Sales teams do what they are paid to do. If commission is a percentage of revenue, reps will work hardest on the deals that add the most revenue, whatever those deals cost to serve. That is not a failing of the reps. It is the incentive working exactly as designed.
The problem with paying on volume
Revenue-based commission treats every dollar of sales as equally good. In practice, they are not:
- A deal won with a deep discount pays the rep almost the same as one won at full price.
- A customer who orders small, often and urgently pays the rep the same as one who orders in bulk.
- Extras given away to close a deal, such as free delivery or extended terms, cost the business but not the rep.
Over time this pulls the customer base toward the accounts that are easiest to win and hardest to profit from.
What changes when you pay on profit
When some or all of commission is tied to the profit a customer generates, reps start to care about the things that drive it:
- Price. A discount now costs the rep as well as the business, so it is used more carefully.
- The right customers. Accounts that are cheap to serve become more attractive to win and grow.
- Terms and extras. Free delivery, rush orders and special terms are offered when they win business worth having, not by default.
The goal is not to make reps into accountants. It is to point their judgment in the same direction as the company's.
Doing it fairly
A profit-based scheme only works if reps trust the numbers. A few principles help:
- Use profit after the cost to serve, not just gross margin, so the scheme rewards customers that are genuinely profitable.
- Keep it simple enough to explain. A rep should be able to see why one deal pays more than another.
- Do not change everything at once. Many businesses start with a blend, such as part revenue and part profit, and shift the balance over time.
- Model it before you launch it. Look at what last year's payouts would have been under the new scheme, rep by rep, so there are no surprises.
Start with the numbers
Before you can pay on profit, you need to know the profit of each customer and each rep, once the cost of serving them is counted. A Revenue Opportunity Assessment shows profit by customer and by rep, and how last year's payouts would have changed. To get a feel for one customer first, try the free cost-to-serve calculator.