In our last article we discussed the negatives of a traditional software sales compensation model within the structure of a Software-as-a-Service (SaaS) company. Traditional sales compensation is an inflexible system that can lead to severe negative cash flow problems at the introduction of each new account. Moving in the opposite direction and paying sales compensation as annuities over the life of the contract leads to a different set of problems ⎯ hardly better than remaining with the traditional model. It is important to keep your compensation system simple while encouraging sales growth and rewarding your employees.
It is also important to keep your sales compensation plan simple and understandable for your sales staff. This helps you by limiting the amount of tracking you need in order to properly compensate your employees.
SaaS companies should consider a model under which 75% or more of the first billing cycle’s expected revenue is paid to the salesperson. Less than half of this commission should be paid when the salesperson closes the contract, with the balance due after the customer has ramped up. The resulting compensation is easy to track and easy for your staff to understand. It also results in a pattern of commission payouts. Your salespeople are encouraged to regularly close new deals, while striving to maintain current customers, all of which helps grow the customer base for your company.
This sort of simple compensation structure has many advantages. It allows SaaS companies to prevent negative cash flow at the outset of a contract, and it is easy for employees to understand. It also helps the company to align their recurring revenue model with near-term objectives, and it can easily be modified to create additional bonuses and encourage positive sales behaviors.
For example, you could pay higher commission rates for multi-year contracts. This motivates direct sales staff to secure a committed customer base while bringing in new clients. SaaS companies can offer incentives for bringing in new customers, which helps promote aggressive sales. You can take advantage of the Rule of 78s by paying additional bonuses or otherwise incentivizing first and second quarter sales. You can also motivate salespeople to keep current customers and expand their base by offering an annuity on current contracts, but depreciating that compensation over two to three years.
Another way for SaaS companies to compensate direct sales employees is to pay bonuses based directly upon existing retention and growth, but only to salespeople who meet or exceed new revenue quotas. This sort of system helps alleviate many of the stagnation problems with an annuity-based compensation structure. It can also be successfully paired with some of the sales rewards ideas above.
SaaS companies are able to take advantage of some fantastic revenue streams and earn much more revenue from a contract than they would by offering their software with a perpetual license. But this model of sales requires an extensive overhaul of traditional sales compensation and a unique approach to commission payouts that encourages both new sales and customer retention to ensure long-term profitability.
Alliance Group International has assisted many SaaS companies over the years with their go to market plans, sales compensation programs, and strategic planning. If you’d like to learn more about all of the benefits of partnering with AGI, please give us a call at 925-984-2441 or use the quick contact form in the right column. We look forward to speaking with you soon.