There are lots of opportunities for people to make a lot of money from Sales where you get paid a commission as payment. But is it the right choice for you? Why do some people fail at this type of work and others succeed?
Last week we explored how to work out your hourly rate and a few weeks ago we explored working out how much it costs to just open your businesses doors each day. Next week we will look at charging yourself out on a project basis. But for today lets look at getting paid by commission.
This is where you get a percentage of the sale you make; it is most common in the Real Estate Industry but can be used effectively in quite a few industries. If you are not a good sales person then this may not be the way to go.
I have seen commission based charging be hugely successful for people and I have also seen people collapse under the strain of commission based charging. How it works is that for every sale you make, you receive a certain precent of that sale as payment.
When I worked in the Real Estate Industry, the Sales Men would receive a payment each week known as a retainer and then for every house they sold they would receive a certain precent (like around 1%) of that sale as a commission. There was also some Sales Men that didn’t get retainers each week, but received a higher percentage on the sale (like around 2.5%).
Some disadvantages to getting paid a commission on your sales is that if you are not a good sales person, or if the industry you are selling in is slumped then you may not get paid for months and months and months. Imagine if you didn’t sell a house for 6 months. How would you live during that time?
Also the commission is only paid when the house ‘settles’ and that could be 30, 60, 90 or even 120 days after the sale actually occurred. How would that affect your cash flow?
An advantage of being paid a commission is that if you are an excellent sales person then you have the potential to earn a lot of money. Imagine selling a house every week, or every day, even having to wait 30, 60, 90 or 120 days for settlement wouldn’t matter as you would be getting paid often.
Lets look at commission payments compared to the hours put in. Someone who wants to sell their house contacts you, you go out and look through the house and spend some time researching houses in the area to set a good price for your seller. You list the house and then spend your time taking potential buyers out to look through it and see if they want to buy it. You may take people there quite a few times.
Eventually you sell the house. You then need to do all the paperwork involved and wait for the sale to settle. How much time did it take you to sell this house? 20, 30 hours? How much commission did you get for this sale? Lets say you got 1% or a $250,000 sale. That is $2,500 from the sale, not bad. But divide that by 30 hours and you are getting an hourly rate of $83. Which is average, but you could probably live with that, as long as you sold a house every 30 hours.
But what happens if you list the house, take one potential buyer through and sell it? Taking up around 4 hours of your time in total. On the above example, this would mean that you receive $625 per hour, not a bad hourly rate, but once again, to keep getting that hourly rate you would need to sell a house every 4 hours.
But lets look at Commission payments outside of the Real Estate Industry. Have you ever thought about how commission payments would work in the Event Management Industry?
Imagine if you are an Event Manager and you are bidding to event manage a conference that your local Life Coach is wanting to run. You tell them that you will take 20% of any profit that is made as payment for the night. Now the Life Coach is thinking, wow that’s great, if I don’t make any profit then I don’t have to pay them. And this is a risk, but you know that you are an awesome Event Manager and the Life Coach is very popular and is in demand, therefore the conference will be a huge success.
So you find a venue, negotiate everything there, do up a great marketing campaign and start advertising. You have worked hard so far, maybe putting in 20 hours and you know that leading up to the night and on the night you will work around 10 to 20 hours, so 40 hours all up.
The tickets go on sale for $100 a ticket, the rooms holds 150 people and you know that this Life Coach is really popular and therefore the room will fill. The venue is charging $10 per person for the night and all the marketing etc has cost you around $1,000. Therefore when you add the figures, the cost to run the night is $2,500.
The ticket sales are $15,000 and therefore the profit is $12,500. Now remembering that your deal was to receive 20% of any profit, therefore you would receive $2,500, breaking it down to $62.50 per hour.
Now this doesn’t seem much, but what happens if you organised the local Fun Run to raise money for the local hospital? There are endless amounts of opportunities to work as an Event Manager on a commission base. Yes it is risky and you may not get much some times, but other times you will paid quite handsomely.
If you are passionate about what you do and really believe in the product you are selling, wether that is Real Estate, Insurance, Event Management or anything else then you could make quite a bit of money from Commission from sales.
So how do you work out how much you should charge/receive as a commission for selling things in your industry? Well it is very similar to if you were working out your hourly rate, there are a few things you need to do to get to this figure.
- You need to go back and read my blog how much does it cost to just open your doors and work out how much it cost you to just operate each day.
- You need to do a bit of market surveying and ring or get someone else to ring 10 businesses in your area that do the same thing as you and ask them what they charge, or how do they charge.
- You need to do a bit of market surveying of businesses similar to yours but who aren’t in your area, so they may be in the next town across or in your Capital City. You just need to get an idea what and how people are charging.
- Then you need to look at your ability and what you offer. Is it the same as everyone else in your industry? Or are you doing things slightly different?
- Write down the commission rate that is the highest in your industry in your area. Does it cover your costs? Are you comfortable with that rate? Do you think it should be higher or lower? If it is higher will people pay that rate? NEVER EVER charge less than what everyone in your industry is charging, even if it doesn’t feel right to be charging that amount.
- Believe that you are worth every cent you are charging. If you don’t believe you are then you shouldn’t be in business, it is as simple as that.
Have fun and remember that you may loose money on one sale, but the next may make you a fortune. Keep working towards success. And believe in yourself and enjoy what you are doing every day.
If you would like to download my Checklist for calculating your Commission Rate, please click on the button below.