In the fast-paced world of Software as a Service (SaaS), sales performance is paramount. Sales commission practices play a critical role in driving success within SaaS companies. In this blog post, we'll explore the essential components of effective sales commission strategies and highlight best practices used by leading SaaS organizations.
Sales commission structures are the backbone of incentivizing sales teams in SaaS companies. From tiered commissions to split commission models, we delve into the different structures and their impact on sales motivation and revenue generation.
Inside Sales vs. Field Sales vs. Both:
In order to determine the best commission-plan we would need to understand the team structure. If the company has both Inside sales reps (ISR’s) as well as field account executives (AE’s), you will need a clear delineation between the functions. For example, ISR’s – entrusted with Renewals only? Small opportunities, specific territory or vertical?
Each of these factors would impact the quota allocation as well as the OTE (on Target Earning).Â
Do you compensate Field sales for renewals? In essence pushing them to maintain a good relationship with existing customers, or do you focus their attention on landing new business only. Field sales normally carry a higher quota and earn greater OTE’s.
SaaS companies will usually consider the following factors when deciding on the functions and their compensations:
Product Complexity: SaaS companies offering complex or high-value solutions may opt for a field sales approach to provide personalized consultations and address customer needs effectively.
Customer Base: Understanding the preferences and expectations of your target customer base is crucial. Some customers may prefer the convenience of inside sales interactions, while others may value the relationship-building aspect of field sales.
Costs and ROI: SaaS companies should consider the costs and potential return on investment associated with both inside sales and field sales approaches. Analyzing metrics such as Customer Acquisition Cost (CAC) and Customer Lifetime Value (CLV) can help determine the most cost-effective sales strategy.
Best Practices for Designing Sales Commission Plans:Â
The art of designing effective sales commission plans that align with company objectives, motivate sales teams, and drives revenue growth. Below are listed some of the guidelines and best practices. Some imperative overlaying factors that should always be considered are: setting clear targets, ensuring transparency, keeping it SIMPLE, clear written communication and leveraging performance data for continuous improvement.
Commission Structure for New Deals vs. Renewals:Many SaaS companies differentiate between commission rates for new deals and renewal deals.For new deals, commission rates typically range from 5% to 15% of the contract's total value, depending on factors such as deal size, complexity, and the salesperson's performance.For renewal deals, commission rates may vary but tend to be lower than those for new deals, often ranging from 3% to 10%. This is because renewals usually require less effort than acquiring new customers.
Payment of Commission on Renewals:Whether to pay commission on renewals depends on the company's sales strategy and objectives.Some SaaS companies offer commission on renewals to incentivize sales reps to maintain strong relationships with existing customers and ensure high renewal rates.However, other companies may choose not to pay commission on renewals, opting instead to provide incentives or bonuses based on other metrics, such as upselling additional products or services to existing customers.
Overall Accepted Standard of Spend on a Dollar of Revenues:The acceptable percentage of revenue spent on sales commissions varies widely across industries and company sizes.In the SaaS industry, the percentage of revenue allocated to sales commissions typically falls within the range of 10% to 30%, depending on factors such as the company's growth stage, business model, and competitive landscape.Early-stage SaaS startups may allocate a higher percentage of revenue to sales commissions to drive rapid customer acquisition, while more mature companies may focus on optimizing sales efficiency and profitability, leading to lower commission rates as a percentage of revenue.
Factors Influencing Commission Rates:Commission rates within SaaS companies are influenced by various factors, including:Average deal size: Larger deals may warrant higher commission rates to incentivize sales reps to pursue them.Sales cycle length: Longer sales cycles may require higher commissions to compensate for the extended effort and resources invested by sales reps.Competitive landscape: Commission rates may be adjusted to remain competitive within the industry and attract top sales talent.Company goals: Commission structures should align with the company's objectives, whether it's rapid customer acquisition, revenue growth, or profitability.
Commission Plan Flexibility and Adjustments:
It's essential for SaaS companies to maintain flexibility in their commission plans and be willing to adjust them as needed based on performance data and market conditions. Regular reviews of commission structures allow companies to ensure alignment with evolving business goals, optimize sales performance, and retain top talent within the sales team. It is believed that companies with adaptable commission plans will achieve 10% higher sales growth.
Navigating Average Quotas and Commissions
Average Quota:
Quotas in SaaS sales typically vary based on the sales role, with differences between quotas for Account Executives (AEs), Inside Sales Representatives (ISR’s), Sales Development Representatives (SDRs), and other sales roles.
For Account Executives, average annual quotas often range from $500,000 to $1.5 million or more, depending on factors such as deal size, sales cycle length, and average contract value.
For inside sales roles such as Sales Development Representatives (SDRs), annual quotas often range from $200,000 to $500,000 or more, depending on the company's sales targets and expectations.
Quotas for Sales Development Representatives, who focus on generating leads and qualifying prospects, may be lower, ranging from $100,000 to $300,000 annually.
It's important to note that quotas are not one-size-fits-all and should be tailored to each salesperson's territory, experience level, and historical performance.
Average Commission:
Commission structures within SaaS companies can vary widely, but they typically consist of a percentage of the total contract value or Annual Recurring Revenue (ARR) generated from sales.
For Account Executives, average commission rates often fall within the range of 5% to 15% of the contract's total value, depending on factors such as deal size, complexity, and the salesperson's performance.
ISR’s & SDR’s may earn lower commission rates, often ranging from 1% to 5% of the contract value for deals they generate and qualify.
Some SaaS companies also offer tiered commission structures, where commission rates increase as salespeople surpass their quotas or achieve specific performance milestones. By Large companies compensate overachievement by either a 1.5/2x factor > 100% attainment and some opt for a tiered approach of 100%-125% attainment at 1.5x and above that at 2x multiplier
Average On-Target Earnings (OTE):
On-Target Earnings represent the total compensation a salesperson can expect to earn if they meet their sales quota and performance targets.
For Account Executives in SaaS sales, the average OTE typically ranges from $100,000 to $250,000 or more, depending on factors such as base salary, commission structure, and bonus opportunities.
For inside sales representatives in the SaaS industry, the average OTE typically ranges from $70,000 to $150,000 or more annually, depending on factors such as base salary, commission structure, and bonus opportunities.
Sales Development Representatives (SDRs) may have lower OTEs, often ranging from $40,000 to $80,000 annually, reflecting their focus on lead generation and qualification rather than closing deals.
It's important to note that these figures are averages and can vary significantly based on individual factors and company-specific considerations. Additionally, commission structures and quotas may evolve over time in response to changes in market conditions, company goals, and sales performance.
In the competitive world of SaaS, maximizing sales performance is non-negotiable. By leveraging effective sales commission tools and best practices, SaaS companies can drive success, achieve revenue growth, and stay ahead of the curve in today's dynamic marketplace.
Share your thoughts and experiences with sales commission plan implementation and what tools you use to manage these in the comments below. Don't miss out on future updates – subscribe to our blog and follow us on social media for more valuable insights on business planning.