Should I Use Per-Transaction Rewards?

Should I Use Per-Transaction Rewards?

When adding certain types of rewards, you can specify whether rewards should be calculated per-transaction. The short answer is - if it's important for reps to see a per-transaction commission amount (and rate), then you should check the checkbox, but be aware of potential side effects.

This is best explained using an example.

Suppose that you a sales incentive plan with 2 attainment tiers:
  • For revenue under 50K, pay 5% of revenue
  • For revenue above 50K, pay 8% of revenue

Suppose that you only had two sales in January:
  • Sales #1 worth 45K - January 1
  • Sales #2 worth 15K - January 2

Portion-Based Approach
If you do NOT use the per-transaction approach, here is how we'll calculate commissions:
  • The total sales amount was 60K
    • The order in which sales happened is not important
  • The portion of 60K under 50K is 50K, so we pay 5% of that
  • The portion of 60K above 50K is 10K, so we pay 8% of that
  • Total payout: 2,500 + 800 = 3,300

Per-Transaction Approach
If you DO use per-transaction approach, here is how we'll calculate commissions:
  • The total sales amount was 60K
    • It's important to note that sales #1 happened before sales #2
  • For sales #1, the cumulative total was 45K, which was below 50K, so we pay 5% of 45K
  • For sales #2, the cumulative total was 60K, which was above 50K, so we pay 8% of 15K
  • Total payout: 2,250 + 1,200 = 3,450

Comparing Approaches
As you can see, payouts are quite close, but there is still a difference of $150. This is because sales #2 sits "on the fence" of the 50K threshold. Using the per-transaction approach, sales #2 was enough to exceed the 50K threshold, therefore sales #2's entire revenue (15K) was paid at the 8% rate. Using the portion-based approach, we considered the aggregate (collective) total revenue, and paid 50K of 60K at the 5% rate, and 10K at the 8% rate.

Here are some pros and cons of the the portion-based approach. The payout seems more correct. The payout is also more robust. For example, it does not matter if we re-order sales transactions such that sales #2 happened before sales #1. The payout will always be the same since we just look at total aggregate revenue. On the flipside, there isn't a clear per-commission amount (or rate) we can attribute to each sale. We're simply looking at the aggregate total revenue (across all sales), and assign a portion to each tier.

Here are some pros and cons of the the per-transaction approach. There is a clear payout rate and commission amount associated with each sale. Each individual sale will either be at the 5% rate, or the 8% rate. On the flipside, we would get a different payout if we re-ordered sales transactions such that sales #2 happened before sales #1. And the payout is more generous because it allowed sales #2's entire revenue to be paid at the 8% rate.

If it's important for your team to have a commission payout (and payout rate) associated with each individual sale, consider using the per-transaction approach but be aware of implications. Otherwise, use the portion-based approach as it is more robust / correct.

Enter Blended Rates
Perhaps you really do want a per-transaction commission amount so you use the per-transaction approach. However, you don't want transactions which "sit on the fence" to have their entire amount applied at the higher tier / rate as you consider it to be overpayment.

Sales Cookie can magically split transactions which overlap two tiers. In the example above, transaction #2 was worth 15K and had its entire amount applied to the higher 8% tier. With the following advanced option, transaction #2 will be split into #2a and #2b, with values $5K and $10K respectively (for each portion).

Here is the option to enable on your plan:

There is a tricky situation where a single (large) transaction causes the running total to cross multiple tiers. In this case, Sales Cookie is capable of splitting the same transaction, each tier receiving a portion of your large transaction.

Finally, when a split happens, your reps will see the portion assigned to each tier. Here is an example where a transaction was split in two. One portion was paid at the 5% rate, and another portion was paid at the 7% rate. About 90% of this transaction's amount qualified for a higher 7% rate, and about 10% qualified for a lower 5% rate:

In Conclusion
To recap, here are your options:
  • Portion-based approach
    • Always correct, but no per-transaction payout
    • Preferable if you want a lump sum which is not transaction-specific
  • Transaction-based approach
    • Dependent on chronological ordering of transactions
    • Variant #1 - assign entire "on the fence" transaction to higher tier
    • Variant #2 - use blended rates to split "on the fence" transactions  

Please reach out for additional assistance! We'd love to help.

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