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Calculating Commissions for Sale Raps


#1

We are a wholesale diamond and jewelry business and we are looking
to hire a sales person, but we have a very unique situation.

We sell loose diamonds and our own jewelry line both wholesale and
retail.

The sales person we plan to hire will be responsible for bringing in
customers, but the scenario will be different based on the type of
sale. For example a retail customer that comes in looking for a loose
diamond and engagement ring will have to be serviced by me (the
owner) because i cannot give the sales person access to the entire
inventory of diamonds. But if a wholesale customer comes in looking
for a piece of jewelry that is part of our line, this would be
something the sales person could assist them with. If this store
starts a program with us (purchasing a certain amount every month)
how would you recommend giving commission to the sales person? Is it
fair to only offer commission for the first time sale? or how do you
go about this?

Please advise.
Thank you.


#2
The sales person we plan to hire will be responsible for bringing
in customers 

Bringing people in the door is not sales, its marketing. If you want
your salesperson to do marketing too, give her/him the necessary
tools to do it. Like an ad budget and training. Really, marketing
your business should fall in your area of responsibility or hire a
marketing consultant.

Is it fair to only offer commission for the first time sale? 

If you do this you strip away all incentive for your salesperson to
perform. Don’t you like to make money when you make a second sale to
the same customer? You wouldn’t sell it at cost.

Since margins are fatter at retail (particularly since you are doing
both) perhaps you could figure a way to have your salesperson do the
retail after all. If you’re worried about too much access to loose
goods…have the rep narrow down what the customer is looking for
then get a selection from you. Have the rep sign for it and check it
back in together.

I would suggest a commission based on gross profit, which could be
at different rates for wholesale and retail. By keying the commission
to your profit you provide a reason for your salesperson to make the
sale at full price. And if the price has to be cut in order to make
the sale the commission goes down,

For example…

the Retail of an item is $350. At keystone the unit cost is $175.

Plan A

You have a commission rate of 10% of the selling price
350 - 175 (cost) = 175 gross profit
350 X 10% = 35 commission amount
175 (gross profit) - 35 = 140 net profit to you

Plan B

You have a commission rate of 20% of gross profit
350 - 175 (cost) = 175 gross profit
175 (GP) X 20% = 35 commission amount
175 - 35 = 140 net profit to you

At full price these two plans pay the same commission amount and
yield the same net profit

Now suppose you have to discount to make the sale. Let’s say its 25%
off ticketed price so the item sells for $262.50

Plan A

262.50 - 175 = 87.50 gross profit
262.50 X 10% = 26.50(commission amount)
87.50 - 26.50 = 61 net profit

Scheme B

262.50 - 175 = 87.50 gross profit
87.50 X 20% = 17.50 commission amount
87.50 - 17.50 = 70.00 net profit

So you see that Plan B provides incentive to you and your
salesperson to make the sale at full price. But in the event you must
discount, your net profit is higher with Plan B over Plan A. B
actually makes your salesperson WANT to work hard to make you the
most profit.

Plug your own rates into all that and see what you come up with.

Good luck