First, let's clarify what a breakeven point is. The simplest definition is that breakeven occurs when revenue equals expenses.
But since revenue and expenses are both moving targets, it helps to look at breakeven from a slightly different perspective.
There are two types of expenses: fixed and variable. Fixed costs are expenses that do not increase as business increases. Examples include office space, utilities and salaries.
Variable costs are expenses that vary with the amount of business you do. Commissions, telephone charges and manufacturing costs are variable expenses.
Variable costs are tied to revenue – if you don't have any sales, for the most part, you don't have those expenses. But whether or not you bring in any money, you still have to cover your fixed expenses. For the sake of argument, let's say that 80% of your revenue goes to variable expenses. That leaves 20% of the revenue to cover fixed expenses and profit.
At breakeven, that entire 20% goes for fixed expenses.
Once you pass breakeven – when you've got your fixed expenses paid for – the rest is profit. And lowering your breakeven point directly and immediately increases profit. Now, let's talk about why offering a choice of plans lowers breakeven (and increases profit).
1. Risk-sharing
Typically, at least one of the plans you offer will give sales representatives the option of taking on greater risk in exchange for a potentially greater reward.
A commission-only or 100% plan does this. So does a plan where the sales associate reaches a higher commission faster in exchange for paying for his own advertising.
The sales associate who has confidence in her own abilities chooses this plan because she believes she will make more money this way.
The company benefits because it is shifting an expense (like advertising or office expense) to the sales associate. Or the company is replacing a fixed expense (a salary) with a variable expense (a commission).
By reducing expenses like this, the company lowers its breakeven point and starts making a profit sooner.
2. Motivation
By offering a choice, you are allowing people to select the style of compensation that motivates them most effectively. This removes the disincentives to greater production that exist in so many commission plans. When sales representatives become more productive, profitability increases.
3. Turnover costs
Improving motivation reduces turnover. The expenses associated with turnover decrease; therefore, so does the breakeven point.
Offering a choice also helps retain those reps who want a different style of compensation. They no longer have to leave your company to obtain it.
4. Recruiting
Offering a choice expands the pool of potential recruits. If you offer only a straight commission, you are limiting the number of people who will be interested in working for you. When you offer more options, you can choose from a greater universe of talent. That lowers your recruiting costs and reduces breakeven.
Of these four factors, the first one is the most direct. Having sales associates pay some of the costs of running your business or having them take on additional risk has an immediate effect on your corporate profitability.