Sunday, September 27, 2009

SaaS Inside Sales Compensation Plan

Building the right compensation plan for your SaaS inside sales reps is imperative and complicated. One size does not fit all, but I have gone ahead and constructed one as a guide/example for folks to use with full quota carrying reps.

There are two metrics you need in order to build the most accurate compensation plans: First you need to know how much you are planning to sell your software for per seat/user per month. The second is your total Sales & Marketing cost of sale. S&M COS includes all marketing cost and sales overhead.

Once you have your S&M COS for the month, divide that number by the number of seats/users sold in the month. Let's say your total S&M COS calculation came out to $500 for the month of September. If your billing at $50 per seat with a S&M cost of $500, it would take about 10 months to recoup the S&M cost per seat. If your recouping your cost in less than 1 year's time (<12 months) your doing things properly and on your way to becoming a successful and profitable SaaS company.

Now let's get a little more granular. Say your a start-up and not certain of your total S&M cost of sale and all you want to do now is argue that your incremental cost and pay of an inside salesperson is reasonable. Here is an example:

Step 1: Pay Structure
-You want to pay your inside sales reps 40% base and 60% commission
-You want to pay them $48K base and $72K commission OTE of $120K (good salary)

Step 2: Cost of the individual (just using an industry average)
-Take industry average of 1.2x to 1.4X base salary for the individuals cost to the company (I will use 1.2X since your a start-up and your costs are probably still fairly low)
-Cost to the company for base salary is 1.2X of $48K=$57,600
-Cost to the company for commission is 7.65% (FICA and Medicare) or in this case $77,508
-Total cost to the company for the individual is $135,108

Step 3: Determine the price per seat for your software per month

Step 4: Do the math
-If a rep sells a 225 user deal in September it covers the incremental cost of that employee. 225 x $50 per user x 12 months = $135,000

Step 5: Understanding the power of SaaS
-This is recurring revenue, so the goal is to keep the customer for years to come. In years 2, 3, and beyond is where you really start to make money and your total cost of sales starts to drop substantially.

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