Misguided Thinking on Paying Markups and Commissions

Image credit: Pavel Danilyuk

Recently, I had a series of spontaneous and unrelated conversations on the topic of commissions and markups. In all cases, the person wanted to find a “way around them.”

In one case, the conversation centered on providers of services and products adding a percentage or flat fee to the amount for which they had purchased a component product or service from a vender.

For example, a provider of construction services adds a 15 percent commission to the purchase price of wood bought to build a deck. Or a legal firm adds a 15 percent markup to the cost of the printing or finishing work required for dossiers and exhibits. Or a marketing firm adds a 15 percent markup to the cost of the ads it purchases for a client.

In another case, someone reached out to me via this site’s contact form with questions related to my series of articles on weddings in France, asking for my take on wedding planners getting a commission or marking up the components of the wedding plans they developed.

She was referring to how a planner will often add a markup to a table setting’s rental cost or a commission to the hair-and-makeup service provider’s charge.

In both cases, I understand the perception of “gouging” that getting charged a commission or markup could provoke. I can grasp why someone would see these costs as “additional” or even “unnecessary.”

And I can understand the drive to find a way out of or around paying commissions and markups from providers.

However, people with this perception need to reframe their thinking a bit. When they do, they’ll realize that these components of a provider’s service or product investment aren’t unfair or “additional” at all—and that they’re more commonplace than they may realize.

Volume Discounts are for Bulk Buyers

Your provider gets prices from venders that people and companies purchasing directly—in other words, you—could not get.

Why?

The vender gives providers a preferred pricing structure because they either receive or could receive volume business from the provider.

For example, an advertising agency buys a lot of advertising, often on behalf of several clients. If you sell advertising space, you want to win business from companies that can buy a lot of it from you. In a similar vein, wedding planners and interior designers serve a lot of clients—and can therefore rent a lot more table settings and buy a lot more lamps than any given individual.

In fact, even with the markup your provider may add to the price at which they’ve purchased the product or service, you will likely receive a better deal on the item via your provider than you would in buying directly—all thanks to these volume discounts.

Shifting the Sales Commission

Some venders do not have sales teams and use providers as their sales force. Other venders have only a few sales professionals on staff for limited direct sales and rely on providers to help them reach critical mass for revenue.

Therefore, venders often give your provider what may look like a preferred or discounted price with the understanding that the amount allows the provider to add the sales commission the vender would otherwise pay an internal salesperson.

In this case, the 15 percent your provider adds to the cost it pays comes from the vender—not from you. The vender has lowered the sales price by a specific amount to give the provider a commission on the sale. If you bought the item directly—if you can buy it directly—you would pay the commission to the internal salesperson rather than to your provider.

In terms of your own accounting, the cost is a wash.

Reallocation of Marketing Costs

In a similar vein, venders who sell products and services via providers reduce their costs for marketing.

Marketing efforts add an often-intensive sum to the provider company’s overall cost of operations—just as reducing marketing reduces the vender’s operating costs. Yet the vender benefits from the provider’s marketing via increased revenue without the up-front marketing expenditure.

Therefore, venders often provide a discounted rate to providers—and not to direct purchasers, like you—to help recoup or contribute to the cost of the marketing efforts required to bring in the business from which both businesses benefit.

Buying Added Value—not a “Markup” or “Commission”

Your provider increases the value of the products and services acquired from venders—often exponentially—and reduces their cost to you in a variety of ways for which a commission or markup only partially compensates:

• Finding, sourcing, vetting, coordinating, and managing venders—often of highly variable, complex, and specific products and services

• Ensuring the delivery of quality services and products (often something only a trained eye—like your provider’s—can evaluate)

• Processing and paying vender invoices and ensuring accurate and fair pricing according to industry standards

• Handling the bookkeeping, accounting, and tax requirements on the state and federal levels

Many of these activities require industry-specific experience to perform with accuracy—something your provider adds to the mix. Further, much of the legwork involves extensive time and expense from your provider’s team that deserves fair compensation.

Markups and commissions—whatever you decide to call them—help providers recover some of these costs and compensate for their hard-earned skills.

Purchasing “at Cost” is a Myth

Nothing you buy will you get “at cost.” Not truly.

In every sale or deal, companies have had to account for the cost of the item sold, for the expense of their expenses and overhead, for the investment in their sales and marketing efforts, and for the profit they need to stay in business.

Such is the nature of commerce. Even when you buy a jug of milk directly from a dairy farmer, you pay a “markup” or “commission.”

Negotiate Elsewhere for a Win-Win

Think you’ve managed to negotiate out of these commissions or markups with your providers?

You haven’t.

Instead, you’ve forced your provider to add additional cost somewhere else in the overall work agreement to recover their costs and gain a profit on the work.

If you have a pinched budget—something I can fully understand, as we’ve all faced it—you can indeed negotiate, but don’t consider what you’d call commissions or markups your best bet as a negotiation point.

Instead, consider thinking through the scope of work with your provider to find a win-win situation that has the two of you coming out ahead. (For more on the scope versus price discussion, read this article.)