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The Best Commission Calculator for You
| Guest post by: Stephen Flaum |
Article Overview: This paper compares rule-driven commission calculators, like CommissionCalc, with the 3 other types. It explains when each is best.
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Free Download - By Stephen Flaum |
The Best Commission Calculator for You
THE BEST COMMISSION CALCULATOR FOR YOU: Four Options for Automating Commissions
Many accounting functions are similar from company to company. You probably use standard A/R, A/P, and General Ledger software whether you import food or provide training services.
Commissions are different. Companies develop unique plans, optimized for their business strategy. In fact, companies frequently have great variety within their plan, computing compensation differently for different products, customers, or sales representatives.
Accountants use many different tools to compute these varied commissions. However these tools all fall into four categories:
• Fixed-function commission software
• Report writers
• Rule-driven commission software
• Custom software
Each of these methods is right for some companies. This paper explains their pros and cons, and how to choose the right one for your company.
FIXED FUNCTION SOFTWARE
Standard accounting software usually has the ability to compute simple commission rules, such as: “All salespeople get 3% on all sales.” Often different rates can be used for different items, customers, etc. For some accounting systems, you can buy software which adds more rules.
The defining characteristic of these programs is that they implement certain specific rules. Within the limits of these rules, the user can set predefined parameters; for example, maybe commission is 4%, rather than 3%. However, you cannot add rules. If your commission rate is based on a quota, you can use fixed-function software only if it has a quota feature.
Who should use fixed-function commission software? This is usually an easy decision: If the shoe fits, wear it. In other words, if you can find proven fixed-function software which implements your rules, this will probably be the least costly, simplest method of computing your commissions.
What if the shoe almost fits? For example, maybe you can find fixed-function software which computes the commission for your salespeople, but not for your sales manager. Or maybe the fixed-function software doesn’t support the sales teams you use, but you could assign a salesperson ID to each team and manually distribute commission to team members.
There is no general answer to this question. Your choice will depend on your situation: How many hours will the adjustments require each month? Will the semi-automatic reports be as accurate and clear as reports created by rule-driven software? What is the cost of each type of software?
Occasionally vendors of fixed-function software offer to modify their source code to compute a unique commission plan. They may claim that this makes their product equivalent to rule-driven software. However, this is far from the case; it actually results in a form of custom software. You will need to customize every new version of the commission software – and you will need a new version of the commission software whenever you update your accounting software. Furthermore, since only vendor personnel can customize the source code and each customization is unique, they can do this on whatever schedule and at whatever price they consider appropriate. In contrast, version updates to rule-driven software do not require manual rule changes, accounting-system updates typically do not require updates to the commission software, and updates are generally included in moderately-priced annual support contracts.
REPORT WRITERS
Custom reports are a common way to compute unique commission plans. Often, they do this well. In fact, custom commission reports are really a special case of the custom commission software option described below. What distinguishes custom reports from other custom commission software is that they are much less costly to implement. Unfortunately, with this lower cost comes reduced flexibility and power. Specifically, report writers have three limitations.
• As more rules and parameters are introduced, custom reports may not be able to handle the increased complexity. For example, you can easily write a report which pays a different rate for each combination of 3 salespeople and 2 product lines. Coding similar logic for 100 salespeople selling 15 product lines is probably impractical. If the rate also depends on zip code and you sell into 60,000 zip codes, you certainly cannot hard code all combinations into a report.
• If hard-coded commission parameters change frequently, you will have to change the report continually. This will take time and introduce the chance of error. Also, your commission accountant may need help doing this.
• Some commission rules are difficult to implement in a report writer. For example, commission on product returns is often charged back at the rate in effect when the order was invoiced. However, if the rate changes, it can be hard for a report writer to determine the original rate.
A common practice is to do most computations in a custom report, then export the report to a spreadsheet and enter manual adjustments into the spreadsheet. This works well if few manual adjustments are needed. However, if the manual adjustments take 8 hours or more per month, one of the other methods will be more economical and accurate.
RULE DRIVEN COMMISSION SOFTWARE
A “rule-driven” commission program is one that bases its computations on rules supplied by the user, rather than requiring the user to select from a fixed set of preprogrammed rules.
Why hasn’t rule-driven software entirely replaced fixed-function commission software? Because it has historically been much more costly to buy and implement. In fact, traditional rule-driven commission software was designed only for companies with very large sales forces, because only they could afford it.
This changed with the introduction of CommissionCalc in 2000.
CUSTOM SOFTWARE
Custom commission software varies greatly. Today, it is most often used to compute commission in only 2 extreme cases.
• First, it is used for very simple, but unique, commission plans, where the development cost will be small. The custom reports discussed above are the most common example of this.
• Second, it is used for extremely complex plans where there is simply no other alternative and cost is not an object. For example, drug companies pay commission to the salesperson who worked with the doctor who wrote the prescription for their drug. Since it is difficult to determine who that is, we know of one such company which used custom software. Although they spent more maintaining that software than on commission, this was essential to their marketing strategy, so they were willing to pay the price.
In most other cases, standard commission software – whether fixed-function or rule-driven – is more economical, simpler to implement and maintain, and more reliable than custom software.
WHAT IS BEST FOR YOU?
In principle, there are many options. In practice, the number of viable options depends on both what your commission rules are and what accounting software you use.
• Fixed-function commission software is economical, and a good choice if your commission plan fits within the rigid limits of this type of program.
• A custom report is often a practical way to compute a unique commission plan, provided that the plan is not too complex.
• Rule-driven commission software is the method of choice when those methods aren’t flexible enough, especially now that the availability of CommissionCalc has made this option economically viable regardless of how many salespeople you have. This type of software can compute virtually any commission.
• Rarely, none of the above will work. In that case, custom software may be the only option.
There are many ways to compute sales commission, but only one of them is right for you.
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Related Forum Posts
Commission Junction or Your Own Software
- I can't tell you how easy it is to use your own software vs using something pre-created such as Commission Junction, but in the past when I've joined affiliate programs and they use something like Commission Junction, I lose a bit of respect for the company.
*Why* don't they have their own software? *Why* do I have to go through all this rigmarole of joining something else?
I prefer the "personal" touch - although it might not be that personal - of dealing with the company itself.
Just my two cents!
Re: Who is doing CPA marketing here?
- [quote="Trent Brownrigg":3n71pzcm]I've dabbled in it but not really enough to say that I "do it" or know much about it. CPA marketing seems to be majorly on the rise though and a lot more people are starting to do it. I plan to look more into it this year and actually started doing a little research yesterday. What CPA network are you using?[/quote:3n71pzcm]
Commission Empire and Adnetwork
Have you tried ClickBank?
- Hi Binary Guy - you've got a lot of good posts going here! Going for the March contest prize?
Have you looked at Click Bank? It's an affiliate management tool that is very popular for people selling ebooks. You can see what your competition is charging and how much commission they are givnig out as well as their sales letters so you can choose and compare. Another one is Commission Junction which offers similar sevices but there are more high end companies involved instead of e-marketers.
Good luck with it. If you find something better, let us know.
Viral marketing campaign
- Thanks for the generous offer Susan. Have you considered building an affiliate program? I'm not sure if ClickBank or Commission Junction would take on that kind of service instead of a product based company but it's worth investigating. If you can't go with them it could be worth your time developing your own affiliate program.
Another good place to start is with satisfied customers. Someone who is happy with your work knows others who could benefit from your service. Usually all they need is someone to ask them to refer a friend!
Creating an online business
- Hi Praveenv,
Setting up an online business in itself is not too difficult. All you need is a website and a way to process payment. PayPal is a great example of an easy to use payment processing company.
Then you'll need to find a product to sell. There are affiliate programs like Commission Junction or ClickBank where you can find many different vendors who are looking for distributors. Every time you make a sale, you get paid. Going through C/J or C/B is easy because they track everything and take care of paying you.
If you are sourcing your own products then you will need a distributor agreement between yourself and the other company. It outlines things such as how much you get paid, what your responsibilities are, are you the exclusive distributor or not, etc. You should speak with a local lawyer to get this agreement hammered out for you.
You should also formally setup a company and business number. This is usually done through a local government office but I cannot speak for how it is done in your country.
Good luck!
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