Monday, February 9, 2009

Commission Only Sales?

Recently I have been involved in a number of "commission only" sales discussions. It's only natural in a down economy to try to find ways to cut cost and remove risk. I will give you my bias up front, I have never had a commission only position and I have never wanted to implement one within my organizations. Keep in mind that I have spent most of my career in technical sales, with long sales cycles (typically more than two or three visits) and a fairly strong price tag. It has been a solutions environment, not a product environment.

Now having said that, I'm not opposed to commission only sales positions. I do think that several conditions need apply for it to be successful.

  1. Short sales cycle, one stop selling is best.
  2. Lower price point, typically one that would facilitate an immediate decision
  3. High transaction level, several sales per day or week
  4. Simplistic sales methodology, the fewer steps the better
  5. Strong lead generation program to support the process

I know of a couple of companies that have tiered compensation plans. A new Territory Manager might start out year one with a reasonable base and lower commissions. Year two they are required to select either a lower base and higher commissions or commission only, which pays the highest commission rate. The reason this model is successful is because the sales cycle for the initial system is long, but there is a high volume of additional sales once the system is installed. The really good sales people have a strong base and recurring revenue. They have a steady stream of revenue every month thus insuring a monthly income.

So if the environment is right, what's the down side? I have heard it stated by several sources that the cost of hiring a sales person, including training cost, is $40,000 to $100,000. Most sales people become more efficient and productive the longer they are in territory. The risk in a commission only sales position is employee turnover. What is the incentive for the sales person to stay? How does the company protect their investment?

The second downside is loyalty. Many commission only sales people do not see the need to act out of a sense of loyalty toward the company that has hired them. They are very territorial in their approach. They tend to not share best practices. They are very reluctant to perform most administrative tasks that don't lead directly to compensation. They feel they do not owe the company anything, because they only get a small portion of what they provide to the company via sales. If they are making enough money and the company provides them the freedom they want, they may stay indefinitely. But that decision is predicated on them achieving their goals, not the companies.

If the current economy is causing you to seriously change the compensation plan to a commission only plan, think long and hard first. It may be the solution, it may compound the problem. Trying to multiply the sales force by reducing the base may not work as well as you think. The numbers may say differently, but give it the logic test. Will six commission only sales people outsell three with a small base? What will the administrative cost be with higher turnover and a sales force that just doesn't seem to get around to the paperwork. Can they hunt on their own (and what is the incentive for them to do that for you verse anyone else) or do you need to provide leads? If they don't follow procedures what's your leverage?

Again, I have intentionally stayed away from commodity, product sales so I wouldn't look for a commission only sales position. I have always felt my value to my employer and my client was my ability to solve problems. There is a place for commission only sales. Many very good sales people have made a very good living on this type of plan. But it comes at a cost for both.

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