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Industry

Direct Sales Compensation and Discount Structure

Ready to pour your heart and soul into building a business? “Risk” is a term to become familiar with when selecting a Network Marketing business, investing in the stock market, opening a franchise, etc. People will give you a lot of advise in picking a company to work with among them being:

  • Do they sell consumable products so the income stream continues after the first sale?
  • Do they have a track record and good management so you don’t work yourself to death running the roads while the company goes broke?
  • Do sales create a large enough volume to get paid well (pay plan)? Unit prices and individual sales volume potential means a lot to me. Sometimes it takes no more effort to sale a product with a large price compared to a product with a low price (handling costs may be similar too).

The “due diligence” list goes on an on and sometimes your “gut” is a great guide too (as well as loving the people and culture of the company and the products). In fact, the culture is the number one issue with many people (it’s not about the money). It’s about the relationships and the great memories from taking the journey. Glenda and I have some really great memories and we wouldn’t trade our associations with people and what we have learned along the way for anything!

Yet, the numbers speak to me and the first thing I look at is the Discount Structure. Companies that have been around for awhile didn’t create their discount structure in a vacuum and a lot of thought went into their compensation plan. Despite what some people will tell you there are “no significant” entry barriers to joining a company and there are “no significant” exit barriers either. In many companies, 98% of the people are product buyers who only dabble in the business at times. Your company may be a “Private” company, like the one we work with, and “Public” companies give out a lot of good information (that’s the place to start). In my industry, I review the financial statements of companies like RELIV every so often. You should make a list of public companies you feel are related to your industry and review their financial statements.

  • Rule of Thumb–Big Discounts are Good and Small Discounts are Bad (it’s etched into our brains).

Is it easier to sell a 40% or 50% discount? So you think retail is too high? How would you like to get it at 50% off? Why does this mind game work so well? When a person walks into a clothing store they notice two sales racks and one says 50% off (the other says 25% off). Which sales rack do you go to first?

The “suggested retail” price is not the price, and anyone who continually consumes products at the retail price needs to review the discount structure. In many companies you can pay a small annual fee and at least get 20% off. Therefore, for many ongoing customers the “suggested retail” price is meaningless and financial statement studies bear this out. Wholesale discounts or distributor (member) discounts would normally be deducted from Gross Sales and not be shown as an expense on the income statement.

Go to the Income Statement and look at Commission Expense and divide that annual expense by the Net Sales in order to determine the Real Commission Percentage. This is a very good Industry Comparison of the overall commissions paid out to distributors . Also, review the footnotes to compare their discount structure with the company of your choice. Industry Statement Studies provide a lot of information and are reviewed by financial analyst and lending institutions.

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