How do you pick the right commission structure?

1 Straight commission

Straight commission is the simplest and most common commission structure in direct sales. It means you get paid a fixed percentage of the sales you make, regardless of any other factors. For example, if you sell $100 worth of products and your commission rate is 20%, you earn $20. The advantage of straight commission is that it's easy to understand and calculate, and it rewards you directly for your sales results. The disadvantage is that it doesn't account for other aspects of your work, such as customer service, referrals, or expenses. It also exposes you to more income fluctuations and risks, especially if you have slow periods or high competition.

2 Base salary plus commission

Base salary plus commission is a commission structure that combines a fixed amount of pay with a variable amount based on your sales. For example, if you have a base salary of $2,000 per month and a commission rate of 10%, and you sell $5,000 worth of products in a month, you earn $2,500 ($2,000 + $500). The advantage of base salary plus commission is that it provides you with some stability and security, as well as an incentive to sell more. The disadvantage is that it may limit your earning potential, as your base salary may be lower than what you could earn with straight commission. It also may reduce your motivation, as you have a guaranteed income regardless of your performance.

3 Tiered commission

Tiered commission is a commission structure that increases your commission rate as you reach certain sales thresholds or goals. For example, if you have a tiered commission structure that pays you 15% for the first $10,000 of sales, 20% for the next $10,000, and 25% for anything above $20,000, and you sell $25,000 worth of products in a month, you earn $5,250 ($1,500 + $2,000 + $1,250). The advantage of tiered commission is that it motivates you to sell more and rewards you for higher performance. The disadvantage is that it may create a sense of pressure or frustration, as you may feel like you have to reach the next tier to earn more. It also may create a disincentive to sell more once you reach the highest tier, as your commission rate stays the same.

4 Residual commission

Residual commission is a commission structure that pays you for repeat sales or recurring revenue from the same customers. For example, if you sell a subscription service that charges customers $50 per month, and your residual commission rate is 10%, you earn $5 every month from each customer who stays subscribed. The advantage of residual commission is that it creates a passive income stream for you, and encourages you to build long-term relationships with your customers. The disadvantage is that it may take longer to earn a substantial amount, as you have to accumulate a large customer base and retain them. It also may depend on factors beyond your control, such as the quality of the product or service, the customer satisfaction, or the competition.

5 Team commission

Team commission is a commission structure that pays you based on the sales of your team members, in addition to your own sales. For example, if you have a team of five direct sales agents, and your team commission rate is 5%, and your team sells $50,000 worth of products in a month, you earn $2,500 ($50,000 x 0.05) from your team, plus whatever you earn from your own sales. The advantage of team commission is that it fosters a sense of collaboration and leadership, and allows you to leverage the skills and efforts of others. The disadvantage is that it may create conflicts or resentment within the team, as some members may feel like they are carrying the weight or not getting their fair share. It also may dilute your individual income, as you have to share a portion of the sales with your team.

How do you pick the right commission structure for your direct sales business? There is no definitive answer, as different commission structures have different pros and cons, and may suit different situations and personalities. The best way to decide is to consider your goals, skills, preferences, and market conditions, and compare the potential benefits and challenges of each commission structure. You may also want to experiment with different commission structures and see how they affect your performance and satisfaction. Ultimately, the right commission structure is the one that aligns with your values, motivates you to sell more, and rewards you for your hard work.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?