Long-term contract salespeople typically earn a commission on recurring business. This is popular among SaaS companies and other subscription-based businesses. The structure of the sales commission plan for these organizations must ensure competitive remuneration.
Companies get and use the software on a subscription basis, and the software is housed on an off-site computer, according to the revenue recurring model. All SaaS products fit under the umbrella of cloud computing as we know it today.
Many prominent pieces of business software, such as messaging software, CAD software, content management, human resource management, and, of course, sales compensation software, have adopted this delivery model.
A well-structured recurring revenue commission plan will encourage salespeople to work harder and generate more money for the company. There are several different types of recurring revenue commissions. It has a lot to do with how, when, and what a corporation intends to pay commission.
SaaS Sales Commission Challenges
The first fundamental design difficulty for recurring revenue models is determining how to assess the sale’s value.
So, not only for your compensation planning but for your entire go-to-market approach, there are a few key questions to consider:
- When does the account transition from the individual who won the contract to account management?
- From a commission standpoint, how do you determine the worth of a sale?
- In two years, the sale may be worth a lot or nothing at all. So the first question is, “How do you put a value on it so you can compute commission accurately?”
Second, when you use the lifetime value concept, when do you truly pay? Do you pay the salesperson after five years? Obviously, that is not a good idea. When is it appropriate to pay out commissions?
The second design challenge here is whether or not to split sales compensation. This will depend on the nature of your business model.
Managing Commissions on Recurring Revenue
Salespeople are typically compensated with a salary + commission in organizations that rely on a regular income. Employers can, of course, go with a straight commission model or design a bonus program. However, SaaS and other long-term contract salesmen are less likely to use these approaches.
Talented salesmen are required by a company that wants to offer high-priced subscriptions. To attract great talent, you must provide a stable remuneration plan. Combining a stable income with a sales-based commission ticks a number of boxes.
Of course, the method you use will be determined by the demands and requirements of your company. If a different style matches your budget better, go that way instead.
Companies sometimes set commissions based on the sale of a contract or subscription. Commissions are held in other plans until the contract or subscription is completed. Other structures, on the other hand, disperse a portion of the sales commission over the course of the contract or subscription.
The best of all worlds is achieved by paying commission throughout the contract. This is because if a company pays the fee upfront, it runs the risk of losing money if the contract is later canceled. This can lead to a chargeback, which no one enjoys.
Waiting to pay commission until the contract is completed, on the other hand, may leave staff dissatisfied and financially vulnerable. The choice in the middle balances the risks for both the company and the employee.
After deciding how to pay the commission, the next step is to figure out how much to pay. What percentage of a contract or subscription will salespeople earn? There are a lot of questions that only your leadership team can answer about this decision.
First and foremost, sellers must consider on-target earnings (OTE). When calculating OTE, a company must determine a remuneration range that will keep salespeople pleased. On the other hand, it must make financial sense in the long run.
Split OTE in half if the pay mechanism is a 50-50 split between base salary and commission. For example, if OTE is $60,000, the starting wage will be $30,000. A salesperson’s potential commission will then be set at $30,000. Extrapolate that further: how does that break down a single salesperson’s potential annual sales? And at what rate will that prospective commission be fulfilled?
With a bit more arithmetic, you’ll arrive at the correct rate. With that in place, you’ll be able to achieve the complete sales compensation package. It’s time to put the plan into action and automate the process.
For SaaS/subscription revenue businesses, sales compensation is a more complicated topic. Unlike traditional software sales, when a new customer signs a contract, the salesperson’s job isn’t done. Instead, it’s critical to keep consumers for a long time because that’s how you maximize your profits.
When it comes to the sales commission, the idea is to align sales practices with the company’s goals. While the reasoning for the compensation plan may not be straightforward, the plan itself must be as straightforward as feasible. The plan should be simple to grasp for the salespeople, and it should be evident how to act to receive the best results.