Choosing the right sales commission structure is crucial for incentivizing teams and maximizing potential earnings.
But with so many options, how do you know which approach is right?
This guide will walk through the most effective commission structures, with examples of how each works across different industries. Let’s begin with the basics.
What is SaaS Sales Commission Structure?
A SaaS sales commission structure refers to the method or formula used to calculate the commissions earned by sales representatives selling subscription-based software services.
Some key things to know about SaaS sales commission structures are:
- They are typically based on the annual contract value (ACV) or total contract value (TCV) of closed SaaS deals rather than one-time sales amounts. This matches the recurring subscription revenue model of SaaS.
- Common structures include paying a percentage of ACV/TCV, using tiered commission rates, and offering residual commissions on annual renewals.
- Tiered commission rates that increase with larger deal sizes are very popular in SaaS. This incentivizes reps to go after larger enterprise-level contracts.
- Residual or "evergreen" commissions paid out on renewal align incentives around customer retention and account expansion.
- Factors like sales organization, role, quota, ramp, and company growth strategy impact structure design and the rates used.
- Many structures provide additional incentives for exceeding quotas or thresholds for key customer success metrics.
The goal is to design a commission structure that rewards behaviors benefiting both customer value and business growth in the unique context of recurring revenue SaaS models.
10 Effective Commission Structures for SaaS Sales
With so many options to choose from, selecting the right sales commission structure for your team and Saas company can be an overwhelming decision. Having a solid understanding of the most commonly-used commission models is key to making an informed choice.
Let's delve into the 10 different types of sales commission structures, explaining each one in detail with a real-life scenario, highlighting when to use them, and pointing out possible pitfalls to avoid.
1. 100% Commission
In a 100% commission structure, sales representatives rely entirely on commissions for their income. No base salary is provided, and earnings are directly tied to successful sales.
Industries that use 100% Commission Structure
- Real Estate: Independent real estate agents often work on a 100% commission basis, earning a percentage of the property sale. Agents have a direct financial incentive to secure the best deals for their clients, aligning their interests with customer satisfaction.
- Insurance: Many insurance agents operate on 100% commission, motivating them to actively seek and close deals. Agents focus on selling policies and providing personalized coverage solutions to maximize earnings.
- Freelance Sales Consultants: Individuals offering sales consulting services may rely on a pure commission structure. This encourages consultants to focus on delivering results, as their income is directly tied to successful sales engagements.
Example of 100% Commission Structure
Imagine a startup software company that embraces a 100% commission model. Sales reps earn a generous percentage of each software license sold, offering high earning potential with no cap.
When to Use: 100% commission structures work best for startups selling high-margin products to experienced sales reps who can handle income volatility.
Pitfalls to Avoid: Relying solely on commissions risks high turnover rates due to income instability for reps.
Pros
Total earnings tied directly to performance
Strongly motivates sales activity
Cons
High income volatility
Potential for high turnover
2. Base Salary + Commission
This common model combines a base salary with a commission based on sales performance. It provides financial stability through a fixed income while incentivizing additional earnings through successful sales.
Industries that use Base Salary + Commission Structure
- Retail: Sales associates in retail commonly receive a base salary along with commissions on products sold. This structure ensures a stable income for sales associates while encouraging upselling and delivering excellent customer service.
- Telecommunications: Sales representatives often have a base salary supplemented by commissions for selling phone plans and devices. This motivates reps to actively promote and sell high-value phone plans and additional services.
- Technology Services: IT sales professionals may have a base salary complemented by commissions on service contracts. This aligns sales incentives with delivering high-margin IT solutions and services.
Example of Base Salary + Commission Structure
Consider a retail store where sales associates receive a fixed monthly salary plus a commission for each product sold. The base salary ensures a consistent income, while the commission motivates reps to maximize sales.
When to Use: Provides stability for less experienced reps selling complex products.
Pitfalls to Avoid: Reps may rely too heavily on base pay without incentive to maximize commissions.
Pros
Provides income stability
Attracts experienced reps
Cons
Potential for complacency relying too much on base pay
Administrative workload of managing payroll
3. Tiered Commission
In a tiered commission structure, sales reps earn different commission rates based on reaching specific sales or revenue milestones. As they achieve higher targets, their commission rates increase.
Industries that use Tiered Commission Structure
- Technology: Software sales may utilize tiered commissions, rewarding reps for achieving specific revenue milestones. It encourages sales reps to aim for higher revenue targets, driving increased sales of software products.
- Automotive Sales: Car salespeople often have tiered commissions based on the number of vehicles sold. This motivates salespeople to exceed sales quotas and achieve higher commission rates for exceptional performance.
- SaaS (Software as a Service): SaaS companies may implement tiered commissions for subscription-based sales. This rewards sales reps based on achieving specific subscription revenue milestones.
Example of Tiered Commission Structure
A technology company might implement a tiered structure where reps earn 5% commission on sales up to $50,000, 8% on sales between $50,001 and $100,000, and 10% on sales exceeding $100,000.
When to Use: Motivates reps to achieve and exceed sales targets, rewarding top performers.
Pitfalls to Avoid: Set realistic benchmarks to prevent demotivation and frustration.
Pros
Rewards exceeding sales targets
Incentivizes larger deals
Cons
Complex to initially set appropriate sales tiers
Must be monitored and adjusted over time
4. Revenue Commission
This straightforward model ties commissions directly to the total sales amount. Sales reps earn a percentage of the revenue generated, making it a simple and transparent structure.
Industries that use Revenue Commission Structure
- Consulting: Consulting firms may use a revenue commission model, tying earnings to the value of contracts secured. This structure aligns with the overall financial success of the firm, ensuring reps contribute to substantial contract values.
- Advertising: Agencies might implement revenue commissions, aligning earnings with the total revenue generated from client campaigns. It rewards sales reps based on the success and financial impact of client advertising campaigns.
- Event Planning: Companies specializing in event planning may apply revenue commissions based on the size and value of events organized. This motivates sales teams to secure high-value events, contributing to the overall revenue of the company.
Example of Revenue Commission Structure
A consulting firm might offer a 10% commission on the total value of contracts sold. If a contract is worth $100,000, the rep earns $10,000 in commission.
When to Use: Effective for businesses with standardized pricing or set service rates.
Pitfalls to Avoid: Clearly define whether commissions are based on gross or net revenue to ensure profitability.
Pros
Simple and transparent structure
Directly rewards total sales amount
Cons
No accounting for profitability
Could lead to excessive discounting
5. Gross Margin Commission Model
In this model, commissions are based on the profit margin rather than the total sales amount. Sales reps earn a percentage of the profit, encouraging the sale of high-margin products.
Industries that use Gross Margin Commission Structure
- Manufacturing: Companies selling physical products may use gross margin commissions to ensure sales contribute positively to the bottom line. This structure encourages sales reps to focus on products with higher profit margins, contributing to overall company profitability.
- Technology Services: Firms providing IT services may adopt this model to align commissions with profitability. It aligns sales incentives with delivering high-margin IT solutions and services.
- Retail (High-End Products): Retailers offering high-end products may use gross margin commissions to prioritize profitability. It rewards sales teams for selling products with higher profit margins.
Example of Gross Margin Commission Structure
Imagine a manufacturing company selling a product for $1,000 with $600 in expenses. If the commission rate is 15%, the rep earns a commission on the $400 profit.
When to Use: Encourages reps to focus on selling products with higher profit margins, safeguarding overall profitability.
Pitfalls to Avoid: Ensure the structure aligns with business goals, and reps do not avoid discounting excessively.
Pros
Prioritizes profitability
Focuses reps on high-margin offerings
Cons
Administrative complexity
Harder for reps to predict their earnings
6. Commission Draw
The commission draw model provides sales reps with a guaranteed monthly draw, which is later repaid from their future commissions. It supports new hires during their initial period of ramping up production.
Industries that use Commission Draw Structure
- Real Estate Agencies: New real estate agents often receive a commission draw during the initial period as they build their client base. This structure provides financial support to new agents as they ramp up production, offering a safety net during the learning curve.
- Media Sales: Advertising sales representatives may receive draws while establishing relationships with clients. It supports reps in meeting basic financial needs during the challenging early stages of client acquisition.
- Technology Startups: Startups might offer commission draws to sales reps during the initial phase. This structure offers financial stability to sales reps as they navigate the uncertainties of early-stage business development.
Example of Commission Draw Structure
A real estate agency offers new agents a $2,000 monthly draw during their first few months. If their commissions total $1,700, they keep the full commission plus an additional $300 to reach the draw amount.
When to Use: Beneficial for new hires during the initial period when they are building their pipeline.
Pitfalls to Avoid: Clarity in draw repayment terms is essential to avoid confusion and financial strain on reps.
Pros
Supports new hires during ramp period
Provides income stability for establishing pipeline
Cons
Repayment terms may create confusion
Can place financial strain on representatives
7. Residual Commission Model
In the residual commission model, reps receive ongoing commissions as long as the accounts they generate continue to generate revenue. This often applies to long-term accounts or contracts.
Industries that use Residual Commission Structure
- Insurance Agencies: Insurance agents may receive residual commissions for ongoing policy renewals and additional coverage sales. This encourages agents to cultivate long-term relationships, ensuring ongoing revenue from policy renewals and expansions.
- Subscription-based Services: Businesses offering subscription models, such as software as a service (SaaS), may utilize residual commissions. It aligns with the goal of retaining and expanding the customer base for continuous revenue streams.
- Real Estate Investment: Companies involved in real estate investment may use residual commissions for ongoing rental income. It motivates sales teams to focus on properties with long-term rental potential, ensuring sustained income.
Example of Residual Commission Structure
An advertising agency might earn a residual commission for every year a client continues to advertise, creating a strong incentive for maintaining long-term relationships.
When to Use: Ideal for businesses with long-term accounts and a focus on repeat business.
Pitfalls to Avoid: Clearly define the conditions under which commissions continue to avoid ambiguity and ensure ongoing value from the accounts.
Pros
Encourages long-term customer relationships
Rewards account expansion and retention
Cons
Tracking complexity for paying commissions
Requires investment in tracking infrastructure
8. Territory Volume Commission
Sales reps in a specific region earn commissions based on the overall sales volume in that territory. Commissions are distributed based on the total sales across the region, promoting teamwork.
Industries that use Territory Volume Commission Structure
- Pharmaceuticals: Sales teams organized by territory may use this structure to distribute commissions based on regional sales volume. This structure fosters collaboration within sales teams operating in specific regions, ensuring fair distribution of commissions.
- Consumer Goods: Territory volume commissions are common in industries where sales territories are well-defined, like consumer goods. It promotes teamwork and regional collaboration to achieve higher overall sales volumes.
- B2B Services: Companies providing B2B services may use territory volume commissions for regional sales teams. It supports regional sales teams in achieving sales targets specific to their territories.
Example of Territory Commission Structure
A pharmaceutical company structures commissions based on the total sales within a specific geographic region. Commissions are split among reps based on the overall sales volume.
When to Use: Fosters teamwork in regional sales and ensures equitable distribution of commissions.
Pitfalls to Avoid: Potential perceptions of inequity; strong leadership needed to maintain a collaborative environment.
Pros
Promotes regional teamwork
Allows flexibility across broader sales force
Cons
Perception of inequity on high-performing teams
Conflict potential over account ownership
9. Multiplier Commission Model
The multiplier commission structure allows companies to customize compensation plans. It involves starting with a base commission percentage, which is then multiplied by a factor based on individual performance.
Industries that use Multiplier Commission Structure
- Technology Startups: Startup environments may use multipliers to customize compensation plans based on various performance factors. This structure llows flexibility to reward different achievements, such as exceeding sales quotas or achieving specific milestones.
- Financial Services: Investment firms might apply multipliers to factor in different aspects of performance beyond sales quotas. This structure provides a nuanced approach to performance evaluation, considering factors beyond traditional sales metrics.
- Consulting: Consulting firms may apply multipliers to reward consultants for exceeding client satisfaction metrics. This encourages consultants to go above and beyond in client interactions, contributing to overall client satisfaction and business success.
Example of Multiplier Commission Structure
If a rep's standard commission is 5%, a multiplier of 1 may be applied for reaching more than 75% of their quota, resulting in a 5% commission. This allows managers to consider various factors in performance evaluations.
When to Use: Offers customization in compensation plans, considering factors beyond meeting quotas.
Pitfalls to Avoid: Clear communication and understanding are crucial due to the complexity that may create uncertainty for sales reps.
Pros
Allows customization based on performance factors
Flexibility to incentivize key objectives
Cons
Complex and opaque criteria
Uncertainty around earnings for reps
10. Base Rate Only
In a base rate-only model, sales reps receive a fixed hourly rate or salary without additional commissions. This structure is suitable when sales reps are more involved in support or consultation than direct selling.
Industries that use Base Rate Commission Structure
- Customer Support Services: Roles focused on customer support might have a base rate only to ensure consistent support without direct sales incentives. This structure aligns with the nature of the role, where the emphasis is on assistance rather than driving direct sales.
- Inbound Sales Teams: Teams dealing with inbound leads may use a base rate only model as their focus is on consultation and support. This supports teams where the primary responsibility is to provide information and support to potential customers.
- Education Services: Companies offering educational services may use a base rate only for roles focused on student support. It ensures stable compensation for roles focused on student support, encouraging a focus on educational assistance.
Example of Base Rate Commission Structure
A customer support team that primarily deals with inbound leads and focuses on consultations may receive a flat hourly rate rather than commission.
When to Use: Appropriate when sales reps are more involved in support than direct selling.
Pitfalls to Avoid: Lacks incentive for increased productivity; may not suit roles focused on driving direct sales.
Pros
Suitable for support-focused roles
Straightforward compensation
Cons
No additional sales incentives
Lower potential earnings ceiling
Outlining your commission structure is crucial, and experimentation may be necessary. There is no one-size-fits-all solution, and as your sales organization evolves, so too might your optimal commission structure.
Focus on building an effective sales process, and tailor your commission plans to motivate your teams, drive performance, and achieve organizational goals.
Choosing the Right Structure
Factors to consider when selecting a commission structure:
- Sales cycle complexity
- Product/service variability
- Sales volume predictability
- Importance of customer retention
- Team capabilities and experience
The structure should incentivize behaviors that align with wider business objectives and growth strategies.
The Bigger Picture
Sales commission structures tie into the overall sales commission plan.
Optimizing the plan involves selecting the right structure, calculating commission rates appropriately, and implementing tracking to monitor performance.
For a deep dive into everything commissions, see this guide: All You Need to Know About Sales Commissions in 2024
In Conclusion
The commission structure you choose can have a major impact on sales team motivation and performance. Match the right structure to your business goals, team dynamics, and industry benchmarks.
Be prepared to experiment, get feedback, and adjust as needed. With the right commission plan, your sales efforts will keep hitting the bullseye.
🔔 Interesting Read: Calculating SaaS Sales Commissions: Why spreadsheets don't work
Make Your Commission Structure Work For You
Choosing the right commission structure is only half the battle. Visdum allows you to seamlessly operationalize your compensation framework through:
- Flexible configuration of customized commission rules and criteria
- Seamlessly integrate your HubSpot or Salesforce CRM and track deals
- Real-time calculation and reporting across structures
- Automated computation for all sales stakeholders
- Easy verification and adjustments before finalizing plans
Schedule a demo of Visdum to maximize the impact of your commission structures!
FAQs
How does SaaS commission work?
SaaS sales commissions are typically based on the annual contract value (ACV) or total contract value (TCV) of closed deals. Common SaaS commission structures include:
- Percentage of ACV/TCV
- Tiered rates based on deal size
- Residual commissions on renewal
Reps earn higher rates as deal size increases to incentivize larger deals. Commissions are paid out upon securing the contract. Residual commissions reward customer retention.
What is the typical commission for SaaS sales?
The typical SaaS sales commission rate ranges from 5-15% of the contract value, with 10% as a general industry average. Enterprise SaaS sales reps often earn 8-15%, while inside sales reps see 5-10%. The rate varies based on role, company, quota, and deal size.
Higher commission rates apply to larger, enterprise-level contracts due to increased complexity. Most rates fall somewhere between the industry averages.
How much revenue should a SaaS salesperson generate?
The expected revenue for SaaS sales reps relates closely to sales quotas. Quotas are often set at $300-500k for SMB/mid-market SaaS and $1-2M+ for enterprise. Quotas factor in commission rates, ramp-up time, and market conditions.
Top performers typically achieve 120-200% of quota. So an SMB rep with a $360k quota would be expected to generate $432k to $720k in booked revenue. Enterprise reps with $1.5M quotas could see $1.8M to $3M in closed deals.
