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 address their issues or pain points. Salespeople concentrate on upselling or keeping current customers 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%. So, for example, if a rep closes a $10,000 deal, they will receive a $1000 commission.
According to the research, United States has the most SaaS firms (15,000), followed by the United Kingdom (2,000), Canada (1,000), and Germany (1,000).
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 unpredictable nature of the industry can affect their ability to meet their 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 actual realized revenue of the organization, which finance professionals despise. If your software is too complex, your sales cycle will likely be longer and more complicated. Both of them are dependent on each other. In such scenarios, it’s crucial to ensure the appropriate prospects are present during your demo to advocate for your cause among less savvy coworkers.
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, control is no longer exerted by the company.
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 the overall market conditions. So the right balance of both can help you incentivize your SaaS sales.
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.
Components to Include in the Compensation Plan Structure
1. ACV/ARR (Annual Contract Value/Annual Recurring Revenue)
The annual contract value (ACV) is a term that 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 a 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. There will always be new customers signing up and some churning out in a subscription business. Your income is constantly fluctuating 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 there are many competing products and services.
Conclusion
Incentivizing SaaS sales can be a complex process with varying levels of difficulty. Without proper planning ahead of time, the risk of poorly constructed incentives is high. However, the benefits of customer acquisition and retention can be substantial, and a well-designed sales incentive plan supported by an agile technology solution can set your business apart and attract and retain more customers. It’s worth the investment to get it right.
Incentivate, an inherent SaaS solution, simplifies this process effortlessly and has consequently become one of the leading providers for SaaS organizations globally.
