Let's talk commissions

How many industries compete to pay their clients a percentage of what they sell? We supply the equipment and the product, keep their machines clean and stocked while passing on none of the cost, yet we pay them money for that privilege. One could argue that they give us access to their employees. However, we save them valuable time by allowing their employees to purchase food without ever leaving their facility. Who was the first vending company to offer money for their service? And how did commissions go from 5 percent to 50 percent? Which of course leads to the big question for operators, how does one make money at these high commission rate accounts?

History of commissions

Here’s what happened. Company B, in looking for more accounts, went into a location that had company A and decided that he could get the account by doing something different. He wasn’t going to offer better pricing or newer equipment, and company A was doing a great job in servicing the account, so he decided to offer the account money for replacing company A in the form of a percentage of sales. He may have offered just 5 percent but now the floodgates had opened and that scenario simply kept repeating itself over and over with the percentage amount always increasing.                                                                                                        

In the quest for more and more accounts, someone finally got stupid and started throwing amounts of 30, 40 and even higher percentages until they finally looked at their profit and loss statement and saw that they were losing money. “REALLY?” So now, what could they do? Well they decided to become creative, they could still promise 40 percent commission, but would show the account sales numbers that were much less. They could pretend to be paying 40 percent but what they were really paying was a much lower  percent of the actual sales, but hey, who would know?                               

Birth of the R factor

This is how we came to the invention and implementation of the “R” factor (Reduction in Sales). In simple math, on a $5,000 per month account, at 40 percent they would be paying $2,000 per month in commission. Now by automatically reducing the numbers to show $3,000 in sales or a reduction of 40 percent, they would pay the account 40 percent of $3,000, which comes out to $1,200, or 24 percent of the real sales, with a saving of $800 a month in commission and another $120 in sales tax. If this was done in the computer software then no one would know but the owner, certainly not the account and not the sales tax office. Now the account seemed safe, as no competitor was going to offer more commission because he would be paying a higher amount on true sales, which would be financially impossible.

This is now the position we have put ourselves in and until everyone plays by the same rules, commissions will continue to increase. The customers who are infatuated with percentages would never think to compare dollar amounts on commissions paid even when you tell them that your 25 percent will be greater than the other company’s 40 percent.

Commissions the right way

Since we will always have an “R” factor being used by someone, we need to move on and talk about some different ways that honest commissions could be paid. Most government agencies that put out an request for proposal (RFP) for their accounts seem to always specify that commission must be paid on gross revenue without any deductions, so we can skip over these accounts. For normal private sector accounts, the way you present how you will pay commission can vary and save you some money. The first one is the easiest way. You tell them that you want to subtract the sales tax from the revenue before computing their commission and most businesses will understand. Another way would be to tell them that you would like to subtract the cost of goods as well, explaining that you would then share with them what you’re actually making. Commissions would be paid on the Gross Profit. Let me see if I can give you a visual, taking an account with sales of $5,000 per month through snacks and sodas, using 45 percent as product cost, 6 percent as the sales tax, and 20 percent as the commission rate. With the $5,000 account and a commission of 20 percent of gross sales you would pay $1,000. If you subtract the sales tax you would pay $940. If the product cost is also subtracted, then the commission paid on the gross profit of $2,450, would be $490.

Now let’s look at another scenario, using the same $5,000 account, but let’s assume that all the pricing is at $1. You go to the account and offer to lower everything by 5 cents and in exchange you will not pay them any commission. This is how the numbers would work. Sales would now be $4,750, less sales tax of $285 and product cost of $2,250 leaving you with a gross profit of $2,215. Now wait a minute, you say, that’s $235 less in gross profit than the previous scenario. Yes, that’s true, but you paid $490 in commission on that amount and now you are not paying anything. This leaves you with an extra $255 per month in gross profit and $3,060 for the year on this one account.

One final way to show you, and we will assume the same sales but this time we will divide them equally between snacks and sodas so that each is bringing $2,500 in revenue per month. We use the same cost and sales tax which brings us to a gross profit of $1,225 for each at 20 percent commission you are paying $490. You go and talk to the account and say, I would like to lower the commission on the snacks to 10 percent because of the short life of most of the products and the throwaways that I have to absorb but I will keep the sodas at 20 percent. Now you’re paying the account $367.50 per month, certainly a far cry from the $1,000 that we started with.

In closing, you really need to look at each account and if you have to pay commissions, try and determine the best way to pay that account. You need to talk to the contact as a business partner and explain what you would like to do and why and show him that this will make sense for both parties. Most of them will understand that just like their business you need to try and save where you can without giving up the standard of service that you have been providing. But whatever formula you agree on, make sure you put it in writing with signatures from both parties so that in the future when a new manager takes over the account he won’t be as quick to change to that so called better deal that may be offered.

I’m sure that I have left off a number of other ways to offer commission, and if you should have anything different I would love for you to share them with me so that I can pass them on. We are all in this together offering the same products, the same equipment, and what sets us apart can sometimes be our service and our honesty.