| Commission model directs the actions of the salespeople |
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Product Manager Esa Heimo, Grey-Hen Oy Towards the targets Commissions can really boost selling. However, simply rewarding on basis of sales can be questionable for the company's result. A developed commission system also takes purchases into consideration. 
A correctly formed commission system encourages the salespeople to profit the company more.
In labour agreements, the recommended basis of commissions is the number of sales and/or the profit gained, where profit is calculated taking the selling price and deducting other costs from it. Such commission models are rather common in the field, but it’s justifiable to ask whether they really profit the company. Often only sales get rewarded The flaw in this common model is that the reward is based only on the actual sale. But in trade-in business, an equally central factor is the price with which the cars have been purchased in. This old model easily leads to a situation, where cars bought in with a high price get stuck in stock, because a good profit is not expected from them. In these cases, the salespeople concentrate on those stock cars that have a better expected profit. Cars that have been bought in very cheaply bring easy profit, so all salespeople are trying to sell them quickly, possibly even with a lower price than the current market level. Obviously, the end result can’t be good for the company. A good profit can be solely due to the salesperson who purchased the car in cheaply. However, they might gain nothing from the good purchase, if the profit is attributed to another salesperson, the one who sells the car. Note the real effect on profit The commission model in trade-in business should be developed to take into consideration the effect of individual sales to company performance. Typically, an individual sale consists of two parts: The sale of a used or a new car and the purchasing of a trade-in. The starting point of this new model is that the company can determine a target sales and purchase price for each vehicle. This price must be a realistic estimate of the selling price of the particular vehicle in the particular dealership. The regional selling price estimates based on a statistical models act as a good starting point. However, they can be modified based on the company’s current stock profile and an estimate of the differences between the market prices and those of the particular dealership. Respectively, the target purchase price can be derived from the target selling price by deducting the costs and the expected margin. See an example on the prices in Graph 1. It must be noted that the estimated prices vary constantly. However, the sales people will know the basis for their own commissions exactly, as real time price data is available when closing the deal. The commission for sales is calculated using the price estimate from the time of the sale, and respectively the purchase commission using the estimate from the time of the purchase.  Graph 1. Example of determining the target prices for sales and purchases. Direction to profitable deals The new and improved commission model is based on this idea: when a used car is bought into stock with a higher price than the target purchase price, the salesperson gets less commission on that sale. Correspondingly, a price lower than the estimate will increase the commission. This way the commission encourages the sales person to profit the company more. Commissions are no longer paid for sales where the trade-in car has been bought in with a price that's too high. On the other hand, the actual selling price compared with the target price for the particular vehicle has an effect on the commission. The actual profit is not directly corresponding to the commission, as the earlier purchase price has a significant effect on the profit as well. It is clear that when you have realistic price estimates, you can’t continue to sell or purchase vehicles with prices that are too high, or too low. That is why the salesperson is also entitled to a part of the target margin that the company has set for each vehicle. By setting different target margins, the company can better manage what kind of cars are being bought in. More accurate commissions Table 2 gives examples on how the prices affect commissions from purchases and sales. The example shows that when 1500 euros extra has been paid for a car, the expected margin is negative, which decreases the commission that the salesperson gets from the deal. However, a salesperson who later on sells the vehicle with the target price gets the normal commission, even though there is no margin.  Chart 2. Examples on the determining the purchase and sales commissions. The percentage paid to the salesperson can be decided on by the company of course. Here you must remember that according to this model both the salesperson who purchased the car and the one that sold it get commission. This is why the percentage can’t be as big as in a model where commission is paid only in connection to sales. On the other hand, the percentage is affected by which cost items are separated and which costs must be covered by the target margin. If needed, highly developed methods can be used, such as methods based on activity accounting. Then all fixed costs such as real estate, marketing and management costs can be attributed to each vehicle. In these cases, the target margin is set lower, but it brings clear profit to the company and a larger commission can be made to the salesperson. Money is not the only measurement Depending on the company strategy, rewarding can take place using other measurements than money. Gathering and following of results can be done with a “target card model” that combines targets for profit, volume, quality and others, plus the related Key Performance Indicators (KPI). Such meters can include customer feedback, the number and quality of customer contacts, customer loyalty and long-term financing profits bound to credit payments. These result cards can be made for individual salespersons or teams. The combining factor in the meters is that they all describe the realisation of the planned methods and objectives of the company. The biggest gain from a highly developed commission model is that it encourages salespeople to act in a way where each individual sale benefits the company. In addition, it promotes even sale of the entire stock, not just the vehicles that bring the best profit. The dealership activity will be more efficiently led, as the sale based profitability becomes understood throughout the organisation. From the point of view of business profitability, the correct pricing of the cars is essential. Cost savings from other sources are marginal in comparison.  This article was published in Suomen Autolehti magazine. |
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