Margin-based commission (also called gross margin commission or profit-based commission) is a compensation model where commission is calculated based on the profit of a sale rather than revenue. This incentivizes reps to focus on profitable deals rather than just large deals. According to Alexander Group (2024), 23% of sales organizations use some form of margin-based commission.
Margin-based commission provides several benefits:
According to Gartner (2024), companies with margin-based commission have 18% higher average gross margins.
Basic formula:
Commission = (Revenue - Cost) × Commission Rate
Or:
Commission = Margin × Commission Rate
Deal 1: High-margin product
Deal 2: Low-margin product
Comparison: Same revenue, but twice the commission on the profitable product.
| Aspect | Margin-Based | Revenue-Based |
|---|---|---|
| Calculation basis | Profit (gross margin) | Total revenue |
| Rep behavior | Focus on profitable deals | Focus on large deals |
| Discounting | Discourages excessive discounts | Neutral impact |
| Complexity | Requires cost data | Simple calculation |
| Transparency | Can be opaque | Easy to understand |
Scenario: Rep closes two $20,000 deals
| Deal | Revenue | Cost | Margin | Revenue-based (8%) | Margin-based (20%) |
|---|---|---|---|---|---|
| Deal A | $20,000 | $8,000 | $12,000 | $1,600 | $2,400 |
| Deal B | $20,000 | $16,000 | $4,000 | $1,600 | $800 |
With margin-based commission, the rep earns 3× more on the profitable deal—a strong incentive to prioritize quality.
All commission based on gross margin:
Combination of revenue and margin:
Different rates based on margin level:
Data requirements: Requires accurate cost data at the product level, which not all companies have.
Transparency: Reps can get frustrated if they don't understand how margin is calculated.
Factors outside control: Purchasing costs and promotions can affect margin without rep influence.
Complexity: Harder to administer than simple revenue commission.
Make calculations transparent: Reps should be able to see how margin is calculated for each deal.
Use stable margin definition: Clearly define which costs are included (COGS, direct costs, etc.).
Combine with minimum: Consider a base commission on revenue plus margin bonus to ensure stability.
Automate: Margin calculations are complex—automation ensures accuracy and time savings.
In companies with varying margins across products, or where discounting is a problem. According to Pavilion (2024), it works best in companies with at least 20 percentage points spread in product margins.
Most plans set a floor at $0 commission—reps aren't penalized for strategic loss-leaders, but aren't rewarded either.
Yes. Quota can be set on margin dollars rather than revenue, which further promotes profit focus.
Margin-based commission requires accurate data and complex calculations. With Prowi, you can pull margin data directly from your finance system, automate calculations, and give reps full visibility into how their commission is calculated.