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SaaS sales compensation is not nearly as complex and mysterious as it has been made out to be. So, here is the scoop…. Although at first glance, lifetime value may appear to be an overly complex metric to use for sales compensation, it is always proportionate to recurring revenue.
Now you can apply any of the various sales compensation models that you already know and love. Your particular choice should match the specific goals, products, pricing and culture of your specific business, as with any other sales compensation design challenge.
The primary principle of sales compensation is to pay the sales rep in proportion to the value of the deal, usually measured by the price of the product.
The value of the deal in turn is wrapped up in the sales commission percentage, which is calculated by dividing the target commission at quota by the sales rep quota: This is important, because it is at this point in the sales compensation plan design that we clearly see that sales compensation is NOT about paying the sales rep a percentage of revenue, it is about allocating a target commission payout based on a measure of performance quota.
The measure we use for performance license revenue, recurring revenue, margin, etc. We consciously choose a measure that scales with deal value, so that sales compensation aligns sales rep performance with company performance.
You can get really fancy with tiers, spiffs, margin vs. What does change is how you measure deal value, and thus the relevant measure of sales performance.
In a subscription business with a recurring revenue stream, the value of the deal is not as clear cut as the price of a software license.
As any MBA or bond trader will gladly tell you, the true value of a subscription deal is the present value of the future cash flowswhich amounts to summing up all the recurring revenue over time, taking into account churn, and discounting it by your cost of capital. As previously mentioned, the LTV of the deal is always proportionate to recurring revenue of the deal.
We do not need to calculate the absolute LTV for the deal, because the commission percentage will scale up or down as needed to make sure we payout the target sales compensation.
Thus for SaaS, we simply change the calculation to the following: But, once a time-frame for recurring revenue is chosen for calculating the sales commission percentage, it is critical to stick with the same recurring revenue time-frame throughout your SaaS sales compensation plan, i.
Psychologically it is often best to base your SaaS sales compensation plan on a recurring revenue time-frame monthly, quarterly, or annually that equals your most common contract renewal term, e.
The picture above shows a quick visualization for two sales compensation plans for two sales reps with similar skill sets and market labor rates: Visual, but maybe not so easy. Below is a simple numerical example that walks you through the calculation.
What quota can the sales rep carry? For example, here is the list price MRR for all sf. The only important rule is that you must use the same recurring revenue time-frame throughout all your SaaS sales compensation plan calculations. When it comes to payout, there is a tendency to want to swap out the correct recurring revenue measure for the explicit contract renewal payment.
The reason the monthly, annual and 2 year renewal contracts all pay the same commission amount is that they all have roughly the same lifetime values, and are therefore of equal value to the SaaS company.
The difference between the three is only the cost of capital. But, the rep and sales manager never see this.
Hence, if we want to add an incentive to our SaaS sales compensation plan for signing longer renewal term contracts it should be determined by how much we value cash up front, i.BUSINESS. design discussions no-schedule meetings professional development collaborate with clients sales and marketing.
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