Determine your commission structure for freelance salespeople
Independent sales representatives play an important role in the sales and marketing strategies of many wholesale companies. Often referred to as Manufacturer’s Representatives, Independent Sales Representatives offer wholesale brands the ability to expand their reach into markets far from where their business may be located and leverage representatives who may have existing business relationships. in target markets.
Independent salespeople are not employees; they are independent contractors paid on commission to represent your brand in a certain territory. When working with freelance salespeople, it’s important to keep in mind that they are business owners just like you: choosing to work with your brand is a business decision for them, as well as for you.
The challenge of dealing with independent representatives is figuring out how to motivate and compensate them. We’ve talked about motivation before: Freelance salespeople usually look for the best commission structures, with the most support but the least interference from you. Their job is to go out and sell, and a good commission structure is the key ingredient in motivating them to do so.
So how do you set up a commission structure that motivates and inspires them to effectively sell your products? This is the subject of today’s post.
Some Hard Truths About Independent Sales Representatives
Independent sales reps typically work on a commission-only structure, which means they’re inexpensive to hire, until they start closing business. You can take them out and work on your behalf with little upfront financial investment, making them a great choice for small businesses trying to grow quickly.
Independent sales representatives usually have several related manufacturers that they represent, promoting their products to a network of buyers in their territory or market area. Representatives are hired based on the territory they cover and the people they know in the territory. Those with the best networks of contacts are in high demand; they travel frequently to meet with buyers, showcase products, close deals, conduct training and solve problems. Their commission represents the value of their network and their time, and must also cover their professional expenses.
Independent sales reps are like most salespeople in that they tend to be very motivated by money. This is a desirable quality in a commissioned seller, but it can work for you or against you. When determining your commission structure, keep in mind that your line isn’t the only one your reps may wear. In a sense, you are competing with that rep’s other product lines to make sure the reps are spending enough time on your brand.
One of the biggest risks in hiring freelance salespeople occurs when companies underestimate the effort it may take to sell their products or overestimate the attractiveness of the compensation they offer. The commission structure may be good enough to convince the rep to work with you initially, but if they find it harder to sell your products for less profit, they may choose to spend more time selling with customers who promote paid products. better.
Structure of the Commission: Key issues to consider
Commissions are usually expressed as a percentage of sales – the challenge you face is figuring out what that percentage should be. It usually varies depending on what is required of the representatives. Here are some questions to ask:
- What is the price of the products sold? The more expensive items sometimes pay a lower commission, but it depends on the sales cycle and what is required of the rep – the more the effort to sell the product, the higher the rate should be.
- What is the role of the representative? Do they provide leads that you close? Do they provide full sales and service? If they provide leads and you do the closing, that usually means a lower commission.
- What assistance will these representatives need to provide to clients?
- Who takes care of customer service and account management?
- Will representatives need to provide training to buyers?
- Is this a one-time sale or will there be repeat customers? How often do you expect orders to be renewed?
The general rule of thumb is that the more time and effort a rep has to put in selling and providing services, the higher the commissions should be to compensate them for their efforts.
Crunch the numbers
There isn’t really a standard commission rate for freelance salespeople, as the commissions vary depending on what is required. The commissions of independent sales representatives can vary from 5% to 40%.
The industry average appears to be between 20% and 30% of gross margins, or 7 – 15% of gross sales, with lower commissions being offered for ‘easy sell’, i.e. products. Manufactured with a simple sales cycle and little or no service or training required and higher commissions offered for more complex sales requiring more demanding service.
In addition to the level of effort required to sell your products, some of the other things to consider when setting your commission rates include:
- What specific target markets or geographic areas are in the representative’s territory? The costs of doing business in urban areas are higher than in rural areas, but rural areas require more travel to get from one customer to another. Take this variability into account in your commission structure.
- At what level are the target contacts? Selling at the C level requires a more sophisticated and solution-oriented approach than selling to someone in the purchasing department; compensation should be higher to reflect this.
- What is the representative’s working environment? Do they work from home, do they have a mobile office or a corporate office? The less they have to offer your business, the less they should be paid.
- How will the representative approach potential clients? On the phone or in person? Telephone approaches would not need to pay as well as in-person sales as there is less time / travel.
- How are you going to compensate for volume sales? Will you pay a bonus on top of the commission?
There are a number of factors to consider when setting your commission structure for freelance salespeople. The most important thing to remember is to understand what it really takes to sell your products and fairly compensate your reps for their efforts and what they offer your business. If you view commissions from this perspective, you can expect your relationship with your freelance salespeople to be long-lasting and rewarding for all parties.
Have you been successful in working with freelance salespeople? We want to hear your stories in the comments.