Dear SaaStr: How Should I Pay Sales Reps When Our Customers Pay Monthly?
There are basically two options — really three, by blending the two:
The first is to pay monthly commissions. I generally don’t recommend this.
I.e., if you pay the reps a 10% commission on what they close … and the customer pays say $500 a month … you pay the rep $50 a month. Each and every month, until the customer churns. This does manage cash flow better in the early days. But reps hate it, and in the end, it won’t help you conserve all that much more cash. So if you do this — don’t do it forever. Don’t do it once cash is a little less tight.
The second is to pay annualized commissions, with an allowance for churn.
And maybe add clawbacks. If that $500-a-month customer has an 80% retention rate at the end of the year on average, then that’s essentially a $4,800 deal. Instead of little $50 a month checks, you can just write a $480 check (10%) of the expected deal size when the customer signs on.
If you are worried you are paying for churned deals, just clawback a pro-rated amount of the $4,800. You’ll find it won’t matter much as you scale, as you’ll get good as estimating the total deal size from each customer segment.
And also more common recently is a blended model for utility-based models: you pay say half an annualized commission up front (40%-50%), and the rest based on usage throughout the year.
A really great deep dive on that with MongoDB’s SVP of Sales of Sales Ops here:
Four Sales Compensation Tactics for Consumption-Based GTM with MongoDB’s SVP of Sales
Yes, the first way is slightly more aligned with your business and cash-efficient. And may seem more appealing in the early days. . But it can be a pain to administer — and more importantly, is not fun for the sales rep. It ends up being demotiovational
Their commission checks start off so tiny. Although in the first scenario, all these monthly commission checks do “stack up” over time. So say 6–9 months into a sales rep’s tenure, there may be little difference between scenarios 1 and 2.
In the end, once cash isn’t a huge stressor, what’s easiest is to pay the reps the way they want to paid (upfront, at contract execution), but the amount you want to pay (i.e., they take home < 4x the total revenue they close).
In the earlier days, you may need to pay them more of each deal (so they can eat and pay the rent) … with a trade-off that you align commission checks with cash received.
Later, you’ll want to flip that around. You want your sales reps doing what they are great at. Closing, closing and … closing. Not worrying about billing or the next month’s payment.
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Jason Lemkin, Khareem Sudlow
