Profit Based Comissions

The key to any successful business is generating the best possible profit and improving your market position and pricing power. Naturally OmniAdministrator can help you improve your customer interaction and thereby indirectly improve your reputation and long term market position and pricing power; however, OmniAdministrator can directly encourage your sales force to chase higher profit instead of chasing higher revenue through lower prices and squeezed profits. Higher profits allow you more for advertising and product/services development, which lead to better market position, which then create more sales and profits.

Let us look at three examples on how a sales person is incentivised.
In our example the sales person is trying to achieve 20% higher commissions. The current sales volume it $500000 yearly revenue with 40% gross profit and 10% net profit.

Comissions based on revenues
Method	Revenue	Gross profit	Net profit
Before any changes	$500000	$200000	$50000
Sell 20% more	$600000	$240000	$60000
Sell 30% more at 5% lower prices	$617500	$227500	$32500

Sales person is encouraged to increase sales by pushing for lower prices at the expenses of the profit margins. This also hurts your future pricing power in the market.

Comissions based on estimated gross profits
Method	Revenue	Gross profit	Net profit
Before any changes	$500000	$200000	$50000
Sell 20% more	$600000	$240000	$60000
Sell 40% more at 6% lower prices	$658000	$238000	$28000

Sales person is encouraged to increase sales by pushing for lower prices at the expenses of the profit margins. This also hurts your future pricing power in the market.

Comissions based on estimated net profits
Method	Revenue	Gross profit	Net profit
Before any changes	$500000	$200000	$50000
Sell 20% more	$600000	$240000	$60000
Sell the same with 20% higher net profit	$510000	$210000	$60000
Sell 10% more at 10% higher prices	$561000	$231000	$66000
Sell 120% more at 6% lower prices	$103400	$374000	$44000

The last example just shows you how futile it is to chase more profit by lowering prices. When you use the estimated net profit as a gauge for commissions you are encouraging the sales team to first maximize profits through price and volume increase.

Naturally we did not consider other factors, such as increased sales may lower general cost per unit. However, we believe profit based commissions benefit your company.

We believe that one of the reasons most businesses have been using revenue to pay commissions is that it was easy and most companies do not have a way to actually estimate the profit on individual inventory items and orders. This is not exactly true, since companies know the cost when they did the original price/cost calculation, but as time goes by this changes due to increasing cost and price changes.

Enter OmniAdministrator with integrated procurement, item inventory, and profit calculation

• First the system help you organize your procurement and encourages the user to update purchase prices by making it easy and simple.
• Then you can specify which components from procurement is used in the product and how much labor and at which cost is used to produce each item in your database. This give you up-to-date cost on each item you sell. Plus it organizes your production so each user can find what is needed to produce this unit.
• Then you can specify estimated overhead (liability insurance, advertising, administration, and future service) for each item in your inventory so as to provide you with an estimated net profit. This may not be perfect but a great improvement over any other method. Or you can leave these blank and just get the gross profit.
• As the order is compiled you may have other cost related to this order such as shipping. These can be registered on the order to generate an even more accurate picture of the actual profit on an order.
• Lastly when you generate orders on the system it takes all this information and can give you a very accurate profit estimate for either net or gross profit.

What all this does for your business will be difficult to measure, but you can use it to encourage your sales team to focus on generating more profit instead of just more sales. In addition, you also give the sales people more tools to keep their customers informed on their orders immediately, instead of having to bug production or shipping for status or tracking numbers on shipping. This again is an intangible benefit, but certainly a time/cost saver and better customer service. We should also mention that one of the ways to increase sales and maximize profit is better conversion rate of sales opportunities into actual orders. Since OmniAdministrator has been designed primarily as a Customer Relationship tool it helps your sales team focus on sales opportunities and disciplined use of calendar events to remind them when follow up calls are needed. Once the product or service has been sold the technical support team can continue to update notes under the customer, which allows the sales person to understand past problems and future opportunities when he call back to renew a contract or ask for a new order.

All this should help your sales team to focus on increasing profit through a more disciplined and structure sales effort.