Fixed Rate in Commission Sales
Definition: A fixed rate in commission sales is an incentive in sales where salespersons are compensated with a predetermined fixed amount for every sale that is made, regardless of the total value of the sale. This rate does not vary with the size or value of the sale; it provides uniform earnings on every unit sold.
Detailed Explanation
In this fixed-rate commission system, the salesperson is aware in advance of what amount they are going to receive per sale. Because of the above, this is quite a simple and predictable model. It is particularly effective in environments where the value of each sale is quite uniform or when a company wishes to encourage a specific behavior, such as the selling of a less popular product or a new product.
That is typically determined by the average revenue per sale, the price of the merchandise, and the effort behind making the sale. On the contrary, unlike variable commissions, which are typically expressed in percentage terms of the selling price, fixed-rate commissions do not change with the selling price of a product or service, but ensure certain income.
Key Characteristics
- Simplicity: Easier to calculate and understand than variable commissions, which can be directly related to the amount of the sale.
- Predictability: Salespeople can easily predict their earnings, and this would therefore help with financial personal planning.
- Consistency: Encourages consistent sales volume since earning does not depend on the sale price.
- Motivation: Motivates salespeople to sell more units rather than striving for the value of each sale.
Importance in the Sales Process
- Financial Planning: Helps companies more accurately forecast and manage the cost of sales.
- Risk Reduction: The risk is reduced for the salespeople in the periods of sales at lower prices or the downturns of the market, hence steady income is maintained.
- Target Achievement: Can be used for incentivizing the selling of specific products or to achieve specific strategic goals.
- Equity: This may inculcate a sense of fairness in the sales personnel, because the earnings are based on effort rather than the varying prices of deals closed.
Real-World Example
A telecommunications company compensates its salespeople using a fixed-rate commission to motivate them to sell new telephone contracts. Each salesperson receives a flat $50 for any new telephone contract sold, regardless of whether the monthly amount charged for the contract is low or high. This policy enables the company to acquire a large client base quite rapidly because it encourages volume sales, not significant value from any single contract.
Another example is a car dealership that pays a $300 commission on each car sold. The same flat rate applies whether it is an economy model or luxury, which simplifies the sales process and allows salespeople to focus on moving inventory quickly.