Carrie Dunham

What is a typical commission rate for independent sales reps?

Asked May 26, 2013 by in Community Discussion

Is there a standard percent to pay sales reps that are compensated solely on commission? I have heard percentages ranging around 20-30%, but haven't talked to many people.

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Warren Miller

Warren Miller   May 28, 2013

The question might be simple, Carrie, but the answer is not. As with most questions in business, the answer is, "It depends."

Let me say at the beginning, though, that when you say "independent sales reps,' I'm going to assume that these are NOT W-2 employees (who would probably also get a salary and travel expenses reimbursed), but reps who are truly independent and work either for themselves or for a separate rep firm. Unless the agreement with the company says otherwise, truly independent reps pay their own expenses.

There is no such thing as a 'standard' commission rate for 'independent sales reps.' Rates vary, first, by industry. But that's not the only determinant. Second, does the rep have 'pricing discretion' (i.e., the authority to cut price(s) to make sales)? If the rep has such discretion, the commission should be based on gross profit, not selling price. And if the rep drops the price, well, of course, the G.P. will drop. . .but so should the rep's commission rate. That makes the rep think twice about dropping the price--not only will s/he get fewer dollars, but those dollars will come at a lower rate, too.

Unless there's a compelling argument to the contrary--which, I'll stipulate, might exist, but also which I've never seen in 38 years as a business professional--I recommend basing the rate on gross profit. I do that because the sales rep is closer to the customer than the company, and the rep should be able to make the call to drop the price to get the sale.

However, there should be a G.P. rate 'floor,' below which the rep gets 0 commission. The closer the rate gets to the floor, the lower is the commission rate. You can stipulate in the WRITTEN AGREEMENT--which you simply MUST have--with the rep that any sales with a 0% commission rate will be reviewed at least annually and might be rewarded with a bonus that is discretionary to the person doing the review. That way, the possibility of a 0% commission does have the potential to get rewarded. . .and every dollar that is above 0% gross profit does contribute to progress towards break-even.

There's also the question of whether the rep is paid on sale or when the customer pays. If it's the latter, then the rep will also become a collection agent. Only the company whose wares the rep is peddling can decide if that's a good idea or not. I think in most cases that it's not, even if the rep gets paid only after the customer pays. It's a not-great idea because it changes the customer's perception of the rep from the helpful sales person to the not-very-fun role of debt collector/deadbeat chaser. I believe it's best to keep the rep out of the collections business. . .although I do believe it is perfectly appropriate for the rep to ask for credit references and EIN on the initial sale. Those are non-confrontational, whereas a collection effort does confront the customer.

There are pluses and minuses to having independent reps. The primary pluses are (1) a company doesn't have an ongoing pay/benefits obligation and (2) no subside of a learning curve - the rep knows the industry and the potential customers. But those pluses comes with some significant minuses: (1) the company cannot exercise much control over how the rep spends his/her time, and (2) it's possible for a company to realize little revenue because of that lack of control. It's human nature for those working on a commission basis to peddle those wares that generate the most money FOR THE REP, which might not be the wares that produce the most revenue and profit for the company. To be sure, there's also a potential hit to the rep's reputation if s/he fails with a product line. But presumably the rep thought about that before agreeing to take on the line and spend time negotiating that written agreement.

I hope this is helpful. If you'd like a telephone chat, I can arrange that.

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Jon Brewster
Jon Brewster Very well written and informative. A recent review of our own business revealed the importance of time when installing POS systems and we need to ensure that the sale takes this into account. To that end we are shifting our model to engage persons with industry specific experience behind the counter and offer them compensation base on both the sale and a share of the installation after which we will assume support responsibility Even a SIMPLE CASH register has a bite and if done properly will consume at least 2 hours from start to finish.
4 months ago

5

Stuart Easton

Stuart Easton   May 28, 2013

In principle it's simple. Figure out what a rep earns in your industry (salary + commission), figure out how much time you want them to spend and what you think a good sales person will deliver each month/quarter/year and do the maths. You want to build in a risk premium.

I'm hiring a couple of commission only sales guys now in the high-end software space and am offering very generous commission on initial revenue, then falling back to more normal commission rates (5%-20%, depending on how far into accelerators they are). The initial "kicker" is b/c I want them to put all their time into my product - so make it possible to earn a living wage.

BUT - hiring commission only sales people should only be used as a short-term fix, in my view. It almost never ends well if you try and make it something more than that. In my case, the guys I'm hiring are guys I've worked with before and whom I would hire is I had the resources... but I'm a start-up. I can pay them out of incremental revenue, but not a salary.

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Todd McMullin
Todd McMullin I appreciated your insight to Carrie's question. Is the 5-20% above your "kicker" incentive or the normal commission rate?. In a startup SaaS environment, can you 1) share how you would structure a commission-only rep agreement (what %) based on deals which when closed would bring annual recurring revenues US$50,000 per client to the organization. Once 2 are closed, then similar deals should follow. 2) If a US$5,000 monthly salary were introduced, what change would this make to the commission percentage? 3) would ongoing commissions be reasonable?
2 weeks ago

4

Farzad Wafapoor

Farzad Wafapoor   May 26, 2013

Traditionally, sales reps on salary get about 5 percent commission.
It is therefore reasonable that an independent sales rep would require 10 to 30 percent.
We offer 20%.

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1

Thomas Haag

Thomas Haag   May 28, 2013

Hi Carrie
I cannot emphasize strongly enough that most commission based sales end in troubles. I hope you at least required a deposit to cover expenses.
In 2012 I had to write off USD $ 12,200 I have been unable to collect from clients (successful clients!) . If at all possible you are better off with a base salary and 12% commission as is the norm in the apparel business.

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Richard Rivas

Richard Rivas   May 28, 2013

Good morning,
In my experience, in selling print advertising, I was paid 15-35%. So I guess it would depend on what your selling and how good you sell yourself

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1

Egide Thein

Egide Thein   May 30, 2013

The highest I have seen in a startup was 50% the first year on annual subscription based sales. 20-30% is possible. It is a negotiation. Bottomline, many companies in the early stages will be happy to reward a sales hero.
Mature companies tend to have their rules set in stone.

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Todd McMullin
Todd McMullin I appreciated your insight to Carrie's question. In a startup SaaS environment, can you 1) share how you would structure a commission-only rep agreement (what %) based on deals which when closed would bring annual recurring revenues US$50,000 per client to the organization. Once 2 are closed, then similar deals should follow. 2) If a US$5,000 monthly salary were introduced, what change would this make to the commission percentage? 3) would ongoing commissions be reasonable?
2 weeks ago

1

Barrington Robinson

Barrington Robinson   June 6, 2013

When I am consulting with companies about hiring commission only sales people, I tend to work backwards.

In other words, I establish what would be a good level of remuneration for that position in their industry and then calculate the number of sales needed to achieve that target and work out the commission rates based on that.

If you don't have figures for your products conversion rate, etc, I would interview as many sales reps in the industry as possible and use any information that you gleam from them to inform your decision.

NOTE: When you are hiring employees it would be unprofessional if you didn't have their remuneration already set out (to a large extent)

However, independent sales agents are business people so it is perfectly fine to ask them, how much do they charge or how much commission would their expect to be paid.

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Dianne Crampton

Dianne Crampton   May 28, 2013

We offer 30%. And, we are actually looking for an independent rep now. For example, our team development resources we license to internal and external team builders will provide $1,492.50 per sale and we want 30 sales per certification class.

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Saskia Wijngaard

Saskia Wijngaard   10 months ago

With a Start up company instead of paying 50% would a 20-30 % range work if you would get re-occurring income. So our service are charged monthly - is it a better strategy to pay 20-30% every month on the same sale to ensure great customer service or pay one lump sum in the beginning.

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