Previous Dilemma: The gross side of service commissions: sales or profit?

Our star salesman is the best closer I’ve ever seen. We pay him a salary plus commission on gross product sales. He has some pricing latitude. I’ve noticed a fairly stable gross profit percentage on products, but it’s different for services. He’s practically giving away services to get more product sales.

Service costs are somewhat vague and hard to accurately measure, but I need to profitably grow the service side of our business. Should I switch his commission structure to a gross profit percentage on services? What do your readers think?

— Jack, Sales Director

Summary of Advice Received

The Modern Commission Structure
Put a stop to giving away the services store
by Meryl K. Evans, Editor, Professional Services Journal

Without a doubt, compensation needs to motivate the sales team to make more sales within reasonable profit margins. No business should give away services and turn into a loss leader. Yet if your commission structure is ineffective, this could happen to your organization.

Developing an effective compensation plan requires knowing the cost of doing business in order to compensate based on profits. Ensure that the sales team knows the costs and reward the team members. Growing overall sales is important as long as profit follows.

Everyone who came to the reader’s rescue agrees that the commission structure needs to change. Tom Armour, founder of ValuedSalesForce.com, reminds us, “You get what you incentivize.” Experts and readers suggest you do the following:

• Use a hybrid structure.
• Change the business model.
• Pay commissions quickly.

Share your experiences and tips for motivating the sales team to meeting business objectives, or ask your own question.

Use a hybrid structure

Most of the people who responded to the dilemma voted to change the commission structure. The sales team pushes product sales because they earn better commissions and turn the cheaper services into a sacrificial lamb. “Switch to a hybrid model that averages the margin from both service and product sales. Then pay a commission based on average margin. Therefore, if the salesperson wants to rob Peter to pay Paul, the average margin and commission payable will reflect this,” says Rich Patterson, owner, Patterson Brands.

Tom Armour also supports a hybrid structure and explains how to go about it. “Pay commission on gross service sales in addition to the gross product sales already commissionable. By combining these two, you can re-establish the annual target/commission earnings, and if the sales rep continues to give away services to sell products, the action will hit the sales star in the pocketbook. I would also establish an approval process/authority for offering services to clients,” Armour says.

Change the business model

The current business model sets up the star salesperson and the sales team to bring in less revenue, so it’s not a surprise to see they rob services to pay products. Michele Harris, president, Smarti Solutions, suggests changing the business model. “Lots of successful businesses designate ‘loss leaders’ that are strong revenue generators,” Harris says. “Bundle the services and the products together, build in the profit margin, and sell it as a separate product offering. Leverage the services to entice customers, and you’ll still be profitable. It’s an easy sell!”

If you want to strengthen an area of your business, use that to incentivize the sales team. Tadd Rosenfeld, CEO of DualEagle.com, explains one way to do it. “The only time to connect commissions to something else is when it’s important to reduce profitability ambition. For example, if your salespeople become too greedy and sell your product for more than it’s worth, hurting you in the marketplace, change the commission structure to reflect a different metric; perhaps include client satisfaction.”

Recognize success faster

Aside from considering the commission structure and model, paying commissions soon after the sale can motivate the sales team to work toward meeting goals. Rosenfeld recommends paying commission as soon as the client pays and publicly recognizing the salesperson. “This makes the reward both financial and nonfinancial, because people appreciate status in organizations. This approach will encourage the other salespeople as well, because they will realize success is possible and wish for the financial and nonfinancial rewards,” he says.

What other ways can you work with the sales team to help them be more successful in selling services? Please share your thoughts in the comments section. If you face other work challenges, ask a question.

About the editor

Meryl K. Evans is senior editor at InternetVIZ and the content maven behind Connected Digest, IT Solutions Journal and Professional Services Journal. Follow her on Twitter @merylkevans.