Salespeople are often paid on a commission-only basis, which means that when they make a sale, their employer pays them a particular percentage or fixed rate. Knowing how to calculate your commission rate can tell you how much money you’ll make each sale and how many sales you’ll need to meet your financial goals if you work in sales.
We’ll go through what a commission rate is, the different types of commissions, and how to find your commission rate in five simple stages in this post.
What is a Sales Commission?
The payment connected with either a fixed payment or a percentage of a sale is known as the commission rate. Commission-based professionals, such as insurance brokers, real estate agents, and car salespeople, are compensated when a sale is made. Sales commission calculation is crucial to the job when your salary is based largely or fully on the number of sales.
Types of Sales Commission
Because there are so many different commission rate models, it’s crucial to understand how each one affects your income. The three primary types of models are as follows:
1. Straight Commission
Your income is entirely dependent on your sales when you work on a straight commission plan. Sales commission calculation based on this method includes
Sales x Commission rate = Income
2. Base Plus Commission
You can earn sales commissions in addition to a basic income if you use the base plus commission model. Employees may find this approach appealing. However, employment may be contingent on sales quotas. To calculate your sales commission based on this method:
Basic salary + (Sales x Rate of Commission) = Obtained Income
3. Draw against Commission
In this arrangement, your company gives you an advance payment that works as a loan that you must repay. To calculate commission based on the method:
(Sales x Rate of Commission) – Adv. Pay = Obtained Income
Don’t Forget to Read: Sales Commissions Make or Break the Company: Here’s Why
Finding the Commission Rate in Five Steps?
Most commission rates may be found by combining the three models above into a single calculation. This master formula can be used in a number of situations to determine the commission rate and earning potential of practically any job.
1.Create the master formula.
You can create one formula that could be used in any situation by combining the three most common commission models. The master formula is:
(Basic salary) + (Sales x Rate of Commission – (Adv. Pay) = Obtained Income
2. Determine your base salary
Companies that use the base plus commission model pay their salespeople a base salary, which you can input with your weekly, monthly, or annual income in the “base salary” column of the master formula. Salespeople who work for organizations that use the draw against commission or straight commission models set their base salary to “0.”
3. Determine your advance pay
Companies that use the draw against commission model lend money to their salespeople to cover potential expenses. Which are collected or deducted from their earnings as they make sales. This model’s salespeople enter their first advance payment in the “advance pay” section of the master formula. Participants in the straight commission or base plus commission models should put “0” as their advance pay.
4. Understand Your Commission Rate
Your commission rate is calculated in one of two ways: as a percentage of sales or as a fixed sum per sale. Those who make a percentage commission multiply their total sales revenue by their percentage rate of commission, while those who make a dollar amount commission multiply their number of sales by their predefined dollar amount.
Percentage model: (Basic salary) + (Sales Revenue x Rate Percentage of Commission) – (Adv. Pay) = Income
Dollar amount model: (Basic salary) + (No. of sales x $ amount) – (Adv. Pay) = obtained Income
5. Input your figures to calculate potential income
Once you’ve figured out your commission model and your numbers, input them into your adjusted calculation to find out your prospective earnings. To find out how much money you can make from one transaction, enter an average sales revenue into the percentage model or “1” into “number of sales.”
Divide your intended revenue by the amount of money you can generate from one sale to figure out how many sales you’ll need to meet your goal.
Desired income formula: (Desired income) divided by (Income from one sale) = No. of sales needed
The Bottom Line
After spending the entire quarter closing transactions, the last thing your sales representatives would want is an inaccurate commission payout. Hence, it is critical to understand your sales commission structure and how to calculate sales commissions to avoid erroneous remuneration.
Having an effective sales compensation strategy in place before sales commission calculation guarantees. The company’s product or service and bringing in additional clients.
