As compensation plan experts, we always ask our clients about the costs of their products and services relative to retail or wholesale prices.
We’ve written extensively about the importance of the multiplier, the ratio of retail price divided by landed cost. The multiplier and the targeted pre-tax profit for the company determine the funds available in the budget for total field compensation.
For some direct selling companies, there is great variability in their multipliers. Some of their products are able to be marked up significantly more times than others. In this post, I will suggest several strategies you may wish to consider if your company also has varying multipliers.
First, let’s begin with three definitions:
- Price – this is the price that a customer will pay for a product
- Commissionable Volume (CV) – this is the basis upon which compensation will be paid to independent representatives
- Qualifying Volume (QV) – this is the number of points for qualification purposes that will be generated when the product is sold
Here are the strategies we suggest for consideration to our clients with wide-ranging multipliers:
Reduce Commissionable Volume
Set the Commissionable Volume to a percentage of the price, based upon the multiplier. The higher the multiplier, the higher CV will be as a percentage of the price. Calculate these percentages either on individual products or by product classification using the average multiplier per product class.
Calculate the expected average multiplier for all product sales, and use this average multiplier in calculating the CV of all products the company will sell. This is an option if you have a high degree of certainty in predicting your sales mix by the multiplier.
Don’t sell lower multiplier items by themselves. Only sell lower multiplier items together with higher multiplier items as a package. Calculate the CV for the bundled items based upon a multiplier calculated using the total bundled costs and the price set for each bundle.
Make Lower Multiple Items Non-Commissionable
If yours is a party plan company and you have just a few lower multiplier items, make them available only as hostess special items in which case no QV or CV could be generated when they are purchased.
However, if yours is a network marketing company or you have many lower multiplier items, this strategy is probably not an option.
Increase the prices of these less profitable items to make them more profitable with the expectation that you will sell fewer of them at the higher prices.
Don’t Sell Lower Multiplier Items
Make the decision that these items aren’t a good fit for your direct selling business, and either sell them in another business or choose not to sell them at all.
About Qualification Volume (QV)
When you set the Commissionable Volume (CV) of a product, in addition to setting the price, you will also need to make a decision on how you will determine the Qualification Volume (QV) for each product.
QV is the measurement of how much each product or package counts towards compensation plan requirements (personal sales volume, group sales volume, leg volume, organization volume, etc.).
These are the strategies we suggest for consideration to our clients with wide-ranging multipliers:
QV = Fixed Percentage of Price
You may choose to set the QV equal to a fixed percentage of the price of each product. The percentage could be 100% or less. Taking this approach will not discourage representatives from buying or selling lower multiplier items.
QV = CV
Another option is to set the QV equal to the CV for each product. While this would make your compensation plan easier to understand, it will cause your independent representatives to be discouraged from buying or selling these items because they will count less toward meeting qualification requirements.
Set the value of QV of each product independently. For the products you wish to sell more frequently, set the QV as a higher percentage of the price as compared to other products.
You Have Choices
While having less profitable items is not ideal, the good news is that you have choices. For help making yours, contact Sylvina Consulting.