interested in your thoughts –
I am interested in hiring a sales rep to sell my product to super markets. Once the initial order is won, there is little work involved in receiving the subsequent monthly orders as these are generated by software – little sales effort involved. Should they receive the same commission for each subsequent order?
Thanks for any advice!!
We generally approach questions such as your from this perspective: do you want to hire somebody who works for you as an employee whose job it is to create leads and an initial sale as an order-taker, or do you want to enter into a partnership with an independent businessman (the rep), who will build sales for you over time?
Many reps will not be very motivated to get a one-off commission. It is a lot of work to create a relationship with the buyer. That initial up-front work needs to be properly motivated: for example, with the hope of building a strong income stream for both you and the rep.
You have to think of the commission as not paid for service delivered by the rep on that one sale, but as part of a larger compensation package for many sales over time. Otherwise, you are in effect telling the rep that they are going to do a lot of work that never gets compensated (for the sales that don’t materialize).
So you should consider the business from the reps point of view. The rep can make you a lot of money over time. Wouldn’t you want them to be motivated to do so?
I work for a direct mail magazine here in Orange county as an independent contractor. When I originally started about 2 years ago, they initially started me off with a small base ($1k/mo)for the first 6 months, with the following commission structure (month 1 was 35%), (month 2 was 30%), (month 3 was 25%), (month 4 was 20%), (month 5 was 15%), (month 6 was 12%). Then after the 6 month period, my commission plan was a flat 40% commission on all sales (new and existing), without any base salary.
The commission structure is not bad, but with the competition from all these other direct mail magazines, it’s extremely difficult to sign on new clients. In a good month, I may only get 6 new deals, with an average ad rate of $250/mo x 6 month agreement = $1500 total gross for company, of which I receive $100/mo x 6 = $600 over the course of 6 months, or $100/mo towards my monthly check. Since new deals come on and old deals expire, it’s difficult to make even $4,000/mo gross.
I’ve discussed with my manager about a higher commission plan, or even one with added bonus tiers, but she simply states that my comp plan is very high for direct mail. If that’s the case, why aren’t I making a decent income. I do work this job full time, canvassing businesses and making over 60 calls per day.
One last thought, since this is already an established direct mail company, I figured that they already had their fixed expenses factored into the production of each mailer (printing cost, mailing cost, paper cost) some of those expenses would change slightly with the addition of a new ad, but for the most part, it probably wouldn’t change too much. If the owner is getting 60% of each new sale that they wouldn’t have gotten before, should I ask for a higher commission plan. Again, they don’t pay any of my expenses now.
I’d love to hear your and the communities thoughts.
Stuck in Limbo
We are a small private investigative and computer forensics company who is looking to expand and hire a sales person. We have not been able to find any rates that pertain to our type of business for being able to set up a commission structure. We are definitely thinking gross because depending on the investigator on the case (each one gets paid a different rate) the net would be lower or higher at any give time. We don’t feel it is fair that the sales person earn less commission because the investigator working the case that day earns more then another one. Or do we have to look at it that in the long run it balances out with some higher and some lower? Also we are thinking 3-5% commission rate based on the profit scales on different services we provide – is this reasonable? Any feedback on our situation would be appreciated.
Unfortunately, commissions for direct mail magazines is not something I have background in. So my comments would probably not be relevant except in generalities.
As for those generalities, it seems you could be making your principal good money. If so, then you should be entitled to a livelihood that reflects your value. On the other hand, if that is not true, then you would need to shift your focus to something what works better for both sides.
Commission rates vary with industry and within industry. As such, it is advisable to network with people in your industry to find out the prevailing rates. However, in your case and in many cases, this is not possible. Hence the popularity of this topic.
Here is another way to look at it: suppose your independent sales rep only was representing your services. What commission rate would they need to earn an acceptable income? If the billings sold were multiple millions of dollars, then 3-5% of that might be an acceptable commission. Then factor by how much of the rep’s work would be devoted to your line. The assumption being that the rep has other lines to sell.
For example, if billings were $5 million, then 3% is $150,000 which would be an excellent compensation level. If they worked one quarter on your line, then one-quarter of the $150,000 is $37,000, which would be your cost for a “one-quarter” rep billing $1.25 million. The example is not necessarily supposed to be realistic, but illustrates the math to determine whether it is reasonable for the rep. Adjust for your real numbers. Then you will know if 3-5% is appropriate.
We are seeking sale reps. Nonetheless, we sell full container loads per order which vary from $8,000 to $12,000 in product value per sale. Clients might re-order 2 to 3 times a year. From what I’ve read in this blog, sale commissions vary between 10% to 15% which based on our industry seems high as we work with low profit margins and aim in volume. Does anyone has experience on what is a good commission rate due to the sale volumes we carry per sale? Will 3% – 7% make sense or is it simply much lower than the standard?
When we give the guideline 10-15% that is a very broad generalization, and it could vary widely in specific industries. Whereas 15% might be fine in retail, it would be completely inapplicable if your were selling “nuclear reactor facilities”. I exaggerate to make the point.
Thus this would be a good time for others with specific industry experience to chime in.
We are in energy efficiency and I have always paid my reps a flat rate of 5-15 bucks per fixture (depending on the type of fixture plus 50% on any overages. We are now looking at changing the commission structure and I am thinking a percentage of a sales price but it doesn’t quiet feel right! I would like to factor in the fact that recruitment and residual income is something that I would like to offer also. Anyone here have some sort of the same structure?
Hey I’m a independent contractor providing a medical procedure service, paid on a per call basis. I’ve gotten a new hospital contract to provide this service. Wondering what would be a fair commission
I am hoping some readers will chime in.
Could you please elaborate on your service? It appears to me that you are not acting in the capacity of an independent sales rep.
Hi there, I am looking to become an independent sales rep, working with various companies to generate leads and close sales if necessary. From research, I have found that my commission would, as you say, be within 5 and 15%. However, I have no idea about how to go about contacting these companies to offer my services. Does it boil down to a simple phone-call/email or do I have to meet the company in person and sign a contract?
Many thanks.
Once you have decided on a line you would like to take, there is no hard and fast rule for how you would contact the principal. It depends upon the type of line, your previous experience, and how the initial contact via phone call goes. I am sure that experienced reps can chime in with a wealth of experience.
Having said that, there is nothing that replaces face-to-face interaction, as it is not simply a matter of “social networking” and Skype. The independent rep relationship is like a marriage. While you might select dates online, you would never agree to marry based solely on the remote experience. With the sales representation relationship, there are some aspects which might require going beyond the remote relationship; yet it can be and is done all the time without that fact-to-face.
A good way to look for lines to carry is to use the free service for reps available at our parent website, RepHunter. You can search for free for new lines in all industries and territories who are actively seeking representation.
Please feel free to create a profile at no cost to you. You can then take advantage our our training tools as well as conduct unlimited free searches.
I hope this helps!
From looking at this article and others, it seems that the standard commission paid to sales reps is around 10% would this be true if the product you were selling was worth millions of dollars? Is it really that simple to earn large amounts of money as a sales rep for a company producing expensive products, such as heavy machinery?
You have to consider reality. In general, when total prices go up, commission rates go down.
Also, bear in mind that large ticket items take longer to sell. What is the sales cycle? Maybe you could be working on a deal over a several year period, and the “large commission” needs to cover that long period. Some common sense reflections of this sort will help you to understand.
We are a start up company selling a patented product that covers a wide range of markets including gift shops,pet shops,coffee shops and florist. We will be looking for reps and my question is are the commission rates the same for all these markets and if so should we try and find reps that can sell to muti markets.
Our general guidelines would cover all of these markets. Regarding differences in commission rates, I am wondering what makes one of the named markets so different that a commission structure would be different? In fact I would think of them as all the same market “retail”. So why would different types of retail affect the commission? If there is no good answer, such as “coffee shops are so much more difficult to sell to for the rep”, then I would not see why rates should differ either.
If any experienced reps would like to give a counterexample, that would be great!
If the sales rep is selling a service that will be managed on a monthly basis, does the rep receive a one-time commission or receive a monthly commission for the length of the contract?
Hello. I am venturing into sales, because I am very familiar with the product to be sold and it is innovative technology to be introduced to the US from Korea. I have never done sales. This is a service that needs to be renewed yearly. How much commission do you think I should take?
I will be the only one (so far) selling in America.
Any advice?
@Kio – Arrangements vary. However, it is our position that since both parties are in business to make money, there has to be incentive for both. If the rep does not have residual income, there is little motivation to build the business, and he is more like a hired hand.
You should convince yourself that the best results can be obtained by rather having a partner who is motivated to build the business.
@Julia – generally commissions run 10-15% but it depends on the industry, margins, and dynamics of the business. This is the most common question, and you might get insight from previous comments on the topic.
Hi – My apologies up front for all of the questions, but i am totally in the dark about sales reps. I am an artisan skincare manufacturer. I am thinking about hiring a sales rep on a straight commission basis. I know I am probably being a bit obtuse, but when you say that commission is based upon the sale price, do you mean the suggested retail price or the wholesale price? Is the commission paid always the same rate or is it acceptable to pay a slighly higher commission rate, i.e 12% for a new customer and then drop it to a lesser amount, i.e. 10% for maintaining the account? If I sell a bar of soap wholesale for $3.00 for under 100 bars and then drop the wholesale price for larger orders to $2.80 how does that get accounted for with the commission rate. And how do I price my items to allow for a sales rep. Never having had one before, I did not include that in my pricing. None of my items is a high dollar amount retail, ranging from $6.00 to $30.00 a piece, so quantity will be what makes the money. Again, sorry for all of the ?’s and thanks in advance for any help. Deb
In my experience, it is based on the invoice price which would be the wholesale price. However, in certain industries the customary practices could vary. From the manufacturer’s viewpoint, the invoice price is “real” whereas the retail price is hypothetical, as it varies as sales, clearances, loss leaders, and other factors come into play that are outside the manufacturer’s control.
There is a lot flexibility as people come up with all manner of ideas. However, you have to “think like a rep” to understand. They need to be able to make a living so at the end of the day (or more to the point) at the end of the year, was your line a valuable contribution to their living?
Regarding pricing, it is common for the inexperience to underprice. There are many business school case studies and business articles where underpricing and not overpricing is the problem. When you price, the approach of determining you price based upon you costs has to start with your direct costs, plus indirect costs. Then on top of that factory overhead. Then “General and Administrative”. Then marketing and selling, including commissions. So with all these costs, it is easy for something that starts out at $1 dollar for your materials to end up making you have to charge $5 to cover the true cost, with all the things I mentioned. There are entire courses of study that look into pricing, and I have written more extensively about this elsewhere.
But the commission rate in almost all cases is based on the invoice price, which is the price your customer is paying you. But if your cost including everything listed above except the rep’s commission on the $1 of materials ends up being $4.50, then 10% commission to the rep can only be paid by making your price $5. Think of the rep as all those sales people on the floor of your favorite department store.