Friday, February 4, 2011
Residual vs Flat Commission
Generally most home business companies fall in to one of two commission categories, some have aspects of both, but most are one or the other. Those two types of commission are very simply a flat commission, where you earn a percentage of each sale, one time, and a residual commission, where you earn a commission over and over.
But how does it really work? It's fairly simple, yet seems to present itself as more complicated than it is. So, I will break it down for you here.
Flat Commission ~
A flat commission pays you a percentage of each sale made. So, if you work with a company that offers a 30% flat commission you will earn $30 out of every $100 in sales you bring in. However, you will have to continue to make the same number of sales PLUS additional sales each month in order to see your income climb. With a flat commission you will start every month (or sales period) off with an income of $0 and build your income on a basis of sales made during that month (or period.)
Example 1: During your first month with Company A you find 30 people interested in your new business and product. This earns you $300 in sales. If you are earning a commission of 30%, that would bring your commissions to a total of $90. However, in month two, you only find 25 people interested, which equals only $250 in sales and just $75 in commissions. Because you made less sales in month two you earn less income.
Residual Commission ~
In a nut shell residual commission is a payment structure that provides you a longer term income per sale. Usually this type of income is only available through companies that sell some type of membership or autoship plan where the customer has a monthly fee. The reason for this is simple, when you sell a "plan" of this type the customer promises to pay a monthly fee, your commission comes out of that payment. So, even though you are only making the "sale" one time, you are going to be paid month after month. The major benefit to this type of commission payment is that it's longer term than flat commission and allows you to build a larger income quickly!
Example 2: During your first month with Company B, you find 30 people interested in your business and make $300 in membership sales. With a commission of 30% you earn $90. However, when month two comes you find another 25 people interested and make $250 in sales, which equals $75 in commissions, in addition to the $90 in commissions from the previous month for a total of $165 in income for month two. You made less sales and earned more in month two because of the business you brought in during the previous month.
Recruiting Income ~
The second way that many companies allow you to earn income is through the recruitment process. This usually allows you to earn an income from bringing others in to the business. However, the two types of commission come in to play here as well. If you are with a company that pays a flat commission based on the sales your recruits make you will receive commissions only if and when they create business. If you, however earn a residual commission on recruits simply for having them on the team, you will earn regardless of their business success. SOME, companies combine the two and provide their recruiters with a residual commission simply for team building plus pay them additional commission based on the sales of those recruits, but most do not.
Prior to getting involved with ANY company it's best to completely investigate their commission plan. Many companies will start you out with a higher commission rate and then drop it after a few weeks of months. Others will have sales quotas or requirements in one way or another to earn higher levels of commission. Make sure you ask questions about commission of your enroller prior to enrolling! When it comes to your income you don't want surprises!