Ask the Experts | How to Set Price, Commission

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Question: How did you set price and commission in your company?

Weldon Long, New York Times Bestselling Author:

Well, I’ll tell you up front, I’m going to defer a lot of this to our resident expert, Mr. Gary Elekes – on a variety of different pricing models and what works and what doesn’t work – but I think what the question is – well, there are two very distinct questions, right? Setting your price in terms of what you’re charging vs. what you’re commissioning your salespeople.

So, in terms of your pricing, I’ll tell you what not to do, and that is not to have some random price that you make up out of your head, or use the cheapest guy in your community, in your market, as the benchmark for what you want to be. Right? That’s what you don’t want to do.

I’ll let Gary comment more on specific models, but it’s about how much revenue do you need to generate based on your installation fee, right? What do they have to generate for you to make money? Gary will comment in detail on that – he’s got courses, by the way, on all of this stuff on the EGIA Contractor University platform.
On the commission part, listen, I think commissions on average tend to run anywhere from 6 to 10, 11, 12 percent, depending on the company and the margins on the deal. What I will tell you conceptually, I always preferred to pay my people off a percentage of the gross margin of a job, not of the gross revenue. We all know you can sell a job for $10,000 and maybe not make a dime off of it. If you’ve got a 30% gross margin on a job, and your overhead is 40%, then you just lost $1,000 when you sold a $10,000 job.

So you gotta make sure that the commissions are related to the gross margin, the gross profitability on a job. So what we did, we had a sliding scale – and we’ll take an imaginary $10,000 deal – if it came in at 60% gross margin, so $4,000 went to cost of goods and $6,000 went to gross profit, then if I recall correctly I think the top of the scale was 25%. So the sales professional would get 25% of the gross profit of that $6,000. If you do the math on that real quick, that’s $1,500. So he would have gotten 15% of that overall $10,000, but that’s on a 60% gross margin job. As the gross margins came down, then the percentage came down. And it got down as low as, if they got maybe 45% or 42% gross margin, they were making next to nothing on the job; they were probably making a couple hundred bucks on the job.

But I think it’s very important that the sales professional’s performance is attached to that gross margin. Otherwise you get in that situation – and I’ve seen it happen – “oh we just pay 10%, we pay all salespeople 10%.” So a guy sells a job for $10,000, he makes $1,000 and the company breaks even or loses money on it. That’s not a balanced, fair approach.

So you can experiment with the numbers you’re comfortable with, there’s no set amount, some companies are more generous than others. But at the end of the day, you’ve got to be making a sustainable gross margin, gross profit, to run your company, pay your bills, and still make a little bit of profit.

So, I’ll toss that over to Gary to get into a little more detail on the price and how that structure is set.

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