Structuring a well-designed sales compensation plan is crucial for any company, particularly in the subscription-based software market. However, creating a compensation plan that motivates your SaaS sales team and maximizes revenue potential can be challenging.
Revenue Operations (RevOps) aims to coordinate sales, marketing, and customer success departments to optimize revenue growth. RevOps can help ensure that your sales compensation plan aligns with the company's objectives.
This blog will discuss how to calculate sales commissions for SaaS and develop a compensation plan that maximizes sales potential, taking into account your business goals, revenue model, budget, and commission structure. Before you get started with calculating sales commissions, it is essential to have a comprehensive sales compensation plan. Let's begin there
To motivate reps and boost revenue growth, companies can use various types of commission structures for Software as a Service (SaaS) sales. Nowadays many companies try to mix and match when it comes to sales compensation structure.
The compensation structure created for the existing employee might not be appropriate for the employee who joined as a fresher. This is where they bring the Hybrid Commission structure. This commission structure combines different commission structures to motivate sales reps based on various revenue streams. For example, a company may offer a flat commission on new sales and a recurring commission on renewals.
The following are some common commission structures that are revenue-oriented:
Business goals are essential for SaaS businesses, as they provide direction and aim for revenue growth, customer acquisition, and retention. Specific objectives may include increasing annual recurring revenue (ARR), expanding into new markets, or increasing customer lifetime value (CLV).
Creating a compensation plan for a SaaS sales team requires aligning with business objectives and considering specific sales roles. A commission structure that rewards reps for closing high-value deals or achieving quotas can increase revenue. Meanwhile, rewarding reps for bringing in new customers can improve customer acquisition.
Commission percentage should differ for different sales roles and departments. For example, an SDR may earn commissions based on the number of qualified leads generated, while an AE's commissions may be based on the number and size of deals closed. Compensation plans should motivate and incentivize reps with a transparent, understandable, and clear path to success.
Below are some common business objectives for SaaS companies and how they relate to creating a compensation plan from a revenue perspective:
Whether you want to calculate sales commission for your AEs, SDRs, BDRs, or CSMs, there are several factors that influence these calculations. Let's dive into each of these:
There are two main strategies when it comes to calculating commissions using recurring revenue:
In an upfront commission structure, the sales representative is paid a lump sum commission at the time the sale is made, even if the revenue is generated through recurring payments. For example, if a sales rep sells a $10,000 annual subscription with a 10% commission rate, they would receive a $1,000 commission upfront, even though the revenue will be generated over the year.
Calculating upfront sales commission for sales reps requires several key pieces of information:
With these pieces of information, you can calculate the upfront commission for each sale using the following formula:
Upfront commission = Sales rep commission rate x Sales price
In an overtime commission structure, the sales representative is paid commission on a recurring basis, based on the recurring revenue generated from the sale. For example, if a sales rep sells a $10,000 annual subscription with a 10% commission rate and a 12-month payment plan, they would receive a commission of $83.33 per month ($10,000 / 12 months x 10% commission rate).
Calculating overtime sales commission for sales reps requires several key pieces of information:
With these pieces of information, you can calculate the overtime commission for each sale using the following formula:
Over time commission = Sales rep commission rate x Sales price x Contract or subscription period
Both upfront and overtime commission structures have their advantages and disadvantages when it comes to calculating commissions using recurring revenue.
Over time many companies have realized that when it comes to calculating sales commissions, using Excel is just not an option anymore. Missing numbers, adding extra decimals, and forgetting to close the brackets are some very common mistakes that lead to a huge change in the entire data. Here's a detailed read on why you should move away from excel spreadsheets for calculating SaaS sales commissions.
Considerations such as industry, the state of the talent market, and the company's financial health all play a role in determining the base salary to variable salary ratio in a startup's compensation plan. Yet, it is generally accepted that in the early stages of a company's lifecycle, the variable income offered is greater than the base salary. Since many companies have limited funds, paying salespeople a greater variable income can encourage them to work harder and bring in more money.
60-70% variable salary and 30-40% base salary is a common early-stage business compensation ratio.
While this is a good rule of thumb, the specific ratio should be adjusted based on the demands of the business and the sales force.
Startups should take into account the following when determining the appropriate base salary to variable income ratio:
If you're looking for practical advice/tips and tricks on creating your SaaS sales comp plan, Anna Talericko, CEO of Corporate Finance Institute does a phenomenal job of detailing it all.
A survey conducted by Harvard Business Review Analytic Services found that companies with highly effective sales compensation plans are 81% more likely to have salespeople who exceed their quotas than companies with less effective plans.
A company’s success relies heavily on its sales team to reach sales goals, and a well-planned compensation plan is vital to build a motivated and high-performing sales rep. The compensation plan should align with the company's business objectives, be competitive in the job market, and cater to the sales team's capabilities and needs.
Moreover, recognizing exceptional performance is crucial in creating a sales culture that rewards effort and success. Publicly acknowledging outstanding work can motivate salespeople to perform better and retain top talent. Promotions and bonuses are some ways to appreciate and promote high achievers on the sales staff, which helps them feel connected to the company's goals, boosts morale, and promotes loyalty.
The sales commission formula is: Commission = (Sales Revenue * Commission Rate). Multiply the total sales revenue by the commission rate (expressed as a decimal) to calculate the commission earned by a salesperson.
To calculate SaaS sales commission rates, determine the commission percentage based on factors like deal size, recurring revenue, and customer contract terms. Common methods include flat rates, tiered structures, or a percentage of monthly or annual recurring revenue (MRR or ARR). Adjust based on company goals and sales strategies.
Calculate sales reps' commission by applying a percentage to the total sales value. Typically, the commission rate ranges from 2% to 10%, varying based on industry standards, sales goals, and the structure of the commission plan. Adjustments may apply for different performance tiers or quotas.
Sales commission in SaaS is typically calculated on gross sales, not net sales. The commission is based on the total contract value or recurring revenue generated from the sale before deducting any expenses or discounts.
The typical sales commission rate for SaaS (Software as a Service) ranges from 5% to 20% of the contract value. Rates vary based on factors like deal size, sales cycle length, and company objectives, with some structures including recurring commissions for subscription renewals.
The commission rate for independent sales reps in SaaS varies but commonly ranges from 10% to 30% of the recurring revenue. It depends on factors such as the sales agreement, contract length, and the strategic importance of the deal to the SaaS company.
The easiest method to evaluate SaaS salespeople is through Key Performance Indicators (KPIs) such as Monthly Recurring Revenue (MRR), Customer Acquisition Cost (CAC), and Customer Lifetime Value (CLV). These metrics provide insights into sales efficiency, revenue impact, and customer retention.
The average sales commission for a SaaS account executive typically ranges from 10% to 20% of the Annual Contract Value (ACV) or Annual Recurring Revenue (ARR). It may vary based on factors like deal size, sales strategy, and company policies.
Account managers in SaaS sales often earn commissions based on upsells, cross-sells, and renewals. Commissions are tied to the expansion of existing customer contracts, encouraging account managers to drive customer satisfaction, retention, and the overall growth of the customer relationship.
Sales managers in SaaS typically do not work on direct commissions for individual sales. Instead, they often receive performance bonuses, salary, or a combination of both. Their focus is on overseeing and optimizing the sales team's performance rather than securing individual deals.