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Variable Rate Commissions & Discounting

Furniture World Magazine


Variable rate commissions can eliminate discounting, stop underselling and be a powerful motivator for your salespeople.

The biggest problem for many retail furniture stores is that their salespeople can't seem to sell anything but price. This sounds like a training issue, and in a way it is, but in many cases, training won't solve the problem.

From The Salesperson's Perspective
Most furniture salespeople are paid on commission, and the vast majority are on a flat-rate commission compensation plan that is calculated as a percentage of sales. In other words, they sell something and they make some money. If they don't make a sale they don't make any money. A flat rate commission plan will boost sales, but if your salespeople have any price negotiation authority, it also serves to motivate them to lower your gross margins.

Salespeople live with the fear that if their customer walks, they'll lose the sale to someone down the street who will be willing to cut the price. That's why they may be highly motivated to make a preemptive price cut to prevent the customer from walking. The boss may have encouraged them to sell the benefits of quality and services rather than selling price, but in the absence of a monetary inducement, that “sales training” largely falls on deaf ears. Salespeople know on which side their bread's buttered.

Underselling Customers
Whenever a salesperson fails to step a customer up to merchandise that they can afford, and that will provide a higher level of satisfaction, they undersell that customer. Underselling results in lower sales for the store, lower income for the salesperson, lower satisfaction for the customer and a significantly reduced chance that they will return to make more purchases in the future.

The Need For Increased Sales
With costs continuing their inexorable climb, it's certainly no secret that, without increased sales, stores find themselves in a bind… a classic profit squeeze. Some retailers are already spending more on advertising than they can really afford. Increasing advertising can generate traffic, but it doesn't always boost sales. Depending on your market and level of investment in advertising you may already be at a point of diminishing returns. The fact that increased advertising might not produce the desired results, doesn't make the need for more sales go away, so what's the solution?

Solution: Variable Commissions
The problem with a flat rate commission plan is that it doesn't really discourage discounting. When the salesperson's choice is to earn a little less commission or the dreaded no commission at all, it's really no choice at all. A little more commission isn't worth the risk of losing out altogether. Likewise, a little more commission from stepping-up may not be worth the effort to do so, especially if there is a danger of getting priced out of the game.

A variable commission system, calculated on sales, but with the rate tied to the gross margin earned, strongly motivates salespeople to maximize gross margin. They are rewarded not only by the calculated percentage of a greater sale amount, but also by a greater percentage of a greater sale amount. Discounting is strongly discouraged in the same way, only in the reverse. Salespeople who discount are penalized because they receive a lower percentage of the lesser sale amount.

Using a 1% reward/penalty for each 5% increase/ decrease in gross margin makes the effective rate of reward/penalty 20% of the increased or decreased sale amount, thus giving your salespeople plenty of motivation to resist the urge to discount prices.

Most furniture stores' lineups start with a promotionally priced piece. From there, the gross margin percentage improves at each product step-up. That 20% of the price difference also gives salespeople plenty of motivation to expend all possible effort to sell better merchandise.

All of this results in an incentive for salespeopleto maximize the size of each sales ticket without much added expense. Check the chart on page 26 that compares fixed and variable commission rates and calculates the impact for salespeople and the store.

In the example, it's assumed that the store's historical average gross margin had been 45%, and it had been paying a flat 6%. It's pretty easy to see that if both the store and the salespeople are motivated to make money, that the store would have three times the motivation to sell the  $800 item compared to the $400 item, since the gross margin is three times as great. Using a flat 6% commission plan, however, sales people would only have twice the motivation, since the commission on  the $800 item would only be twice that on the $400 item. Using the variable commission plan shown in this example, the salespeople would  earn 3.6 times as much on the $800 item as on the $400 item, thus  having even more motivation than the store!

Experience has shown that a variable rate commission system will motivate the salespeople to step up an average of one level above their historical sales average. In this example, the step up would be to the $600 item, where the historical average sold was $500. Consequently, the store would earn $300 in gross margin, on the average, on each sale from this lineup, compared to $225 before… a 33% increase! The salespeople would average $36 in commissions, vs. $30 before… a 20% increase. If we assume a delivery cost of $25 for any item in this lineup, the store would now average $239 after delivery and commissions, vs. $170 before… a whopping increase of over 40%!

Maximizing sales at the same time you maximize gross margin without increasing expenses (except for the small percentage increase in commission expense) increases your net profit exponentially!

But How Do You Implement This?
First construct a commission chart designed for your store, your merchandise and your market. If you need help with this, give me a call or drop me an email, I'll be glad to help you without charge. You will, of course, need to have the ability to easily determine the gross margin percentage for each product in your line-up. It is possible to structure a program that will not pay out any increase in commission while returning a five-fold increase in gross margin. This may seem like a daunting task but the process can be automated with specialized furniture software.

Next you will need to present the new system in a positive light to your sales force. Without their enthusiastic support, you may find that all your efforts will be counterproductive. Fortunately, when properly designed and implemented, a variable commission rate program will boost your bottom-line and also line the pockets of your salespeople.

 Larry Stark is the Chairman of PROFITsystems, Inc. Larry spent the first 21 years of his working life running Stark's Furniture, the retail furniture business founded by his grandfather in 1897. He has spent the last 26 years running PROFITsystems, a leading retail furniture software and consulting firm located in Colorado Springs, Colorado. Inquiries on any aspect of retail financial management can be sent to Larry care of FURNITURE WORLD Magazine at lstark@furninfo.com.