A successful sales compensation plan is essential for every software as a service (SaaS) business. While determining sales commissions may seem like a fairly simple task, it involves an in-depth understanding of your company's needs and your sales force's objectives.
SaaS businesses need to have a commission plan that encourages their sales force to focus on customer satisfaction and retention in addition to closing deals.
But where do you even begin?
This post will walk you through the requisites of crafting a sales compensation plan tailored to your SaaS business. We'll cover topics ranging from establishing an appropriate OTE and compensation mix to establishing realistic goals and incentivizing appropriate actions.
Before we dive into “how to build a SaaS sales compensation plan”, let’s understand the various other factors that contribute to designing the perfect plan for your business.
What is a sales compensation plan and why is it important for your SaaS business?
A sales compensation plan is a set of rules that details how a sales team is compensated for reaching predetermined targets. Salary, commissions, bonuses, and other incentives are all included.
SaaS companies cannot function without sales compensation plans, which incentivize sales teams to meet objectives that advance the company's goals. It can also not work without sales commission management software that helps in maintaining all the commission details for closed deals.
Increased revenue and profitability might result from a sales compensation plan that encourages sales representatives to go above and beyond their quotas.
In addition, when the sales team's interests and the companies are properly aligned, everyone works together towards the same goals.
Understanding the 3 SaaS Sales Models
- Self-serve: The Self-service model enables users to be more self-served, i.e. find solutions, information, or support on their own, without requiring a conversation with your team. The distinctive part of this model is the absence of a sales team. Customers can sign up for a product directly or even find solutions to their problems on their own online, without having to wait to talk to a member of your team. This product-first strategy results in lower client acquisition expenses and is increasingly becoming a preferred choice for SaaS founders.
- Enterprise: In this business model, sales is the driving force. Relationships with potential clients are fostered by salespeople and account managers. In the end, they hope to speak with the executive buyers who are responsible for allocating large resources. The account executive demonstrates the product's capabilities, negotiates the price, and conducts due diligence to ensure that the buyer understands how the product will benefit the company.
In professional environments, marketing functions act as an enabler of sales. Marketing efforts such as branding and awareness drives, as well as market research, feed into the sales funnel. The sales team helps in closing deals via product roadmaps, social proof, and other sales tools.
- Transactional: The transactional sales model is distinguished by high-volume, efficient sales and support operations, brief sales cycles, and rapid onboarding. Customers can anticipate signing contracts, receiving periodic updates and thorough documentation, and having access to service representatives when issues arise.
Transactional sales models are typically high-risk and high-reward, with a greater sales volume. If your product is suitable for it, the transactional method can provide the best of both environments for your business.
Factors that Drive SaaS Sales Compensation Plan Structure
- Revenue targets: There should be a SaaS sales incentive plan for reps to meet and exceed revenue targets aligned with the company's growth strategy.
- Customer Acquisition Cost (CAC): The plan should ensure that sales reps are not over-incentivized to close unprofitable deals due to the high CAC associated with SaaS products.
- Subscription-based sales: The plan should reward reps for not only closing new deals but also retaining existing customers over time.
- Churn rate: The plan should incentivize reps to sell solutions that meet customers' needs and reduce churn.
- Gross Margins: The plan should reward reps for selling high-margin products that contribute to the company's overall profitability.
- Customer Lifetime Value (LTV): The plan should incentivize reps to focus on selling to customers who are likely to have a high LTV, which can help the company invest more in customer acquisition.
- Sales cycle length: The plan should motivate reps to prioritize high-value deals and minimize the time spent on low-value ones, given the lengthy and complex SaaS sales cycles.
- Team structure: The plan should be tailored to the size and needs of the sales team, with different plans for inside sales reps and enterprise sales reps.
Key Elements of a Successful SaaS Sales Compensation Plan
- Base Salary: A salesperson's base salary is a predetermined annual sum they are guaranteed to receive regardless of performance.
- Commission: A salesperson's commission is the percentage of their salary that is contingent on their level of success. A sales representative's commission is often a fixed percentage of their total sales.
- Bonus: A salesperson can earn a one-time bonus if they meet or surpass certain goals, such as their sales quota.
- Performance Metrics: Sales representatives are held to a set of performance metrics, such as monthly or quarterly sales quotas, customer retention rates, and the number of new clients they bring in.
- Territory and Account Management: Sales success can be affected by how accounts and territories are divided up. The distribution of accounts and the size of the sales territory should be fair and practical.
- Claw backs or Chargebacks: When a consumer cancels or returns an order, the corporation may seek to recover some or all of the compensation paid to the sales representative through a process known as "claw backs" or "chargebacks."
Note: A sales representative’s base salary and other incentives combined are known as on-target-earning.
Your company's requirements and objectives should inform the structure of your sales compensation program. Your choice may be influenced by things like the company's culture, financial situation, or available products. Sustainable and effective SaaS sales compensation plans strike a balance between motivating and incentivizing sales staff and meeting the company's financial objectives. Your plan should be reviewed and revised regularly to accommodate the evolving needs of your company and sales force.
Aligning your sales compensation plan to your business objectives
To align your sales compensation plan with your SaaS company's goals, follow this 5-step approach:
STEP 1: Identify the company's goals and objectives, such as revenue growth or customer acquisition.
STEP 2: Determine the specific metrics your sales team needs to achieve to contribute to these targets, such as monthly sales quotas or customer retention rates.
STEP 3: Design a compensation plan that rewards sales reps for achieving these targets, such as higher commission rates for exceeding sales quotas.
STEP 4: Communicate the plan clearly to your sales team and provide regular updates on progress towards the company's goals.
STEP 5: Monitor and adjust the plan as necessary to ensure it continues to motivate and incentivize your sales team to achieve the company's targets.
Now that you’ve identified your businesses’ key objectives and are familiar with the different types of commission plan structures for SaaS, let’s move on to selecting the best plan mix for your company.
Selecting a commission plan that meets your needs
- Understand the Market: Research what other companies in your industry are paying their sales reps.
- Define Your Financial Goals: Determine your company's financial objectives to offer competitive pay to your sales team.
- Determine the Metrics for Success: Set clear criteria for success to help you reach your goals and set fair sales commission and bonus rates.
- Consider Your Company Culture: Keep your organization's culture and principles in mind while designing the plan.
- Test and Adjust: Try out the plan and make changes as necessary to ensure it is inspiring and rewarding to your sales reps.
Additionally, consider your sales force size, sales process complexity, and industry competition when choosing your commission plan. For a large sales force, you may need a tiered compensation structure, while incentivizing agents for specific goals can help with a complex sales process.
Accounting for different sales roles and responsibilities when designing your compensation plan
To design a compensation plan that incentivizes different sales roles appropriately, follow these steps:
- Define sales roles and responsibilities: Identify the various sales roles in your organization and their specific responsibilities.
- Determine key performance indicators (KPIs): For each role, determine which KPIs are most important to measure performance.
- Establish a fair base salary: Determine a competitive base salary for each role based on experience and market demand.
- Set commission structures: Tie commission rates to specific KPIs for each role. For example, inside sales reps may receive a commission based on meetings booked, while account executives may receive a commission based on closed deals.
- Offer bonuses: Consider offering bonuses to motivate reps to achieve specific goals or milestones.
Establishing fair and equitable compensation plan policies
- Establish clear and transparent metrics: The first step is to establish clear and transparent metrics for measuring sales performance. This includes defining what success looks like, setting specific goals, and outlining how these goals will be measured.
- Use objective performance measures: Use objective performance measures that are consistent across all sales reps. Avoid subjective measures that could be interpreted differently by different team members.
- Ensure alignment with company goals: Make sure that the compensation plan aligns with the company's overall goals and objectives. Sales reps should be incentivized to focus on the activities and outcomes that will have the greatest impact on the business.
- Regularly review and adjust the plan: Regularly review and adjust the compensation plan to ensure that it remains fair and equitable over time. This includes monitoring performance metrics, soliciting feedback from sales reps, and making changes as needed to reflect changes in the business or market conditions.
- Communicate the plan clearly: Ensure that the compensation plan is communicated clearly to all members of the sales team so that they understand how it works and what they need to do to earn rewards. Provide training and support to help reps achieve their targets.
- Be transparent and consistent: Be transparent and consistent in how you administer the compensation plan. Ensure that all sales reps are treated fairly and equitably and that the plan is administered consistently across the entire team.
Measuring the effectiveness of sales compensation plan: Metrics you should track
Measuring the effectiveness of your sales compensation plan is essential to ensure that it's achieving its intended goals and driving sales performance. Here are some key metrics you can use to track the success of your sales compensation plan:
- Sales revenue: The most obvious metric for measuring the effectiveness of your sales compensation plan is the revenue generated by your sales team. This metric can help you determine whether your plan is driving sales growth and increasing revenue.
- Customer acquisition cost (CAC): CAC measures the cost of acquiring a new customer. By tracking this metric, you can determine if your sales compensation plan is effective at driving new customer acquisition.
- Customer lifetime value (CLTV): CLTV measures the total value of a customer over their lifetime with your company. By tracking this metric, you can determine if your sales compensation plan is incentivizing behaviors that lead to long-term customer relationships and recurring revenue.
- Sales pipeline: Your sales pipeline measures the number and value of deals in progress at any given time. By tracking this metric, you can determine if your sales compensation plan is driving a healthy pipeline and ensuring that sales reps are motivated to close deals.
- Sales productivity: Sales productivity measures the amount of revenue generated per sales rep. By tracking this metric, you can determine if your sales compensation plan is incentivizing behaviors that lead to increased productivity and revenue.
- Employee retention: Employee retention measures the number of sales reps that remain with your company over time. By tracking this metric, you can determine if your sales compensation plan is effective at retaining top talent.
Adjusting your compensation plan according to the evolving needs of your business and team
As your SaaS business and sales team evolve, it's important to review and adjust your sales compensation plan to ensure that it remains effective and motivating. Here are some steps you can take to adjust your compensation plan over time:
- Review your metrics: Start by reviewing the metrics you use to measure the effectiveness of your compensation plan. Are you seeing the desired results? If not, which metrics are not meeting expectations? Use this information to identify areas where your plan may need adjustments.
- Evaluate changes in your business: Your business may evolve, with changes in product offerings, target markets, or sales processes. Consider how these changes may impact your sales compensation plan and whether adjustments are needed to ensure that your plan remains aligned with your business goals.
- Solicit feedback from your sales team: Your sales team is on the front lines of selling your product, so they can provide valuable insights into what is and isn't working with your compensation plan. Solicit feedback from your sales team on what is motivating and what could be improved.
- Consider changes in the market: The competitive landscape and industry standards for sales compensation plans may change over time. Keep an eye on these changes and adjust your plan accordingly to ensure that it remains competitive and attractive to top sales talent.
- Make adjustments incrementally: When making adjustments to your sales compensation plan, it's important to do so incrementally else it will lead to becoming an inefficient comp plan. Large changes can be disruptive and may confuse or even cause a drop in sales performance. Instead, make small adjustments and monitor their impact before making further changes.
- Communicate changes clearly: When making adjustments to your compensation plan, be sure to communicate the changes clearly to your sales team. Explain why the changes are being made and how they will impact the sales team's earning potential.
If you’ve come along this far, you’re already on the right track to designing a killer sales compensation plan for your SaaS business. We hope that this blog helped you gain some fresh insights and the thoughts necessary to start building your first comp plan. If you’re looking for more SaaS sales compensation best practices to get started, check this out.