SALES

The Commission Conundrum

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As companies try to increase sales while cutting costs, a popular trend has been to explore the use of commission-only sales staff. While this seems like a win-win situation -- the company gets to put more feet on the street without paying base salaries -- this approach can easily backfire and bog down the overall sales effort. Contrary to the idea that commission-only sales representatives are free, since they are only paid on what they sell, there are two huge costs of using such a sales force:

  1. The hiring, training, and supervision of these workers can overwhelm the management team.
  2. Independent sales representatives are given little incentive to provide customer service beyond the sale.

Not only can these negatives divert the focus of the company management, but they can also result in severe damage to customer confidence. Before a company pursues a commission-only compensation plan they should be aware of the two conditions that most often accompany success with this model and ask themselves if they meet these requirements.

The first condition required for this model to work is a short sales cycle. Most people either do not have the patience or simply cannot afford to wait three to six months to complete a sale and earn a commission. In addition to the requirement that these staffers have the financial means to support themselves for several months, a long sales cycle dramatically increases the difficulty of maintaining their interest and motivation. As weeks and months go by without a commission payment, the natural tendency of people is to give up and find a more reliable source of income. In a nutshell, most workers are looking for jobs that provide a steady paycheck, not a business opportunity with a long-term upside.

If your product has a long sales cycle and you are still determined to pursue a commission-only strategy, it is important to compare the opportunity you are offering with other commissioned sales positions that have similar sales cycles -- for example real estate. Does the position you are affording require a similar time and work commitment as selling real estate without an equally attractive upside? If you can't offer a greater potential for success for a similar investment of time, why would anyone choose to sell your products? In this situation, management will find it extremely difficult to maintain an effective and motivated sales team.

The second prerequisite for success with this compensation model is a relatively simple product. Consider the items sold by successful home-based and network marketing firms such as Amway: vitamins, long-distance service, household cleaners, the list of products trends very heavily toward simple to understand and consumable goods. Even with a short sales cycle, a freelance sales staff typically has a very high turnover rate and if the products are too complex, managers will find themselves buried under an endless loop of training new personnel. Because a commission-only staff is not compensated for time spent on product training, most sales representatives working under this model consider it a burden. Such resistance makes it impossible to properly instruct representatives on the features and intricacies of a complex product. Paying sales representatives for training would do little to stem the high rate of attrition of commission-only personnel, and managers would still find themselves constantly teaching new staff. In addition to the overwhelming training effort, complex products usually require a higher level of continuing customer service, and since a commission-only compensation plan provides no incentives for providing ongoing support or even maintaining the company reputation after the sale is complete, this model often results in deteriorating customer support.

Under the right conditions, a commission-only compensation model can be a great way to ramp up sales and rapidly expand your sales force. But it shouldn't be considered a free or painless way of increasing sales without costs. Before pursuing such a strategy, managers must weigh the commitment of time and expenses of recruiting, training, maintaining and managing a highly transient sales team. Can your product or service offerings be taught quickly? Can they be sold fast enough so the staff feels there is enough reward for the time they are investing? If you answered "no" to either of these questions, the commission-only model may end up costing you much more than a conventionally compensated sales staff.

Last updated: Jul 1, 2005




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