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.
We currently work with distributors, but will be working on a commission basis only for our military sales. My question is: do independent reps specializing in military sales receive a a commission rate that is different or based on different criteria than a commercial sales rep?
Thanks for any input.
We at RepHunter do not have any knowledge of special commissions in military or public sectors. Our suggestion is that you contact reps who work in those sectors to find out.
I hope this helps!
Who pays the credit card processing fee when a independent rep receives payment for a wholesale order by credit card?
Should the fee be split based on the reps sales commission – i.e- if they make 15% commission on the order than they pay 15% of the fee; or should the entire amount be deducted from the commission?
We have asked around a bit and the consensus is that such situations need to be negotiated as part of the agreement between the principal and the rep, and should be covered by the Sales Representation Agreement. Normally such fees would be paid by the principal as a cost of doing business, as the principal would be receiving the payments. And likewise, the rep is not normally part of the “channel”, as the rep does not take possession or title to goods. Otherwise, this would be more of a distributor role rather than a rep role.
However, your case is not this typical situation. Taking the typical credit card fee of 3 – 4% and expecting the rep to pick up that cost is only fair in the context of the entire Sales Representation Agreement. For example, a higher commission would be justified relative to the industry if it is not common practice in that industry to have the rep pick up this cost.
We currently define exclusivity as any sale coming from a given reps geographic territory (submitted through the rep’s office or directly from the end customer, “sometimes without the rep’s knowledge”, into the company)as commissionable. Is this common or are commissions typically paid only on those sales channeled through the rep’s office indicating direct contact from the rep?
From our team member Matt:
I would answer yes. In fact, it is the Holy Grail. Sales reps have to make a living and need to be paid and should be paid regardless of if the sale goes through their office or not. And companies should be happy to pay that commission.
Sales reps earn their money not when the sales are good but when they are bad. In other words, if that customer decides to stop buying, that is when companies pay sales reps less but the sales rep has to do more work.
So, yes. If this account is in the sales rep’s territory the rep should be paid for ALL sales.
Considering your previous answer, we suspect that we have some reps who are collecting easy money by collecting commissions only because the end customer resides in their geographic territory on sales they have had no knowledge of or direct contact with. Is it those reps whom we make non-exclusive to avoid this situation?
The percentage of the rep agencies that “just collect money” compared to the ones that actually do their job to earn the money is, to me, irrelevant.
As a principal you’re going to give away money for free once, probably twice, then if you’re on top of your rep agents, you know who’s working and who’s collecting money.
From our team member Matt, in response to Paul of 14-Oct-11:
You have to consider your motive and “easy money” is only a term used by those that have never been an independent sales rep. It seems to me that you would be better served to inform the sales rep that you have a new customer in their territory and require that they contact and service them rather then keep the rep’s commission for yourself. I assure you that the money you keep rather then pay the sales rep will not offset the cost of failure or loss of your sales reps in that territory.
I am going to take on a new role reaching out to sell a sports performance consumer product to sports organizations. I’ll be starting from scratch. My job includes sourcing the contacts, introducing the product, and introducing price. Should I ask for a percentage of the sales and if so, what number?
Thanks,
Anna
From Brenda at RepHunter: “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 other reps in your industry to understand what the acceptable commission is in the market that you are going into, so that you are not only fair to the principal/manufacturer, but also to yourself.”
What about base, if you pay base, shouldn’t commission structure be lowered?
What is a good range of commissions to pay for someone to source us databases for our specific needs?
Our main website at http://www.SalesRepHunter.com is dedicated to helping principals find independent sales reps who sell products for them, and for independent reps to find new lines to represent. Your inquiry seems to be more of the opposite in that you are looking for someone to help you buy a product or service. In our business model, the seller pays the commission. Your question makes it sound like you are the buyer and you are wondering what commission you might pay an agent to help you buy.
So one answer might be “you would not pay for this service at all — rather the seller of the database would pay the commission.”
However, that might not meet your needs and you are in effect asking for a service from someone who would provide consulting or research to you in finding the databases you are seeking. As such, you would be looking for a consultant, and the fees paid to a consultant (not commission which is paid by the seller) is a bit outside the scope of our business model.
Having said that, when you are considering the commissions that principals pay to independent reps to represent their product, the range is usually somewhere between 5% and 20%. It is always best to ask the potential reps what commissions they expect in their industry.
Does anyone have any experience and recommendations on what commission rate is reasonable for a Representative in Taiwan that will be selling a patented process where revenue will only be generated by license agreements?
Hello, I have a question in regards to commission pay, hopefully some one can answer for me. As a manufactures representative, in where the products are custom and made to order, Is the commission rate payed 100% when the sale is made or can the commission be split. For example. If a sale for custom product is a total of X and when the order is received we the manufacturer receives a deposit of 50% of X is the rep in titled to receive 100% of their rate then or 50% of the rate and the balance or the other 50% of the rate once the product has been delivered and paid for. Also what happens if an order is not paid in full does that affect the commission of the rep or are we still obligated to pay the full commission.
Thanks!
I currently work as food service rep in the northeast. Since I am in and out of restaurants, and markets, there is ample opportunity to sell cross over items that my company does NOT engage in. In this case fresh fish. I have a contact who owns a wholesale fish company has been after me to help him with sales. My question therefore is what would be a fair structure of compensation for any sales I bring in for his company?
From Matt to Rick:
We don’t have specific information about the usual commissions of your industry. In our “Tips for Working With Reps” at http://www.RepHunter.net we state that you should determine that commission amount by communication with others in your industry.
Now in this case, I would think the commissions you currently get would be a good indicator of what you can expect from the next party.
From Matt to Ana Maria:
While it would be customary to pay the rep net 30 after payment in full is received, it would also not be unreasonable, depending upon your relationship with the rep, to consider and negotiate “progress commission payments”, to keep the rep’s good will.
In the case of an order that is not paid in full, the obligation would be as stated in your Representation Agreement as pertains to such cases. Again, depending upon your agreement, you may have specified that the commission or a portion thereof on defaulted contracts is refundable from the rep back to you, and could be deducted against future commission payments.
I am trying to create a job as independent sales rep for an upscale candy manufacturer who has always done everything himself. I have found and sold a first customer (small candy shops and food markets, no chains) and have sold him on the idea. However, he has asked me what fee/commission/territory I had in mind. And I am stumped. Not knowing anyone in the business I was hoping someone could help me with this.
what would be reasonable?
Sue – thank you for your inquiry.
Unfortunately we are not able to accurately answer your question. That is because commissions are determined by variables that include only you and the company that you represent. It always comes down to doing what is best for both parties.
I think that you need to be honest and start with a number that works for you. If that number is too high, you will find common ground.
Having said all that, it is very common for commissions to be in the 10%-15% range; again depending upon what is customary in your market segment.
Can an independent sales sue a manufacturer if they take away a product line that they’ve greatly increased the sales for in their territory?
I believe what you mean is “is it a good idea to sue ….” Anybody can try sue anybody for anything. Whether they will be able to successfully prosecute the case is totally different from “can you do it.”
I would suggest that you obtain legal advice as to whether you have a case. It will probably depend upon the wording of the written Sales Representation Agreement that you have with the manufacturer (you do have one, don’t you?)
So the first thing to do is to read your contract to see if there specific language dealing with the particulars of your situation. If you have some kind of protection, then you have a stronger case. But only legal counsel can advise you as to whether they believe your protection is strong enough, whether spelled out in your contract or implied.
Another avenue is to get the input of others on this topic, as you are attempting to do here in the RepHunter blog. Others may have experience in a similar, specific case.
In order to get your question more widely disseminated, I recommend that you join Linkedin, become a member of the Manufacturer Reps group, and post your question there. You should get some response there.
Hope this helps!
I work as a sales rep for an entertainment company and he pays me on the net of what I bring in. If I sell a show for $300 and we pay the performer $150 I get 20% of the profits or $30. I have always been paid on the amount sold. In reality, I am paying for his cost of doing business. What should I do. I am a 1099 contractor.
From Matt to Mary:
“It is always best to derive the commission amount from the “gross” of the sale. Doing this is simply much cleaner for both parties in terms of verification. When you derive commissions based of the “net” it gets convoluted and is derived using variables like expenses and other information the sales rep is not privy to.
I don’t believe it is unreasonable for you to contact this company and request that your commission percentage be adjusted so it can be based on the “gross” sale amount.”
I am currently considering a position as an independent rep servicing the banking sector. The company that I am talking to requires an up front setup fee and an ongoing monthly fee from their reps. The set up fee is refunded on the first sale but the ongoing fees continue. Although I have a lot of experience in this industry I am unfamiliar with sales rep structures. This arrangement hit me as quite odd…it almost seems like a franchise or a pyramid type setup. The monthly fees are not that large in comparison with the commission potentials so it doesn’t make much sense to me. Is this arrangement something you are familiar with?
@cblass6155: No it is not something we are familiar with. We can understand the one-time fee to make sure sales reps are committed to the program. Beyond that, we are not familiar with companies requiring on going payments, unless there was some specific service that they provided you that made sense for you to purchase.
We suggest you inquire further. They may have their reasoning that gives you a better understanding of their intent.
We are a small Mom & Pop fitness studio providing private, 1-on-1 strength training sold to new clients in 10 session packages. We have built our business on referral based marketing, but now feel the need to have an outside commissioned sales reps bring in clients. We expect to close the sale ourselves, no “exclusive” territories will exist and we are thinking of paying a flat amount of $100 to the Sales Rep for each client who purchases a 10-session package. Does this even look reasonable? As you can tell, we are total newbies to this!
I am starting a wholesale garment production business and i’m at a loss as to what to pay my sales reps. What is the fair percentage should i pay?
Pls i need help urgently!
We have a relationship with a former employee of one of the largest retailers who is now starting his own consulting business. This person believes that he can get our company’s products in two or three other national retailers. This person wants an hourly rate for design and packaging consultation, but would like to be paid a percent of the gross sales for any new national accounts he may be able to get us into for a period of three years. What would be an appropriate range for the commission percentage to be?
From Matt:
– 90% of all commissions paid to reps are between 5% and 20% based on gross sale amount.
– Commissions differ with each industry.
– The best way to establish your commission amount is through conversations with interested reps in your industry.
I am manufaturing rep. for a Precision sheet metal stamping, product development and Short Run company. We are currently in commission negotiations. As far as I know there is not an industry standard for commission. Is there a guide line or range of percentages in the Precision Metal Stamping industry for rep. commissions? I will have no salary stictly 100% commissions.
Thanx Much
chuck
I am considering a position as a sales rep for a reputable website selling advertising. No salary. 10% commission–they the money and they provide me the leads. All phone sales. This would be my first sales position and I am wondering what kinds of questions to ask about the company. I can sell almost anything. I trust the company. I am considering working 10-15 hours from home. I would leave my current positions (self-employed) to give this a try.
Questions to ask?
Do I have any negotiating power?
Thanks,
C
From Brenda: My thoughts …
Why leave current part time position for an unknown. At 10-15 hours, they should be able to do both?
Negotiating power? What are you bringing to their table? Do you have sales awards? Met & exceeded a company’s goals? Developed a new territory & can show the results of that?
How are the leads generated? Are the leads inquiring to the company, or are they a demographic lead that the company generated?
We’re starting an automation company and have a couple of independant sales rep joining efforts wirth us. As a CEO of the company I am confused about determining their commission. Even though it’s a service-based company and their responsibilities will stop at lurring clients into buying our solution but my husband will be doing free demo, do technical presentation and close the deal. Does anyone have experience with software companies’ incentives?
While we do not have specific expertise with how software companies structure their incentives, we believe you will find some guidance in our Training Tools at RepHunter at http://www.rephunter.net.
To access our Training Tools, you would have to create a profile, which is free to you, and then go to our Training Page.
I hope this helps!
I am having difficulty collecting my commission for sales I made for the last 30 days . I have worked for this company for the last 4 years and had my best month ever this last month. I quit my job and now they are refusing to pay for sales that have been fulfilled and customers have been invoiced.
Any ideas how I should approach this or what my legal rights are?
My first question would be “were you an employee or an independent rep when the sales were made?”
Depending upon the answer to that question, your rights would either derive from your employment contract if any or employment policies of your company. If you are independent, then your rights would be governed by your Sales Representation Agreement.
Depending upon which type of contractual relationship you have, you could inform the company that you will take the action specified in your agreement. You might be out of luck if you were an employee with no employment contract.
In either case, you might be best served by legal representation. To cut your costs, I would suggest joining one of those membership organizations offered by some law firms. For a low monthly fee you would have the benefit of legal representation. You could search the web for “Pre Paid Legal Plans.” I have used a firm with good results which was formerly called “Pre-Paid Legal”, but has changed their name to “Legal Shield.”
I hope this helps.
I am interviewing for a manufacturer’s rep position that is all commission with a monthly guarantee base against commission. The territory is already well established and I am taking over where someone is leaving. I would be handling around 40 different lines for the personal care/home decor business. Very successful lines-high end territory. What is a fair percentage to expect in negotiations? This should pan out to be around 80K to 90K annually.
I will be an employee with limited benefits-medical only.
Thank you.
With an employment situation the normal commissions for an independent rep (which we normally deal with) would not apply. Thus you would have to look at the total compensation package and come up with something that is fair and rewards your specific talents.
I would hope that some of our other readers might chime in on this one.
After being in business for 30 years we are selling our cabinet company and the equipment. We would like to know what the standard commision is for someone who sells our high end equipment.
I would think it depends on how closely your sale comes to a liquidation as opposed to a normal selling channel. Commissions for a liquidation might not be comparable to what we are familiar with in the Independent Sales Rep channel, as it is a completely different animal.
Hi, Thanks for taking a moment.
I’m contemplating getting involved with a company that is offering 20% commission + 15% of every first month of orders for each store (wholesale). This is for a food product, to be distributed in grocery stores & health stores.
Sounded very high to me, so I’m a bit concerned… To good to be true maybe…?
Thoughts?
Thnx,
J
@Jack – It is hard to know if this is too good to be true. I would recommend trying to contact other reps that have worked for the company to get a feel for the legitimacy of the offer.
Of that budget, how much would be your part of the sale? I would check with established reps in your industry, as to what typical commission rates are as we do not have expertise in this industry.
Hi
I will be selling temporary grandstand seating/stadiums on commission only.
What commission rate do you think would be reasonable?
I too am trying to figure out what to offer a sales rep. We are a new business and have an excellent gross margin, so I belive we can be flexible.
Reading over all the responses, I realize there is no set guideline or scale as every industry and case is different. That being said, I think I am leaning towards a percentage of gross margin.
My question is the following- If the rep is determining the wholesale price to sell to the retailer, how would I provide the marketing materials without an established price? Should I just leave the pricing details blank and let the rep fill it out?
Lastly, when should rep be paid? According to my understanding, a P.O. is considered filled once product leaves our warehouse, so is the rep paid then? Or when the funds clear our account? Any help is appreciated. Thx
Our company sells software as a service solutions to the oil and gas and medical industry. A person who has been a national account sales manager in the oil and gas industry would like to work for us commission only and leverage her contacts. A typical sale is $35,000 first year and $20,000 annual recurring. The cost of good is 20%.
She see an opportunity to build a base of customer accounts and manage them and be paid commission for the annual recurring each year in addition to the upfront sale. Do you have any ideas for commission structure in Cloud solution sales of this nature?
The incentive for her to go commission only (reseller) is the cumulative annual commissions and no limits.
Do you have any suggestions?
To Azza:
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 other reps in your industry to understand what the acceptable commission is in the market that you are going into, so that you are not only fair to the principal/manufacturer, but also to yourself.
I have a manufactures rep who wants 10% plus a 5k marketing fee. Is this common?