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A Guide to SaaS Sales Compensation Plan

Introduction to SaaS Sales Compensation Plans

The SaaS industry has witnessed an unprecedented evolution and growth over the past decade. Businesses largely attribute this surge to the scalable nature of software as a service, which provides them with the agility and efficiency required to thrive in the digital age. An effective sales compensation plan is pivotal in fueling this exponential growth.

Such plans are designed to attract and retain top sales talent and align sales efforts with the company's strategic goals, ensuring sustained growth and customer satisfaction. Recognizing the unique revenue models inherent to SaaS, companies must meticulously craft compensation plans. They should encourage new business acquisition and customer retention, central drivers of success in the SaaS sphere.

According to research, United States has the most SaaS firms (15,000), followed by the United Kingdom (2,000), Canada (1,000), and Germany (1,000).

Challenges in Designing SaaS Sales Compensation Plans

Alignment with Recurring Revenue Model

Sales compensation plans must be structured to encourage initial sales and long-term customer success and expansion, aligning with the recurring revenue model typical in SaaS businesses.

Complexity of Multiyear Deals

Multiyear deals offer stability but complicate revenue recognition and forecasting. It is crucial to design compensation plans that accommodate these complexities.

Balancing Discounts and Sustainable Growth

Discounts and promotional strategies are necessary for securing contracts but must be balanced against the need for sustainable revenue growth to ensure long-term profitability.

Incentivizing Client Retention

Provide incentives for sales teams to focus on acquiring clients likely to engage long-term, mitigating the risk of customer churn and ensuring sustained revenue streams.

Managing Multi-Tier Pricing Structures

SaaS companies often have diverse customer bases with varying pricing structures. Tailor sales incentives to ensure fairness and motivation across different pricing tiers, reflecting these diverse customer bases.

Implementing Clawbacks and Negative Carry-Forward

Clawbacks and negative carry-forward mechanisms help address canceled deals, holding sales representatives accountable while preventing undue penalization for circumstances beyond their control.

Quality over Quantity Emphasis

Emphasize the importance of sales quality over mere quantity by withholding a portion of the payout until successful onboarding is completed. This ensures customer satisfaction and long-term relationships.

Fair Division of Credit for Deals

Dividing credit for deals among multiple stakeholders requires careful balancing to ensure collaborative efforts are fairly rewarded, with commission rates and metrics tailored to reflect individual roles and responsibilities within the sales process.

Performance Measures in SaaS Sales Compensation

ACV/ARR

  • This metric, reflecting twelve months of subscription revenue, is crucial for companies selling yearly contracts, with a typical commission rate of 10% for account executives.

Monthly Recurring Revenue (MRR)

  • Representing a month's subscription revenue, MRR is often employed by companies targeting SMBs with monthly contracts.

Expansion ACV/ARR

  • Incremental revenue from existing customers due to additional users or upsells, with AEs commonly receiving 8-10% and customer success managers 4-6%.

Renewal ACV/ARR

  • Revenue from renewing customers attracts lower commission rates (2-3%) due to lower risk.

Net Retention Rate (NRR)

  • This percentage change in recurring revenue from a specific customer group encompasses both ARR reductions and expansions.

Services Revenue

  • Revenue from one-time implementation or ongoing services, paid at a lower commission rate (1-3%).

Multiyear Contract

  • These contracts, assuming non-cancellability, command higher commission rates than one-year terms.

New Logos

  • Acquisition of new customers.

Management by Objectives (MBOs)

  • Goals or objectives related to non-revenue measures, typically for managers.

Meetings Held

  • This measure, important for business development representatives, counts the number of meetings managed.

Types of SaaS Commission Structures

Recurring Revenue Commission:

  • Aligns with the SaaS model by incentivizing long-term customer retention through commissions based on subscription revenue.

Tiered Commission Rates:

  • Sales reps earn higher commission rates for exceeding sales goals, encouraging continuous performance improvement.

One-Time Commission:

  • Provides sales reps with a one-time payment for initial sales without considering customer lifetime value.

Customer Retention Commission:

  • This commission emphasizes customer retention, which is vital for SaaS, through specific commissions for maintaining steady revenue flows.

Cross-Selling and Upselling Commission:

  • Encourages sales reps to maximize customer value by introducing additional features or services.

Performance Bonuses:

  • Rewards exceptional achievements beyond regular commissions, motivating sales reps to surpass their targets.

Expanded Types of Incentive Calculations

Traditional On-Target Earnings (OTC) Plans

These plans include tiered accelerators and decelerators, adjusting commission rates based on sales performance relative to targets to reward exceeding expectations and maintain minimum standards.

Commission-per-Sale Plans

These plans pay a fixed amount per transaction, simplifying calculations but potentially overlooking long-term deal value or complexity.

Sales Target-Based Plans

Plans with quarterly, semesterly, or annual sales targets provide clear goals but must be ambitiously set to motivate without discouraging effort.

Management by Objectives (MBOs)

MBOs focus on qualitative measures like customer satisfaction scores or team performance metrics, assessing an employee's broader contribution beyond direct sales.

Comprehensive Approach

This multi-faceted approach acknowledges the complexity of SaaS sales and tailors strategies to motivate different roles within the sales process.

By combining these methods, companies can create compensation plans that drive individual performance and overall business growth.

Conclusion

Crafting an effective SaaS sales compensation plan is a multi-faceted challenge, requiring a deep understanding of the unique dynamics of the SaaS business model, market demands, and sales strategies. These plans must incentivize sales personnel to acquire new customers, retain existing ones, and align their efforts with the company's broader strategic goals.

By carefully selecting performance measures, structuring commission plans, and calculating incentives, SaaS companies can foster an environment of motivated sales teams, driving growth and customer success. This approach not only sustains the upward trajectory of the SaaS industry but also ensures businesses remain competitive and responsive to the ever-evolving market landscape.

Incentivate, an inherent SaaS solution, simplifies this process effortlessly and has become one of the leading providers for global SaaS organizations.

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Frequently Asked Questions

What are SaaS sales?

Selling a web-based software that users can access through an online portal is known as SaaS Sales. Companies use SaaS, or software as a service, to their issues or pain points. Salespeople concentrate on upselling or keeping current
while bringing in new ones. Since SaaS reps typically sell at a higher price, providing excellent service and attention is essential to closing the deal.

This software distribution model uses a cloud vendor to host and maintain applications while the software is based on subscriptions. Instead of purchasing a physical copy and installing it on a local server, the software as a service model allows the customer to access the application via the Internet.

What is a good commission model for SaaS sales?

Variable pay, or pay for performance, is considered a good commission model for SaaS sales wherein a sales representative receives extra money on their salary. For SaaS sales, the standard commission rate is around 10%. For example, if a rep closes a $10,000 deal, they will receive a $1000 commission.

What are the difficulties in SaaS Sales Compensation Plans?

1. Lack of Predictability

SaaS sales compensation plans for sales reps are based on achieving specific targets, but the industry's unpredictable nature can affect their ability to meet these targets, causing challenges for both reps and the company. Furthermore, SaaS sales models challenge incentive designers and those working in sales operations or finance.

The primary reason for this is the unpredictability of the organization's actual realized revenue, which finance professionals despise. If your software is too complex, your sales cycle will likely be longer and more complicated. Both are dependent on each other. In such scenarios, ensuring the appropriate prospects are present during your demo to advocate for your cause among less savvy coworkers is crucial.

2. Driven by Customers

The problem you solve through SaaS may be a day-to-day or more strategic one. That drives the criticality of the demand, which the customer decides. As the customer is driving the sales and revenue model, the company no longer exerts control.

It is common for changes in macroeconomic conditions to lead to new players entering the market with more competitive offers. As a result, your customer and his interest in your offering at your price point define your revenue flows, directly impacting your compensation plans.

3. The Right Mix of Fixed and Variable Pay

Determining the right mix of fixed and variable pay is important in designing a SaaS sales compensation plan. Fixed income refers to the base salary or wages an employee receives, regardless of their sales performance. Variable pay, on the other hand, is based on an employee's sales performance. It may include commissions or bonuses on an employee's sales performance. Both pay types have their pros and cons, and finding the right balance is key to creating an effective SaaS sales compensation plan for your company.

Fixed pay provides stability and can help attract and retain top sales talent. Still, it may not motivate your employees to go above and beyond in their sales efforts. On the other hand, a sales commission plan heavily reliant on variable pay will depend on the company's goals, sales role, industry, and overall market conditions. So the right balance of both can help you incentivize your SaaS sales.

What are the 3 techniques to handle compensation plan structure?

1. Clarity in Roles

A salesperson's motivation is driven by having a clear line of sight and accountability for their role. Clarity in roles is essential in a commission plan structure as it helps to establish clear expectations and guidelines for each team member. It ensures that everyone knows what they need to do to earn their commission, avoid misunderstandings and conflicts, and foster accountability and teamwork within the team.

Even though very few work in other sectors, businesses may employ pure hunters, pure account managers/farmers, and pure renewal-based roles. For example, a hunter (salesperson) might get frustrated if they are paid a commission based on a customer's revenue. However, they must give up account control after the contract is signed.

2. Commission Caps

A commission cap is the maximum commission a salesperson can earn in a given period. This can help prevent overpayment of commissions and ensure that the SaaS sales compensation plan is financially sustainable. For example, a company may set a commission cap of $10,000 per year for a salesperson. Once the salesperson reaches this limit, they will not receive any additional commission for the rest of the year.

Commission caps can ensure that the sales compensation plan is financially sustainable and that commissions are paid fairly and consistently. They can also help prevent overpayment of commissions and ensure that the compensation plan aligns with the overall objectives and goals of the company. Commission caps can be set at different levels, depending on the company's needs and goals. They can be placed on a per-person basis or charged for the entire sales team. Commission caps can be on a rolling basis, meaning they reset at the beginning of each period (e.g., each month or each quarter) or annually.

3. Accelerators

An accelerator is a commission rate increase triggered by achieving certain sales milestones. Accelerators are techniques or strategies to increase sales speed and drive revenue growth. These accelerators can take many forms, such as offering free trials, demos, or onboarding assistance, implementing a referral program, or offering flexible pricing or purchasing options.

The goal of accelerators is to make it easier for potential customers to evaluate, adopt, and pay for the SaaS product, which helps to drive sales and revenue growth. For example, a salesperson may receive a higher commission rate for completing a certain level of sales in a given month.

What are the 5 main components of the compensation plan structure?

1. ACV/ARR (Annual Contract Value/Annual Recurring Revenue)

The annual contract value (ACV) refers to the total sales revenue generated by a customer contract over a year. ACV is particularly relevant for SaaS companies, which often operate on a subscription-based business model. When it comes to SaaS growth rates, a good benchmark ranges from 15% to 45% year over year, with the company's stage of development being a determining factor that affects this growth rate. The SaaS market is currently experiencing significant growth, with an annual rate of 18%.

2. MRR

Your company's predictable total revenue from all active subscriptions in a month is known as monthly recurring revenue (MRR). It does not include one-time fees, only recurring fees from discounts, coupons, and add-ons. In a subscription business, there will always be new customers signing up and some churning out, and your income will fluctuate constantly as a result. MRR tracks this change to demonstrate whether and by what percentage the revenue is increasing or decreasing in your organization.

3. MBOs

A Management by Objective (MBO) bonus is a form of performance-based compensation where managers collaborate with their team members to establish achievable goals. By enabling employees to develop their compensation objectives, you can increase their involvement and enthusiasm for the process. Interestingly, 86% of businesses that use SaaS have experienced a noteworthy improvement in employee engagement levels.

4. New Business

How fast are your lead numbers growing monthly? Even if MRR growth is consistent, this may only reflect your current performance rather than predicting future growth. Monitoring the pace at which new leads are coming in can help sales teams plan for future growth, set goals, and reach milestones. Furthermore, gaining a new client is an opportunity to increase revenue and achieve long-term growth, which can be incentivized with special plans.

5. SPIFF

A sales performance incentive fund, or spiff, is a financial incentive that spurs salespeople to advertise a specific product or line. Vendors and employers often use spiff to introduce new products into the market or increase sales within a specific time frame. The inducement can be a discount, a rebate, a club membership, or a cash reward. It is a popular tool for incentivizing your sales team and increasing revenue growth, particularly in the technology industry, where many competing products and services exist.

About Author

Sumeet Shah

Chief Growth Officer @Incentivate, has over 15 years of experience in management consulting, product engineering, and analytics, working with clients across multiple countries, functions, and domains.