Definition: Commission sales are sale transactions that generate an additional compensation to the salesperson. In contrast to non-commission sales, these deals allow the seller to gain more money as his selling operations increase.
What Does Commission Sales Mean?
When a company adopts the scheme of commission sales, it means that compensation to sellers is variable. In most cases, every transaction made by a particular vendor causes an additional payment to him. The vendor’s monthly income depends on his productivity as a salesperson. Commissions aim to encourage more sales because every individual deal means more money to the seller. This arrangement has also the purpose of giving fair reward to the most productive members of the sales team. Commissions are usually set as a percentage of the sales value which means that a vendor increases his income at the same rate of closed sales.
However, the percentage of commissions varies greatly across companies and economic sectors. For example, some firms have variable compensation based on team productivity instead of individual achievements. It might be based on number of units sold, sales value, new clients or a combination of several criteria. Sometimes salespeople earn a fixed monthly wage that does not depend on sales and also have a variable amount that do vary in line with the sales.
Example
Nielsen Plastics has a sales team of 25 people that offer plastic products to a wide range of stores and distributors. Vendors used to earn only fixed wages but the new Sales Manager thought that commission sales should be implemented. He said that sales could increase notably if salespeople obtain extra money with every additional transaction. The Sales Manager therefore decided that sellers would earn 2% of all sales completed in addition to their basic salary.
He would also reward every new client gained with an additional amount of US$1,000 because the firm identified a huge amount of potential customers that had not been reached by any vendor. As a result of the new scheme the company increased sales in 30% and number of clients in 22% at the end of the first year.
