What is a generous commission for a service that generates revenue year over year for a salesperson?
I have a business model that generates revenue over the course of 3 years. So, if I sign a client, they are signed on for three years and it can be renewed every three years. So, there is a possibility a client could be with me for 6+ years. My company is paid based on the size of the organization based on prescription utilization. We are very much a startup and I cannot afford to pay an annual salary for a sales person to help. What is a good commission percentage for a 100% commission based individual? A sale will take 3+ months to develop the relationship and the revenue to the company can range significantly from 15-130k per year depending on size. I was thinking that 40% of the first year revenue would be sufficient but want to get experts thoughts and opinions on a good commission structure. I am hesitant to provide a year over year commission as the amount of work once they are a client is minimal and I can handle that myself. I appreciate any advice.
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Aug 29, 2014
I would recommend paying a tiered commission structure. Pay a higher percentage of the gross revenue the first year and a smaller percentage in subsequent years. It is much easier for a business to generate revenue from their existing client base than bringing on new clients. If sales reps are not compensated beyond the first year of a new client they will loose all interest in the firm's clients and could actually drive clients away. Conversely by paying a small commission after the first year of a new deal the sales people will have a vested interest in making sure that those clients renew each year. Also this is a retention tool for sales reps - it eventually becomes too expensive for them to leave a company
May 9, 2014
Churn is drastically reduced when sales staff starts reaching the 80k/yr range. This is assuming you are hiring professional sales people and not entry level positions. This should give you a starting point on how to effectively keep the churn down, your sales people happy, and therefore motivated. If you are not providing a salary and TTD is about 3 months. You should consider providing some sort of bridge payment during the ramp up time for new hires if you have the capital set aside to do so.
Apr 24, 2014
Hi, great question and it varies with different companies with the product and service you are selling. I believe what you have in place is a good structure given the uniqueness of this type of work and length of the client. My only suggestion once the salesperson hit's there target over the year you may want to add an accelerator percentage commission starting 0.5 %, or 1.00%. I Or an additional bonus if they exceed the target. I hope this helps.
Apr 23, 2014
Thank you all for the responses, they are greatly appreciated!
That said, I will address some of the questions in greater detail.
My company is a consulting firm where I hold intimate knowledge that can save organizations significant funds on their prescription benefit plans. This is a start up operation that is currently being ran out of the office in my home on my free time outside of working for my current employer. The margins are extremely high, if not close to 100%, given that there is no overhead currently associated with the company. The issue that I have is that I cannot engage potential clients during working hours as I have a full time job that demands my attention.
This is why I am seeking a full time sales person. Unfortunately, I do not have a large nest egg to be able to afford to pay a sales person a salary, hence my wanting to engage someone at 100% commission reimbursement.
Also, once the initial sale is made, the salesperson will never have to speak with the client again in regards to servicing them. That would be my role as I would then provide the consulting service we are selling and there is no "up-selling" or additional products or services to be sold. Also, the revenue stream is fundamentally based on the savings that I can provide the organizations I am consulting. There is no up front fee to the organization, the company is reimbursed solely by the savings the companies realize over the three year contract period. That is why the revenue to the company can vary so significantly from client to client.
So, under a hypothetical situation, let's say that this salesperson prospected, generated a lead, and then closed the deal within four months. Let's also say that the company is reimbursed $50,000 per year for the three years of their contract term for a total of $150,000 on this particular client. What is a fair reimbursement?
Again, my hesitancy on providing a continuos sales commissions is that assuming I provide good service and they realize significant savings, they will trust me to remain their consultant of record. It would not be unrealistic to have clients resign contracts every three years. So, in theory this client could generate revenue of $50,000 per year for many many years.
The problem that I am also having is that the commission can be $15,000 per year for the same amount of work by the sales person. But, it can also be $130,000 as well for the same amount of work.
Given this information, does that change the responses?
I appreciate everyone taking the time to respond!
Apr 23, 2014
Maybe instead of looking at it on a yearly basis, make milestones for every 3 months or a shorter period of time. Sometimes a year is too overwhelming especially for a start-up.
When forming a sales team it is really important to get people that are loyal and represent your company properly. I would take it slow and motivate them and make sure the incentives are in the right place.
Some businessmen hate literature but I have to refer to Death of a Salesmen and Glengarry Glen Ross.
Alec Baldwin has a great scene here:
http://youtu.be/8kZg_ALxEz0
Apr 23, 2014
David,
This is not likely the answer you would like to hear, but I would like to question your decision to pay no salary to a sales person. You want to engage a sales professional who will be 100% dedicated to sales of your service, yet you want to transfer the total risk of success on the shoulders of that individual. Is the rest of your organization working for no salary? All should be equally vested in the success of your new venture.
What's more, top sales performers will find many opportunities that pay a base salary plus commissions. How do you plan to compete with other employers for that talented candidate?
A bigger question is this: Have you validated the sales model you describe? Have you or others closed sales of this service in three months, with initial transactions in the $15K to $130K range?
Apr 23, 2014
As someone who has been on the receiving and paying end of commissions I would say at first glance there are two areas I would disagree with. Of course not knowing your margins or impact on cash flow is a disadvantage but here goes - the 40% seems high and I personally would opt to pay a residual.
Unless your margins are thru the roof 40% seems like a very high % to give away on the gross sale.
Just to facilitate an interest on the part of the salesperson to remain in contact with your client I would utilize a residual. No contact = no residual. Not sure if you have an opportunity to upsell or cross sell but even so - occasional contact from the person would sold the account is never a bad thing. Residuals also induce salespeople to stay with your organization as the total amount of their residual income increases. If they leave - that's money that drops directly to your bottom line.
Run a combination of 25% with a residual of say 5% and see how the numbers look.
One last and maybe most important consideration whichever way you go.... is the projected commission enough to attract and retain the caliber of salesperson it's going to take to get the job done. Good luck.
Apr 23, 2014
There are quite a few variables to consider as the landscape changes frequently in the healthcare industry. While your revenue may be based on utilization and that can change year to year that may change the dynamic entirely. A "PAE" or "Paid as earned" compensation will allow you to be more liberal and motivational while limiting your exposure during first and ongoing years. While you propose 40% first year you can pay 25-30% first year but to keep the rep engaged and the client utilizing bonus the sale rep in ongoing years. Just a consideration as bonuses always get salespeople's attention.
Apr 23, 2014
Because of the lead time involved with your IC I would suggest a 50% split on the initial sale with 10% for all renewals.
Bill
Note that my auto-bio talks about sales techniques. The stories are funny but all true: www.thecrazylifeofakidfrombrooklyn.com
Thanks for the expanded information. I'm jumping right to your last "problem". Which is the same problem that happens for all consulting sales. The investment in relationship/COS for a $1M deal can be the same as for a $50k deal. I think if you can continue to grow and invest in the company paying a $40% commission, it sounds fair (it always depends right?).
Do not underestimate the sales cycle to get the deals closed. If you work as a team with the !00% commission sales person and are open and honest with the process, definition of success, etc., I like it.