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Marco Suazo 09.08.2021 14 min read

What are the five types of retail commission structures?

While there are many ways to compensate retail workers and encourage good behavior, few methods work as well as commissions. Setting up a retail commission structure in the workplace ensures workers are motivated to work hard, make sales, improve their skills, and generate profits for the organization. 


There are several distinct benefits of following a commission-based pay structure in the retail industry. 


What are the advantages of commissions in retail?


Incorporating commissions and incentives into the variable pay structure isn't to save money by minimizing payouts but to boost sales and profits by motivating workers. 


  • Since each salesperson benefits from the sales they make, they're incentivized to make as many sales as possible. This leads to much better customer service. 


  • Commissions encourage good behavior among your sales teams. You can mold your salespeople into an ideally performing team with the best skills through a meticulous commission program. 


  • Many commission structures are based on overall team performance. This fosters a bond between the team members, encouraging teamwork. 


  • A fixed pay scale can cause complacency amongst the workers. Commissions ensure that the workers work hard to earn their rewards. 


  • Another key advantage of having a commission-based pay structure is that you can motivate your sales team to push certain products. For instance, encouraging salespeople to sell out all the old products before they lose their shelf life can be done via commissions. 


Now that it's clear why commissions are important, let's discuss the different types of commission structures. Each structure comes with its pros and cons. It's up to you to decide which one benefits your company the most. The goal is to set up a system that helps the company's numbers while also adding more value to the sales team's incomes. This creates a win-win situation for all the involved stakeholders. 


What are the five types of retail commission structures?

1. Fixed Commission


This is the most basic form of commissioning. It's usually practiced in two forms. 


The first one is the fixed percentage model. Under this scheme, the salespeople get a fixed percentage of every sale they make. The second one is the lump sum model, in which salespeople receive a fixed lump sum amount per sale. 


A fixed commission structure works best for luxury goods and high-value services. When retailing cheaper products, this model can lead to losses if the numbers are not calculated correctly. 

2. Variable Commission


This model is one of the most popular ones because it encourages salespeople to hit higher targets. In this structure, the commission is different for different tiers of sales. As the salespeople breach the other tiers, their incentives increase, encouraging them to sell even more. 


The only issue with this form of commission occurs when the workers exceed expectations and perform too well. Due to higher commission rates in higher tiers, the sales can lose their profitability. 


This model works best when new products are launched, or old products need to be cleared out. 

3. Residual Commission


This is the form of commission used by pyramid and MLM schemes. While those schemes have a bad rep, the residual commission can be an excellent motivator for the salesforce. 


This form of commission is usually a tiny percentage because it offers long-term passive income. It works best when working with third-party sales teams. 

4. Team-Based Commission


This form of commission can often be seen in restaurants and eateries. The tips collected by all the waiters are collected and divided equally. Team-based structures can increase communication, inclusiveness, and bonding between the members. Since the commission is split equally between every team member, the best-performing salespeople are incentivized to train poorly-performing members to sell better. Eventually, it adds up to more profits for the company. 

5. Marginal Commission


This is a form of profit-sharing which requires the profit margin to be split between the company and the salespeople. The percentage of the split is pre-decided and can vary from product to product. This model works perfectly for businesses with a large variety of products that vary widely in price. 


Apart from the fixed commission structure, every other choice requires a lot of tracking and calculating. Using a spreadsheet to manually track the different commissions can lead to unwanted errors and delays, demoralizing the salesforce. Hence, it's critical to use commission tracking software that's robust, easy to use, affordable, and scalable. Blitz fits this bill perfectly. Blitz empowers your sales team with the right data giving them visibility across key sales metrics. Not only does this lead to more sales, but it also mitigates the risk of losing out on potential customers. The futuristic Blitz platform is the perfect partner for every retail outlet looking to implement a commission-based pay structure.