Reader Suggests Rethinking Commissions

Dear Janice:
In response to Ralph Palmer’s Closing the Sale column, entitled “Increasing Sales by Stretching Your Stride” which ran in the January issue of KBDN, I’d like to add some thoughts.

Mr. Palmer suggests boosting selling prices, lowering costs and selling more by one percent in order to be more profitable. He predicates his theory based on a 40% gross profit margin (GPM). Then he also presumes that the anecdotal figure of $20,000 in extra yearly profits is going to go directly to the salespeople and designers.

Nothing can be further from the truth, unless one happens to be the company owner.

Mr. Palmer used a figure of $750,000 as a sales goal, which is about what I sold for a retail dealer in my last year before retiring from the daily grind four years ago.

That year, my average GPM was 53%. The company’s requirement was 45% or simply an add of 75% over cost. I sold at over double the cost and was very effective at it because I knew what I brought to the table in the way of design expertise and the confidence that I had in my ability.

Now we had a deal where if we sold at over 46%, the designer/salespeople would get 25% of the additional profits. That never happened because of what I would consider to be rapacity on the part of the owner. When commission-only salespeople do their part, there is sometimes the, “Well, the numbers didn’t work this month” routine handed out with the commission check.

If employers want to increase sales and profits, they need to treat their employees with respect when it comes to being honest about commissions. Working conditions are just as important, if not more so.

There should be a clearly laid-out commission schedule, aside from the long and tedious company manual, that enunciates with certainty just how much an employee is entitled to and will be given without a song and dance. Treating your staff with respect will bring in tons of extra profits.

Commissions should be predicated on a set percentage of the profits. The bookkeeping is easier this way and the employees know what they will get provided they clean up any error ratio.

The simplest way to handle commissions is to set a figure – 12% is a good starting place, and 15% is better. From my experience, the industry standard is 10% while the company is looking for a 45% GPM. At 12%, all the little games can be avoided and not become a bone of contention at some point. Salespeople will be willing to sell more and at a higher price because they are simply going to make more.

If a salesperson sells at 40% GPM with a 10% commission rate, on a 25,000 job, they know they’re looking at $2,500 for their efforts. The company will see $7,500 for providing the selling environment plus the manufacturers’ timely payment discounts if they take advantage of them.

If a salesperson sells a $25,000 job at a 50% GPM with a 12% commission rate, they’ll be getting $3,000 and the company will see $9,500 for the same sale amount. Costly mistakes will be avoided because the salesperson/designer is going to want that extra money. They’ll scrutinize the acknowledgement and plan in greater depth, remembering that an extra piece of $100 molding is only costing them $12 in the short run and much more for a go back.

Finally, having confidence in one’s design ability coupled with carefully detailed drawings, and having an associate proofread the plan and order form before submission will go a long way in ensuring that the designer and the company are rightfully compensated for their investment and endeavors.

The key to selling at 50% plus is in the confidence you bring to the table. When you make your proposal, know in advance that the service and product you are delivering to your client cannot be surpassed and then absolutely deliver on those promises. The easy part will be doubling your costs.

Robert Montgomery Thomas
Weymouth, MA

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