As I talk to sales professionals in the merchant services industry I am always surprised by the compensation traps that they get caught in. The result of this is that they are either not able to make enough money to stay in the business or they stay in the business for a year and then realize that they wasted the last year and have not been able to build a long-term residual income.
I am making this list of 5 commission traps into a mini-series so today we will cover only the first one. This first commission trap is really for experienced merchant services sales professionals and is really up for debate. Keep in mind that I get a little technical with this one and really dive into the financials of the industry so if you are a newbie this one might go over your head. I would love to hear some feedback in the comments, let me know if you have any questions.
#5 – High Residual Split with No Up Front or Free Equipment. Many experienced sales professionals in this inudstry will switch to an “All Residual” plan because they feel that since they no longer need the up front cash, they should build their residual faster by maximizing residual split.
Our company also now offers a 70% split with no up front money and unlike many of our competitors, we do provide free equipment with this program, but we are offering this only because so many sales partners want this type of program. I personally do not feel it is the right financial decision unless you deal almost exclusively with large accounts.
Let’s say you have an average account processing $10,000 per month, generating $80 in total profit or “Gross Margin” if you were part of our standard program, you would get $400 up front, paid on approval and $40 per month residual (50%) plus free equipment, etc. If you were on our 70% split program, you would get $0 up front and $56 per month (70%) plus free equipment. (Keep in mind, many processors do not offer free terminals on this type of program, so you need to add that into your cost calculation as well.)
This means that on the average deal, you are giving up $400 now, in exchange for $16.00 per month. Now, if you look at this from an investment perspective, it really doesn’t look that bad because you are getting $192 per year, or a 50% return on your investment (Keep in mind this is simply interest not compounding return). However, this does not take risk into the equation. If your account makes it to 18 months, you still would not have broken even and you would have waited 18 months to get only $288 of the possible $400 you could have had on day #1.
As we all know, unfortunately there is a very high risk of your account cancelling during the first 24 months and these numbers get even worse with smaller accounts. If you have a deal with $50 in gross margin, you would be giving up $400 in exchange for $10 per month, meaning that your account would have to process for 40 months in order to break even. Because your portfolio will always be a mix of large and small accounts, my advice is to take some money off the table up front and allow the processor to assume some risk.
One final thought on this. I would never offer a program where the processor was not providing the free equipment. As an experienced merchant level sales professional, you know how frustrating and time consuming a reprogram can be. You also know that when it comes to the long term performance of the terminals you do not want any issues that will pull you away from prospecting. Our philosophy is to provide a free VX520 to every client so that even when EMV compliance becomes mandatory, we will not have to go back out and replace old terminals. Make sure you are getting pre-programmed, free terminals on every deal to save you time over the long haul.
If you would really like to run some calculations an scenarios, download our oportunity calculator. This is basically just a simple excel spreadsheet I designed where you can plug in different gross margin numbers, residual splits, etc. and see what your income looks like over time. I even put a retention rate in this one. Check back tomorrow for the #4 Commission Trap!
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