Commission Models and Profitability: Why the 50/50 Split Needs an Overhaul (Path to Profit Series, Part 7)
For years, the 50/50 commission split has been the primary compensation structure in the promotional products industry.When the 50/50 split was created (at least forty years ago), the sales process consisted of salespeople selling predominantly out of catalogs, and the marketing support consisted of catalogs, flyers (most of which were provided by suppliers), business cards, and some (but very little) self-promo, there was no technology and the “support” for a salesperson was simple and the expense low.Forty years ago, there were no ERP's, CRM's, e-commerce platforms, accounting packages, artwork programs, email programs. There were no websites, online product search tools, social media, or digital ad spending. Forty years ago, the turn-around times were 4-6 weeks with faxed or mailed orders; the sheer velocity of the business, the pace today, and the magnitude of its impact is incomparable.Fast forward to today. Today’s salesperson is competing in an entirely different world.To respond to the demand, today’s successful salesforce has had to deploy rapid-fire response tools: mobile technology to respond from anywhere, cloud-based technology to work from anywhere, seamless solutions to move swiftly from project-to-project to respond to the demand.And to compete in an Amazon world, distributors are responding to clients who are demanding more high-touch services that might include creative design, or company stores with fulfillment and kitting, all of which need to be powered by people, and some of which requires a significant footprint, from warehouses to office space. Oh, and let’s not forget that the average margins in the industry have slipped several points since that time, which means we’re not only dealing with more expense and more complexity, but we’re making less profit. In short, the support for a salesforce, forty years ago, was a drop in the bucket compared to today. Forty years ago, it was simple: the house and the salesperson, their catalogs, and their evenly divided 50/50 split. So, why does this industry still cling to a long outdated, forty+ year model of a 50/50 split?And let’s be clear, you might not deploy a 50/50 split, but the residue of that as a model for our industry still creates unhealthy splits (even at 60/40) for the progressive distributor. Following are a few ways the wrong compensation package can cause a catastrophe in your business but also, a suggested remedy to help you, not only avoid disaster, but inspire your team to build a company and a culture that thrives.
The Demotivating SplitThe optimum compensation package in the industry incentivizes your team to increase their sales. The smartest distributors employ goals and benchmarks that guide new sales reps toward their sales goals, increasing their share of the profit as they grow, and more of them are adopting a salary-plus model plus a sliding scale of commissions or bonus based on performance. The old 50/50 model does not create much incentive for the salesperson. Sure, if they don’t sell, they don’t eat, there’s plenty incentive -at the start- to grow your sales, but once the rep hits a level of comfort, the sales rep typically stops growing. Worse, they end up losing all the muscle they once used to do business development, becoming farmers instead of hunters: eventually their sales growth plateaus. And a real killer with 50/50 splits is that no one is motivated to market the business. Salespeople rely on the house to market the business but the house, by giving such a generous commission split, expects the salespeople to represent their marketing force. The result is a stalemate that means little-to-no attention is given to business development and marketing. Successful commission structures incentivize salespeople to grow their sales and push new boundaries. The wrong commission structure demotivates everyone and works against your collective business goals.
The “Everyone Loses” SplitWhen I was a distributor, we had long conversations about commission splits, and we tried every variation we could. Our niche was company stores, which were labor intensive, involving overhead consisting of support teams, warehouse teams, kitting teams, customer service teams, plus, your typical order production overhead and accounting. There was no feasible way to structure a 50/50 split when the house was doing so much of the work, and commission discussions with sales reps were always difficult. I had lunch recently with a distributor friend who focuses on stores as well, and I joked with him about the commission problem. I asked, “Do you remember that worksheet you showed me ten years ago that helped a sales rep understand the burden of operating costs for your business? The one you used to show how a 50/50 split was not fair or feasible for stores.” “Do I remember it?” he laughed, “I used it yesterday!”It surprises me that it’s still a conversation we have today. When a compensation package is structured using the old model and layered on top of a business with high operating expenses, it puts an incredible burden on profitability; the result could mean that both the salesperson and the house lose! Both are working incredibly hard to take care of their customer, and their margins are healthy, but high operating costs quickly erode the profit. And the most dangerous part of that equation is that the customer becomes no longer profitable to serve.Whatever your model, whether stores, or creative services, or some other specialty that involves higher operating costs due to the talent required or the square footage of your operation, you must consider all of your operating costs in light of your commission structure. Otherwise, everyone loses.
Traditional Compensation vs. the Modern AlternativeMany progressive distributors are deploying healthier, creative compensation packages for their teams today. You are beginning to see a rise in more base salaries + bonuses and other structures that inspire growth. These new structures, and their outcomes, are in sharp contrast to the old model in three ways:
- Salary+ a bonus or commissions gives your new employees the time required to learn the business. The industry has a very long learning curve, and if you are not adequately compensating those fresh to the industry, they will not have the means to survive long enough to become a significant asset to you. If you merely provided a 50/50 split, your turnover would skyrocket, and you’ll have a revolving door of good talent leaving. The old model was a “sink or swim” model, with very little training and support to nurture a healthy salesforce; the new model (salary+) fits the most successful training method in the industry, apprenticeship.
- The salary+ option invests the employee in the total outcome of the business. In a traditional 50/50 split model, there are really two businesses: the house, who finances the orders, and the salesperson who owns all the accounts because they can walk out the door with the most critical part of your business: buyer relationships. A base+ model is usually employed by distributors who are providing more and more services to a customer who is dependent upon the business and its services (not just the sales personality) which creates loyalty to the brand and builds longer client life cycles.
- The salary+ option also helps the sales rep attract the right kinds of clients. A 50/50 model (or even 60/40) usually gives the sales rep complete control over what types of customers they bring into the business. Salary+ gives the distributor final say over the types of customers they attract to the business, even if it’s in a subtle but influential way through the apprenticeship process by training. Reps on the 50/50 model either sell something or don’t eat. So, for those in that situation, any business is good business: low margin business, business that makes no sense from a support standpoint, one-time customers (which are costly) that never turn into clients, those are typically the types of wrong clients you end up working with when you lack discretion about the type of business you want to attract.
This post is the seventh installment in our series, The Path to Profit, the previous posts are The Real Business of Winning, 4 Keys to Focusing on the Most Profitable Clients, Four Ways to Uncover More Profit with Existing Clients, Your Suppliers Are Not Vendors – 3 Benefits of Stronger Supplier Partnerships, Stay in Your Lane! 3 Attitudes That Inspire Profitable Working Relationships, and Managing a Profitable Team: Four Hidden Areas Where’ You’re Bleeding Cash.commonsku is an effortless business management platform that empowers you to process more orders and handle more business. Start your free trial now!