Performance-based compensation sounds good until you do the math. At what margins and order values does commission work, and when does it make both sides unhappy.
Commission is not a universal solution
Performance-based compensation is a strong argument. For the client, it feels fair: they pay when something comes of it. For us, it feels professional: we stand by our work. The problem: it doesn't work in every business.
Commission works when three conditions are met. If one of them is missing, commission makes both sides unhappy.
Condition 1: The margin must cover the commission
A craft business with an 8% net margin on orders cannot pay us a 10% commission on sales. Nothing would be left. With a 25% to 40% margin, it becomes interesting. At 60% (typical for digital services or training offers), commission is ideal.
We calculate this before each mandate. If the margin is too low, we recommend a pure fixed-fee model. Not because we don't want commission, but because it would be unfair in that specific case.
Condition 2: The order value must be measurable
For an online shop with clear shopping cart values, commission is simple: the Shopify revenue from our channels is calculated, and that's it. For a B2B business, where orders are negotiated for weeks and the final contract price is not public, it becomes difficult. We once tried to agree on a pure commission for completed training orders with a provider of height access equipment. After four months, it was clear: the prices vary so much, the sales cycles are so long, that we would have to argue about every single invoice. We switched to a fixed fee plus bonus.
Condition 3: The attribution must be clean
If we work for an existing business that already has clients, we need a baseline. What would the business have sold without us? This question cannot always be answered. With a new shop or a new campaign, it's clear. With an established business with existing clients, it's more difficult.
We work with a reference period: the twelve months before our start form the baseline. Everything above that is commissioned. This is not perfect (seasonality, economic cycles), but it is honest.
What happens when commission doesn't work
Both sides become suspicious. The client suspects that we are cherry-picking the easy channels. We suspect that the client is not accurately reporting sales. Such mandates end badly. That's why we prefer to honestly state beforehand if commission doesn't fit, and suggest a pure fixed fee instead.
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