Sales Incentive

Bundesarchiv Bild 183-2005-0801-516, Hamburg, ...

Salespeople

Sales incentives are usually a percentage of the invoice price, because salespeople are mostly driven by commission, right? and we all know that these  salespeople are also prone to ask for discounts which shrink company’s profits. Have you ever wondered if there is a formula where salespeople are encouraged to protect the list price or even try to sell over the price list? Well Thomas T. Nagle and John E. Hogan describe this model in words and I am showing you in numbers. It looks confusing at the beginning but is really simple. The company set a price list, and a sales commission percentage according to the contribution cost of the product.  The cheaper the salespeople sell the lower their commission and vice versa, the more expensive the salespeople sell a product the bigger their commission.

In the example attached you can see one product with 20 % contribution margin and a 15 % commission rate. Notice that if salespeople sell at price list they get the expected commission, but if they vary the price the commission varies with the sale price.  Click here for spreadsheet example: Sales Commission

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