There are certain business concepts that are enormously attractive as a set of ideas, but in practice, they fail to meet the expectations. Pyramid schemes. MLM strategies. Get-rich-quick schemes. But even though it seems that after each new failure no one is going to fall for them anymore – these ideas, despite their ineffectiveness, don’t disappear. When the conclusions drawn up by the media from the previous delusional edition makes people realise that such schemes couldn’t and still can’t work, another catchy idea takes its place.
Many people believe that “this time it will be different” and invest their money, as well as efforts, in something that will never work.
In May 2019, one such idea was that salespeople should be rewarded solely on a commission basis. Perhaps there are still some businesses where sales teams work and thrive in such a way. In most cases, however, this isn’t an optimal (or even possible to achieve in practice) payment model.
Naturally, the market situation may change, and there might be people who will go for it. But for now, we live in a reality where pressure is put on publishing salary ranges in job offers and too low salary ranges are criticised, for example, on Facebook groups. Let’s consider this payment model – starting with the conditions that must be met to make such a sales team profitable.
Our goal is not only to employ a salesperson on the commission itself. Our goal is also to make that salesperson sell and earn enough so that they won’t want to leave the company within the next 2-3 years. To make this happen, a set of factors must occur:
A salesperson can run into their first business meeting after two or three weeks of training. For example, if 3 months is necessary to train someone to successfully sell something – you can forget about anyone giving you three months to sell a product or service.
This salary model will rather attract young people with low financial needs (e.g. full-time students living with their parents), without family commitments and a high risk appetite. Don’t count on them to professionally advise customers because they just don’t have the necessary life experience. They are more likely to rehearse a presentation script. This could theoretically be amortized by paying out a regular salary for the first 3-6 months, but in practice, even in this situation, other points speak out against this model.
This usually means B2C sales. This also means products from non-innovative categories which can be understandable by the average Joe in a short time.
They should have a short sales cycle of up to one month. If a salesperson has to wait for their money for four months, there won’t be many people willing to do the job.
But for someone to be willing to get paid only commision, the price of the product can’t be low. To make it higher – there must be more to share. To make more to share – margins have to be really high. This point eliminates the entire service sector as insufficiently profitable in terms of margin.
It isn’t obvious – but it should be: you are in no position to prevent the salesperson from selling to any customer when you don’t pay a base salary. I mean, theoretically, you could – but after the first refusal, any smart salesperson will quit this job because they won’t want to chase after customers only to have their money-making opportunities limited. Not only that – many people resign in such situations even if the company pays them a generous base salary.
A major part of sales conducted by salespeople who work on a commission-basis only is done by means of network of recommendations, where one acquired customer recommends you to 5 others from which you acquire 1.5 customers on average who recommend you to 7.5 others on average and so on.
If the demand met by a product isn’t high or the market isn’t large, 5 recommendations won’t be generated in a repetitive manner, which will deplete the basic source of leads which will lead to zero sales and the salesperson will eventually quit. This point can be theoretically helped by offering leads to salespeople – but, in practice, it’s extremely difficult – because if you don’t have money to employ salespeople (admit it, lack of money is the main reason you’re interested in this model in the first place, isn’t it?), then how can you have the money to generate leads?
In the context of the aforementioned points, it isn’t surprising that the vast majority of salespeople paid only with commission come from banking, investment broking and insurance sectors. The products are simple, off-the-shelf, high-margin, the market is enormous, B2C, and they are sold during the first meeting.
I personally think this way of rewarding salespeople can be partially responsible for some of the scandals in the financial sector – a salesperson (called a consultant as a disguise) who works in such a model long enough, starts believing that they can brainwash anyone into buying anything. What happens to the customers and product afterwards becomes the problem for the analysts from credit risk or investment departments.
We can’t blame them. After all, the company shifts all the marketing and sales risk onto the salesperson. If there are no leads – the salesperson is in trouble. If someone deceived the customer’s sister two years ago and now the customer calls the salesperson a fraud – it’s solely the salesperson’s problem. It’s no wonder that salespeople shift all the after-sales risks onto the company. Hence, if you want to recruit in this way – make sure that you can conduct sales yourself using such a model. If you can’t – don’t even start because it’s too early for a sales department, not to mention a 100% commission-only department.
The salesperson’s mentality is described in an interesting way in Marek Zmysłowski’s book Chasing Black Unicorns: “I worked as a 100% commission-only salesperson in the financial broking sector. When I was 21 years old, I finalised 73 transactions within two years. It was 2009, the period shortly after the bankruptcy of the Lehman Brothers, so the situation of the contemporary local labour market was significantly different.
In retrospect – the website hipotekaplus.pl was a fintech startup, but we didn’t know such words as “startup” or “fintech” at that time”. I can assure you that although the images from Zmysłowski’s book seem exaggerated, they don’t deviate much from reality. The same appears in the book “Greed” by Paweł Reszka who describes pathological situations in the banking sector and financial institutions, where one of the key influences to this behavior is the commission-only pay discussed here.
So if you wish to pay your salespeople on a commission basis, it’s only a matter of time until your company earns a reputation as “fraudsters” or “brainwashers”. And you can’t blame your salespeople for that. Your sales department will simply sacrifice your brand as well as the reputation of the company and its founders. The reason is simple: If you’re unwilling to sell, you won’t earn. If you don’t earn, you won’t eat. And after all, everyone’s gotta eat. So you put aside your morals and sell the shady saving insurance policies, toxic loans or unnecessary insurance and investment funds which can only lead to a loss.
If after all you have read so far, you aren’t convinced and you still want to have a 100% commission-only sales team, here’s a tip. Be prepared for a high staff turnover. Commission-only pay is characterised by a really small margin of error – especially since people who take this job don’t have a safety net to survive 2 or 3 months without a salary. Besides, the very perception of the risks will make people leave over time. People generally need more stability as they age – out of all the people I’ve worked with, I don’t know anyone who’s worked in this system for longer than 10 years (including those who earned really well in this model).
Rather, save some money and start paying base salaries. Paradoxically – it will be cheaper. And if you’re afraid of the risk, it’s probably a good indicator that maybe your business isn’t ready for a salesperson. Instead of hiring one – give your business a few more tweaks and learn to make money yourself. Hire a salesperson when they can play the role of gasoline poured onto a burning campfire instead of a match that’s needed to ignite it.
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