Selling SaaS is not a sprint; it’s a marathon.
Conventional software sales are focused on one-time transactions, whereas selling a subscription is focused on acquiring recurring revenue that the customer can cancel anytime.
SaaS sales is an assisted buying experience where your sales reps must match the energy of prospects and make a compelling case for your product. To achieve this, it’s crucial to create a motivating environment for your sales reps.
And what better way to motivate someone than compensating them fairly?
Well-thought SaaS sales compensation strategies have the potential to consistently motivate sales reps to exceed their targets and attract the best customers for your business. These customers will continue to pay their subscription fees long after you have compensated your reps for closing the deal.
Charlie Munger once said, "Show me the incentive, and I'll show you the outcome." Your company needs sales reps who are motivated to display effective sales practices to identify and nurture customers who yield greater lifetime value. A great SaaS sales compensation plan ensures continued business growth by influencing positive behaviors and nurturing a customer-centric mindset.
In this blog, we’ll explore the components that make a SaaS sales compensation plan effective and cover everything you need to build a winning compensation plan that attracts top talent, motivates your sales team, and drives greater revenue for your SaaS business.
A clear understanding of the important SaaS metrics that impact your bottom line is essential for sales success. These play a crucial role in strengthening your recurring revenue growth, an indispensable factor for every SaaS business.
Existing customers account for more than 70% of SaaS revenue, making selling to the right customers vital. Sales compensation plans built around clearly defined metrics help sales reps align with the company’s overarching goals and business model.
For instance, if you follow a freemium model where customers start off with a free trial and then switch to per-user pricing, your sales compensation plan should be tied to metrics such as free trial sign-ups, conversions, and deal size (number of users).
On the other hand, if your business model offers a fixed-period subscription fee regardless of the number of users, the compensation plan should focus on rewarding sign-ups and up-front payment terms.
Further, with a usage-based SaaS, compensation plans that reward higher customer adoption and focus on maintaining low churn rates are ideal.
While there are many model-specific SaaS metrics that you can use, here are some key metrics that matter when creating a successful sales compensation strategy.
ARR is the measure of the total revenue that you can expect from existing customers in a year. It serves as a baseline of revenue growth targets for your sales compensation plans.
MRR represents the revenue you stand to earn if all your existing customers maintain their subscriptions. Although MRR may not be directly used in your compensation plan, it is a good indicator to track the progress of your sales reps and the impact of your existing compensation plans.
This is the total expenditure that your company incurs to get new customers, including sales salaries, marketing expenses, and other sales-related activities. Ideal compensation plans focus on rewarding sales reps who close deals with a lower CAC since it improves the profitability of your SaaS business.
The CLV of your business defines the revenue you can expect from new customers based on the historical average. Sales compensation plans should reward sales reps for finding ideal customers who will continue using your products long-term.
This measures the percentage of customers who discontinue using your product and choose an alternative. A high churn rate indicates that sales reps are not effectively guiding customers through the buying process.
It is a sign that you need a compensation plan that encourages better customer engagement and retention strategies to reduce churn.
Expansion revenue refers to additional revenue generated from existing customers through upselling or cross-selling. SaaS sales compensation plans can include specific bonuses for reps that drive expansion revenue even after the initial contract.
These key metrics provide actionable insights for creating effective compensation plans. For instance, if you see that your expansion revenue is stagnant or declining, introducing special performance incentive funds (SPIFFs) or bonuses for upselling and cross-selling will motivate your sales reps to find opportunities and increase the revenue from existing customers.
Ultimately, the goal is to strike the right balance between SaaS metrics that matter to you and compensation components to drive long-term, sustainable growth.
Metrics are one part of the equation, but it is also vital to grasp the components that you can tie with these SaaS metrics. By strategically emphasizing sales activities through monetary and non-monetary components, your reps will clearly comprehend the goals and benchmarks that matter for your business.
A balanced sales compensation plan includes a defined ratio of fixed pay (base salary) and variable pay (commissions, bonuses, SPIFFs, etc.). It’s important to support your reps with a reliable base salary while providing them with opportunities to earn more.
The industry average is a 50-50 split between fixed and variable pay. However, early-stage startups might opt for a 40-60 split, whereas companies in the later stages of growth often choose a 60-40 split for their sales team.
Consider offering commissions on recurring revenue if you want to prioritize and promote revenue retention. It all depends on the structure of your sales team.
If your account executives (AEs) also manage existing customers, giving them commissions on recurring revenue is appropriate. But if you have customer support managers (CSMs), it makes sense to provide them with commissions on recurring revenue instead.
Instead of giving your AEs commission on recurring revenue, consider incentivizing them with commission on expansion. This way, they will stay motivated to keep the customers engaged and grab opportunities to upsell and cross-sell.
Compensation plans that reward top performers set a good example for all the other reps. Accelerators are multipliers that increase the commission rates after an individual rep has achieved 100% of their sales quota.
Similarly, decelerators reduce the commission rate for reps who do not meet a minimum quota, usually set at less than 70%.
This is a strategic component that helps drive the sales of specific products or services. A SPIFF is a variable component tied to new products, services, or bundles. It helps drive the sales of new launches.
A balanced compensation plan uses these components and key SaaS metrics to formulate relationships between sales actions and the rewards your sales team stands to gain. In order to create sales compensation plans that work well for your business, it is important that you first take stock of your key metrics and prioritize them through sales compensation components.
Aligning sales incentives with your SaaS business’ growth goals is critical to your sales compensation strategy. While traditional software sales focus on closing individual deal closures, in SaaS, companies must emphasize long-term customer relationships, recurring revenue, and sustainable growth.
It helps set standards for sales performance and improves budgeting. If your finance team knows how much sales will cost, it becomes easier for them to plan the overall company finances.
Conversely, if you base your sales compensation plans on the key metrics defined above, it gets easier for you to ensure your costs do not outweigh the revenue growth.
Here are a few important decisions you need to think about:
A healthy mix of new customers and expansion is a must for stable growth. To achieve this balance, consider offering higher incentives on new business ARR and providing SPIFFs or bonuses for expansion of existing customers.
You want your sales reps to bring customers that stick around longer and generate revenue consistently. Sales compensation plans can help you incentivize finding the right customers by provisioning for full or partial clawback on customer churn and residual commissions on successful completion of a tenure.
In the SaaS industry, building relationships is paramount. Consider offering incentives for customer satisfaction, product adoption, or renewal rates in addition to new business. Deciding whether to implement commission sharing between AEs and CSMs or keep it separate will provide accountability and clarity of roles.
Different SaaS sales roles require unique compensation structures to incentivize the right behaviors. Let’s run through how you should design comp plan structures unique to each SaaS sales role.
SaaS sales are greatly dependent on the quality of leads.
At any SaaS company, sales development representatives (SDRs) or business development representatives (BDRs) own lead generation. Their compensation plans often include a base salary supplemented with commissions or bonuses tied to metrics like qualified meetings set, opportunities sourced, or pipeline generated.
Let’s understand this with a sample compensation plan for an imaginary SDR named Mark. He is in charge of generating sales-qualified opportunities (SQO) for AEs. All the leads he generates can be considered part of the revenue pipeline.
Therefore, an ideal compensation plan for Mark should reward him for generating leads for the sales pipeline.
Source: Visdum
Mark’s sales compensation plan breakdown:
Mark’s total on-target earning (OTEs) is $80,000 with a 60-40 split, which means his base salary is $48,000 and variable pay is $32,000.
He aims to source 140 SQO and contribute a $7 million pipeline.
Source: Visdum
Mark has an eligibility criteria of achieving at least 50% or more so that he is motivated to reach at least 50% of his sales quota.
Mark’s commission rates are:
AEs are responsible for closing new business and renewals. Their plans emphasize higher commission rates on new ARR and recurring revenue, along with accelerators for exceeding quotas. Decelerators may apply for under-performance.
Let’s understand this with an example compensation plan for an AE called John. If John’s salary is $200,000 with a 50-50 split and it follows the industry standard of 5 times sales quota, then John should bring in $1,000,000 in ARR for the company. If you apply a 10% commission rate, this is what John’s compensation plan would look like:
Source: Visdum
The key components of John’s plan are:
The AE must reach at least 50% of their quota to be eligible for commissions.
John’s commission rates are:
Commissions are triggered upon the first billing of a new customer and paid out quarterly.
The plan rewards different levels of performance through eligibility criteria, achievement tiers, and commission rates while also providing extra motivation for John to focus on specific sales activities such as the sales cycle.
AMs focus on expansion revenue, customer retention, and overall account growth within their assigned business book. Their compensation often includes a higher base salary, residual commissions on ARR, and bonuses for expansion ARR from upsells or cross-sells.
Let’s understand this with a sample compensation plan for an AM called Mary. If her salary is $160,000 with a 60-40 split, here is what an AM compensation plan would look like:
Source: Visdum
Key components of this compensation plan for AMs include:
The variable compensation of $64,000 is divided into three components:
Additional incentives: Referral ARR SPIFF - 1% commission on any new ARR from referrals
The sales compensation strategy depends on your company's current stage of growth. A SaaS startup, for instance, may prioritize lead generation, but an enterprise SaaS company may focus on revenue retention and expansion.
It's also important to consider the interdependencies between these roles. For example, SDR or BDR compensation could include a smaller percentage of the first-year AE commission to incentivize high-quality lead qualification and hand-off.
By tailoring compensation plans to the unique responsibilities and goals of each sales role, SaaS companies can effectively motivate their teams and drive desired outcomes across the entire sales cycle.
A well-constructed sales compensation plan can take your business to new heights, opening up sustainable revenue streams.
But where do you get started?
Follow these steps to design a tailored SaaS sales compensation strategy aligned with your business goals:
Designing an effective compensation plan requires careful consideration of various factors, but the effort is well worth it. A well-crafted plan can significantly impact your ability to attract and retain top sales talent, drive desired behaviors, and ultimately achieve long-term, sustainable growth for your SaaS business.
In the process of creating effective SaaS sales compensation plans, companies often face many challenges. Let’s take a look at some of the most common sales compensation challenges that you should be aware of.
SaaS businesses with long sales cycles often struggle to time their payout cycles. Pay commissions in installments or adopt a milestone-based approach to keep your reps motivated.
Since SaaS is a recurring revenue business, the companies must account for deferred revenue recognition, which makes calculating sales commissions and payouts complex. You may consider planning for this through stepped commission payouts.
Ensuring compensation costs do not extend the intended threshold is a major concern while designing commission structures. Decide on a compensation budget beforehand and ensure the commission structures are aligned with the overall budgets.
Ratability, ASC 606 compliance, and reporting are a challenge for SaaS companies when it comes to sales compensation because it refers to the need to recognize revenue and expenses evenly over the contract period rather than all upfront.
Adopting a sales compensation management software can help you with commission management, including compliance reports.
Creating compensation plans that balance incentivizing new customer acquisition and promoting expansion and renewals can be challenging. Divide the variable compensation of your reps into new acquisitions and expansion/renewal components.
By implementing these best practices, SaaS organizations can design sales compensation plans that effectively incentivize their sales teams, drive sustainable growth, and maintain a competitive edge in the evolving SaaS landscape.
Your sales reps should be confident when they plan their sales activities. A complete understanding of how they will be compensated for their performance is paramount to that confidence.
Make sure always to communicate your compensation plans clearly and give your reps time to discuss their doubts.
Compare your plans against industry standards and competitors to attract and retain top talent while remaining competitive. You can check the average salaries on peer-review platforms like Glassdoor.
Automated tools can help track sales performance, calculate commissions, and manage payouts accurately and efficiently. Moreover, utilizing compensation management tools to streamline processes can ensure accuracy and simplify reporting.
Involve cross-functional teams like finance, sales operations, and HR in compensation plan design and implementation for better alignment and buy-in.
This holistic strategy ensures that everyone is working towards the same goals, leveraging each other’s strengths, and providing the best possible experience for customers.
Source: Goodreads
Now that we have a better understanding about SaaS sales compensation, let's dive into some frequently asked questions:
A well-crafted sales compensation plan can either make or break your business. For your comp plans to be effective, make sure that your go-to-market (GTM) teams are aligned with your business goals. Ensuring alignment across GTM teams is the most sustainable way to keep your teams moving in the right direction in unison.
We hope our sample compensation plans inspire you to roll up your sleeves and start crafting winning plans unique to your business.
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