Finding the Sales Commission Sweet Spot for SaaS
Which levels of Sales Commission will keep your SaaS salespeople motivated to sell more, without unduly eating into your profits? “Trial and error” is one way of answering this question – hopefully, you won’t end up pushing too much sales talent into the arms of your competitors in the process. Alternatively, you can simply see what the going rate is, then match it. You’ll still need to figure out things like your value proposition and the best way to manage sales rep egos, but at least you won’t have to worry about insulting them about their compensation.
To Each Kind of Sale, the Right Commission
Different kinds of revenue deserve different types of compensation. From many a sales rep’s point of view, more effort means more pay. From a company’s standpoint however, the intrinsic value of the sale is a key factor. Accordingly, going rates for sales commission depend on whether a sales rep has hooked a new customer, helped an existing one to buy more, or simply rolled over a current contract to the next period.
Commission Rates Anywhere from 2% to 9%, but for What?
This benchmark published on Lean-Marks.com – “Average Commissions by Sales Activity” – tells you what companies in your sector are paying their sales reps in commission for three different types of sale. In each case, the level is expressed as a percentage of ARR (annual required revenue) quota.
- New Business Sales. In SaaS, as in most areas of business, it is harder to acquire new customers, than to keep selling to existing ones. “New business” also signals the start of the lifetime value of the customer to the company, which is (or should be) a considerable amount of money. High effort and high value therefore explain why commission rates are the highest for this type of sale: Insight Partners quotes 8% of ARR quota, while Pacific Crest suggests 9%.
- Upselling. SaaS companies may be able to generate considerably more profit from a given sales relationship, if the customer starts to use additional services. Upselling is easier for a sales rep to achieve than new business, because the customer has already made a commitment. In this case, Insight Partners indicates 6% of ARR quota and Pacific Crest 7%. Both figures are slightly lower than for new business, aligning with potentially high value with a little less effort.
- Renewals. At 2% of ARR quota, Insight Partners and Pacific Crest cite the same benchmark level of sales commission for this category of sales. Added value is lower, as straightforward renewals change neither monthly revenue, nor profit. Lowest effort and lowest value (although clearly greater than zero) lead to lowest rates of commission.
Using Other Rates of Sales Commission
While you might not want to wander too far away from these industry averages, there may be justification for changing commission levels:
- Higher levels. May encourage sales reps to sell more, faster, helping a SaaS start-up or a software company moving towards SaaS to acquire a subscription customer base more rapidly. Less automated or more specialized sales organizations may also find it necessary to pay higher rates of commission to attract the right sales talent.
- Lower levels. The more the marketing, lead generation, and customer care processes are automated, the less effort will be required of sales reps. Higher fixed salaries with lower rates of commission may also be more appropriate, as “hunter” sales profiles are replaced by “farmers”.