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Every retail business pays out huge sums as sales commissions. The profits they earn is the revenue from sales minus the commission paid to sales reps. Do these commissions affect profits? Well, no, since the commissions are paid for the sales generated by the sales reps, and the better they are paid, the more they are inspired to improve sales, ultimately boosting profits.
In this blog, we have discussed commonly followed methods of commission payments. Have a look to decide which one you can choose for your salespersons.
Understanding retail commission percentage structure
How is a retail sales rep’s commission calculated? There are several ways in which retail industries calculate commission payouts for their sales reps. Let us look at some of them here:
1. Fixed commission
This is the simplest and most commonly followed commission structure. Here, the commission is fixed as a lump sum or percentage of sales generated. This system is mainly practiced by retail businesses that sell high-value luxury products, fashion accessories, and lifestyle products.
Sales X commission percentage = sales commission
Before fixing the percentages, retailer businesses, however need to be careful and calculate the profitability of each item sold. If the commission is fixed for low-margin products, it may result in a loss to the business.
2. Variable commission
Variable commission helps retail businesses manage their profitability as they have greater control in this structure of commission payment. This follows a tiered system, whereby a fixed percentage is paid for an initial number of units sold. Thereafter, the percentage increases.
3. Team-based commission
Under this structure, commission earned is split between members of the sales team. Retail businesses that thrive on team work implement this system. Every member of the team contributes their best performance as they know that higher commissions can only be earned with more team effort.
This way retail businesses stand to benefit as they have salereps who work hard to earn commissions, thereby improving the profitability of the business.
4. Residual commission
Residual commission structure is suitable for retail businesses that employ third-party sales people. They are paid a fixed commission whenever a new client is brought into the business. Thereafter a residual commission is also paid to the salesperson for every subsequent sale to the same client.
As long as the client buys from your business, a residual commission is paid to the salesreps. This is mostly found in insurance sellers. Based on the number of clients, the commission value increases.
5. Draw against a commission
This is a case of advance payment or a draw paid regularly to a sales rep. This is generally followed in retail industries such as electronics and luxury goods. It is beneficial in the case of new employees and to prevent uncertainties in commisison payments.
The sales rep is expected to meet a certain amount of sales every month. If the reps earn more than the expected sale, they are paid the surplus.
Commission total - draw = commission owed
6. Marginal commission
This is another form of tiered commission structure followed by retail businesses. This is also called as the profit-sharing model where commission is split between retail store and salesreps.
The commission is based on the profitability or rather profit margin of each product sold. When the retail store sells a variety of products, fixing a fixed commission percentage on all of these would sometimes result in losses. High-value items will have higher commission percentages.
This structure is most suitable for stores selling high-end electronic products along with some simple home products, such as kettle, steam irons, mixers, etc.
7. Relative commission
This type of commission is based on a pre-determined quota. When sales reps reach the quota, they are paid a base salary plus commission or only commission, based on the plan chosen by the retailer.
8. Gross margin
The gross margin structure is where the payment of commission is a percentage of the profits/margin of the retail business.
Calculating retail commissions
Studies reveal that only 32 percent of employees in the retail sector were actually satisfied with their compensation from their employers.
This is the reason why people move away from retail jobs which leads to loss of money and valuable human resource for the employers. By putting in place a solid retail commission structure, employers can retain more employees.
Cities like New York and Chicago paid a good basic pay structure of 55,983 and 52,087 USD per year. Commissions are paid over and above this value based on the sales quota achievement.
Employees who have more than 10 years of experience are paid between 65K and 70,000 USD per year as base pay which supports the earning potential of sales employees in the long run.
Sales commission is calculated by multiplying the commission percentage with the sales quota that needs to be achieved. Typical sales commission percentage for B2C is 10 to 30 percent based on the product. For B2B clients, this value is estimated at 7 to 15 percent. In garments and fashion, the percentage for commission is set between 10 and 20 percent.
This is an example of the base + commission model. If employees in the commission only model, the sales quotas are higher with higher percentage and value of commission.
Chanel, a luxury brand that sells a variety of jewelry, accessories, apparels and other fashion items offers one of the best compensation and commission structures for its sales employees. The base pay of employees is at 137,642 USD of which commissions are valued at 57,280 USD approximately. Employees get around 20 to 25 percent commissions on various items based on the product value.
How much commission does a retail sales rep make?
The projected overall compensation for a Retail Commission Sales position in the United States area is approximately $94,953 per year, with an average annual salary of $61,666. These figures denote the median, signifying the midpoint of the ranges derived from our exclusive Total Pay Estimate model, based on user-contributed salary data.
The anticipated supplementary pay is estimated at $33,287 annually, encompassing potential components such as cash bonuses, commissions, tips, and profit-sharing. The "Most Likely Range" reflects values falling within the 25th and 75th percentiles of all available pay data for this role.
Case Study: How Compass helped a Digital Automotive Platform simplifies commission calculations and improves sales team performance
Asia’s biggest digital automotive solutions provider that supports the car buyers at all stages of their personal mobility journey. Serving as a bridge between car buyers and key auto industry stakeholders such as OEMs, dealers, and sellers within the country, the company has successfully expanded its diverse portfolio of offerings to over 30 countries worldwide. This expansion encompasses both automotive and non-automotive solutions businesses.
The company faced challenges in manually calculating and communicating sales agents' incentives as the company experienced substantial growth. In response to these issues, the company sought a specialized sales performance management platform to streamline commission processes
The chosen solution was a sales commission automation platform, Compass. This platform facilitated the automation of intricate commission calculations, offered real-time visibility into target versus achievement data for the sales team, and enhanced overall sales representative productivity.
Notable features of Compass included leaderboards for performance ranking, clear visibility for sales users, and granular data access based on regions and designations for business heads.
As a result of implementing Compass, the automotive platform achieved several significant outcomes.
- Sales representatives gained real-time visibility into their performance through the Compass mobile app, leading to improved engagement.
- Business heads could design more effective incentive structures due to detailed visibility into sales performance.
- The platform automated incentive payouts, reducing administrative efforts.
The impact of Compass on the company's performance metrics was substantial. In less than 100 days, there was a:
- 20% increase in incentive program adoption
- 18% increase in incentive program qualifiers
- 25% increase in incentive payouts.
These improvements underscored the effectiveness of the sales commission management platform in optimizing the sales team's performance, enhancing engagement, and streamlining incentive-related processes.
Conclusion
The talent and efforts of the salespersons go a long way in influencing the productivity of you retail business. Due to this fact, sales commissions should not be considered an expense. The compensation to retain the best talent helps accelerate the productivity of the retail business store.
Thus, retail businesses must structure an attractive commission plan that keeps salespersons motivated and attached to the business. Choose the best plan that suits your organization, is fair and competitive, based on realistic targets, and based on periodic revision to structure.
