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Gross-Margin-Based Commission
Commission calculated on gross profit instead of revenue - protects margin from discounting.
Specialty
Advanced
How it works
Instead of paying on revenue, the plan pays on gross margin (or contribution). Discounting reduces commissions, aligning rep economics with company economics. Common in product-distribution and channel-sales contexts. Less common in SaaS where margins are uniform across deals.
Formula
Commission = rate x (revenue - cost_of_goods)
Worked example
Example. A 25% gross-margin commission rate. A $100K deal with 60% margin = $60K margin x 25% = $15K. A $100K deal at 40% margin = $40K x 25% = $10K. Discounting penalizes the rep.
Pros & cons
Pros
- Aligns rep economics with company economics
- Discourages excessive discounting
- Drives margin discipline
Cons
- Requires reliable cost data per deal
- Reps may avoid lower-margin but strategic deals
- Harder to explain than revenue-based plans
Best for
- Distribution and reseller channels
- Product mixes with material margin variability
- Plans aiming to control discounting