Do “comission only sales” actually work?

Quite regularly I get offered commission only sales work. Rarely though is it ever phrased that way. Normally it’s a discussion about how exciting and lucrative the opportunity is, with a statement at the end like “we don’t pay retainers though”. Instead there is a discussion around “spotters fees”, “trailing revenues”, “your margin” or being “looked after”.

For me its not normally just products or multi-level marketing schemes, it’s about larger transactions, eg. “sell my business” or “can you get some serious money involved”.

Commission only has been around for a long time, however I believe it has gained transaction in the last decade or so. The rise of business schools has communicated the message that it’s a cheap, low risk way of gaining sales. In some cases it has been highly successful, for instance selling Encyclopaedias. But like most things in life the multitude of failures are hidden from us as we celebrate the lone success.

So when does it work?

There are three situations, or combination of situations where commission only sales seems to work well:

1. When the product is easy to sell, commission only provides a way for the salesman to maximise his earnings. I have a friend who sells advertising on a commission only basis, when his peers have a base combined with a much lower commission. He chooses commission only as he spends his day working lists of old customers, which have a very high percentage of people that are ready to make a buying decision.
2. When the “salesperson” is already selling to the target audience and your “product” would simply be layering on additional revenue with perceived minimal effort. This option also covers selling though an ad hoc opportunity.
3. Commission only also seems to work best when there are short sales cycles measured in hours or days. Long sales cycles cause two issues; first, the time investment increases requiring a much greater ROI for the salesperson. The second issue is the risk the sale “undermined” by a competition, a member of the same sales team or even the vendor also increases dramatically.

When does it not work?

1. Obviously it’s not going to work when you get the reverse of the above. When your product is difficult to sell, when your salespeople have to find brand new customers and when there are long sales cycles.
2. However it also doesn’t work when it’s an excuse to not invest in your sales activity. I don’t mean just pay retainers, I mean not even providing adequate training, management and follow up. All too often commission only is perceived as a “I’ve got nothing to lose” solution as it costs the vendor almost nothing. The reality is that it can lull you into a false sense of activity, or worse you can have your brand completely trashed.
3. It doesn’t work when the agreement is informal, or the audit trail is poor quality. Both which normally translate into perceived breaches of the agreement, a lack of trust, and sales coming to a standstill. All too often I see merchant banker types fighting over who was owed the commission on a deal that mutated and had multiple parties involved along the route to a transaction.
4. And finally, it doesn’t work when what each party brings to the table isn’t valued properly by the other party. For instance, I am endlessly approached by people who wish to access my network for free (the one I slaved long and hard to build) and only wish to pay me if they can conclude a transaction – an activity I have no control over. Another regular theme is that I can have a website built for them at no cost and then make margins from their brilliant product.

A couple of other points to consider:

• A commission only sales force has little interest in providing customer service beyond the sale.
• The hiring and management of commission only staff can be a huge drain on the management team, as these people are all independent operators.

My point of view is that commission only is a great tool and the right tool when used properly. Mostly though it’s an ill thought through strategy that is doomed to failure by the “I’ve got nothing to lose” mindset of the vendor. Am I wrong?

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Brendan Lewis is a serial technology entrepreneur having founded: Ideas Lighting, Carradale Media, Edion, Verve IT, The Churchill Club, Flinders Pacific and L2i Technology Advisory. He has set up businesses for others in Romania, Indonesia and Vietnam. Qualified in IT and Accounting, he has also spent time running an Advertising agency and as a Cavalry Officer with the Australian Army Reserve.