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3 Recommendations for Sales Compensation for SaaS

I am at the Cloud Channel Summit today.

A topic that seems to be coming up over and over again today is the need to come up with innovative sales compensation (commission) models that align with the subscription business model of cloud.

While this is mentioned as an issue, not too many solutions were discussed so far (we are only at lunch time) so I went hunting online for some good blog posts on the topic. Here are three posts to get the discussion started:

October 2011 – David Cummings on Inside Sales Rep Comp Model for Startups

Here are some ideas when thinking about the inside sales representative compensation model in a startup:

  • Base salaries in the range of $25k – $50k
  • Commissions in the range of $25k – $60k (e.g. $40k base salary and $60k in commission for an on-target earnings of $100k)
  • Commissions would be 10% – 20% of first-year’s revenues (e.g. $1,000/month SaaS product is $12,000/year with a 15% commission would be an $1,800 commission)
  • Commissions should be paid out after the customer’s payment has been received by the startup

July 2011 – Larry Steele (VP of SaaS at Savvis) Tips for Transitioning Your Business to SaaS

It’s not just about compensation: you could technically have a comp-neutral model for perpetual licensing and SaaS bookings. However, you need to examine how Sales is compensated on revenue or bookings. If you set up term limits (i.e., 12 to 36 months) in your subscription billing, then you will want to review your renewal process and make sure your sales team has the right incentives in place to keep the customers you have. Remember, it’s harder to find new customers than it is to keep the precious ones you have.

February 2011 – Joel York Cloud Channel SaaS Channel Compensation

In my post on SaaS Sales compensation, I made the claims that SaaS vendors should a) pay in proportion to the lifetime value of the deal and b) pay entirely up-front, because the SaaS sales rep should not be asked to bear any of the SaaS investment risk, or the rep is likely to just quit and find better work. The same basic ideas holds for the SaaS channel partner with the caveat that it is reasonable to expect the channel to absorb at least some of the risk, if not all of it. So, when it comes to SaaS channel compensation, SaaS vendors should a) pay in proportion to the lifetime value of the deal and b) pay disproportionately, but not entirely up-front because the SaaS channel partner should not be asked to bear a disproportionate amount of the SaaS investment risk, or the channel partner is likely to just quit and find better work.

Somebody also mentioned to me over the break that there may also be models we could learn from in other industries: for example, in commercial real-estate sales people are paid as a percentage of the monthly lease over the lifetime of that lease.

Do you know of any other good recommendations or posts? Please let me know in the comments!

Guy Nirpaz

Guy Nirpaz is a Silicon Valley-based Israeli entrepreneur and CEO of Totango, a Customer Success software platform. A pioneer in the Customer Success field, Guy established the Customer Success Summit and is a well-regarded industry speaker and community contributor. Guy loves people and technology and has dedicated his career to improving the way in which business is done through innovation. Fun Facts: Guy moonlights as the lead guitarist in a rock band based out of his garage in Palo Alto and used to command a tank well as having grown oranges.

  • oren

    Interesting stuff.

    Comment to Larry Steele’s point on renewal compensation: The smart move is to create a separate team that gets compensated exclusively for renewals.

    This way you separate your ‘hunters’ and ‘farmers’ and create incentives for them appropriately.

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  • Oren: You seem to missing the whole point, if you deny the sales people second year onwards revenue and give to farmers then, hunters will not be driven to make sales but will be driven to become farmers. Keep hunting for hunters and good luck..

    I would rather pay upfront with 15% 1st year and 10% for following years as long as total commissions % dont exceed 75% as 75% is my gross margin. That way hunter gets big commissions and all he can think in a day is about getting more new customers. From second year onwards, customer payments are basically mine 100%. R’ber not to let exceed upfront comm % exceed 75% or gross margin. Almost all SAAS players have upwards of 50% gross margins.

  • Rick

    Thanks for these valuable resources for SaaS sales.

    I also tried to search compensation plans for Customer Success reps. It looks still pretty new around the industry and little can be found.

    It would be great to see how customer success reps and managers can be compensated with related customer success goals. And, it certainly helps businesses run customer success programs with confidence.

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