As mentioned in my previous post, products vary in profitability and as a result will yield differing commissions. Let’s take cell phone airtime for example. A company may be purchasing airtime at a 20% discount and selling it to its members at full price. The compensation plan may, however, be paying an average commission of 40%. It is obvious that a commission of 40% on a product with a 20% margin is going to result in a financial loss for the company.
For this reason, the concept of commissionable value (CV) was created. Let’s say you sell $100 of airtime to a member. The cost of this airtime would be $80 giving you a $20 profit. If you set the commissionable value of the product to 20%, you would pay commission on only the $20 profit. The result would be a commission yield of $8 leaving a gross profit of $12.
By applying commissionable value to all your products, you can sell any type of product with any level of profitability without placing the company in a loss situation.
This concept also works when applied to retail discounts and is called Discountable Value (DV). A member purchases the airtime for a 25% discount. If you apply DV of 20% to the product, the client would receive a Discount of $20 x 25% = $5. The member would, therefore, pay $95 for the product and sell it for $100 making a $5 profit.
You can also drive sales of a product by increasing the CV or DV to above 100%. Let’s say you have stock of cosmetics that are about to expire on which you pay 40% commission. You could set the CV or DV or both to 150% thereby increasing the commission yield. On a $100 order, a CV of 150% would result in a $60 commission. This may be the incentive that the network needs to move your stock.
When it comes to special offers and other discounts, CV and DV can be very useful. Let’s say you are trying to dump out of date stock. You could set the DV and CV at lower rates, discount the product but retain some margin.
As you can see, the concept of setting commissionable yield is a powerful one and if used correctly will drive sales while preserving profitability.