How to Set a Commission Rate

How to Set a Commission Rate

Formulating a commission model for a service business can be a challenge. If your commission is fixed, it’s easy to lose sight of the splitting that can improve profitability. In this case, after all the brains and brawn energies have come to bear on the matter, you’ve made a motion to split the commission rate.

After you and your business partner decide how you want to split commissions, it’s time to consider what benefits (and possible new income) you want to produce.

An accountant would, of course, feel comfortable – as would a marketing person, or a attorney if you are in a familiar-looking profession such as law. If you operate a regular storefront, a marketing person might be able to help you make projections for demand based on past experience.

If you are a consultant, however, you will want to know what kinds of costs and income are involved. And also, you will have to decide what percentage of your normal offer should set as a commission to offer new or new-to-you clients. If your original offer was a straight commission, then you should ask to be protected from having to pay caps like that set by your new contract.

If you are in a service-based company and your deal does not include any up-front costs or later-in-the- life-of-the service fees, then you might want to either set a flat commission or a percentage of time factor. And that should be one month’s commission or whatever commission rate your business is already paying the service provider.

Concentrate on the benefits of the client versus the benefits to you or your business. If you paid $1 instead of $30 per hour for a car detailing, for example, or any other type of commercial services, then that should be your goal. Beyond this, you’ll want to consider the number of people you’ll need to manage to generate the kind of revenue you are looking at.

If you are setting a sales commission and is not a commission, it might be smarter to set it directly. If your clients are able to bill you properly, then a pure commission won’t make much sense – and, at worst, will make it less profitable than a non-profit approach to commission.

If you decide to pay them right away, you probably have heard of upfront fees, and you don’t have to worry that such has certain undesirable implications. If your customers are making a return of your investment, then you’ll have less risk of making a loss.

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By the way, how you split the commission rate is a very important way of calculating results. A 50-50 split might be acceptable when you are providing guaranteed lasting benefits, especially when you’re charging for time and expertise, rather than a flat fee.

Or a 50-50 split might not be so bad if you can justify it with sufficient trust between yourself and your clients, but you’ll do better if you charge a percentage of the total revenue you generate for the work and your customers.

Is this a formula for success? You could have a 50-50 split, then make all of your clients pay in a lump sum. They might be paying nothing, and you’ll be getting more work from the money they pay. Or you can split the commission rate into the number of hours you work, in that way you’ll be able to bill your clients properly and spend your time in the best places to work. It is a combination that works for almost every market and business.

Part 2 of this article explains in detail how to calculate the percentage of revenue to charge for each hour you work and the optimal time to work.