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.
Very challenging query, however, have come across this several times when commission based sales professionals approach me or others for business development.
This model between business owner can commission earning sales professional can become very sticky. I tend to address the barriers first so that the relationship is firmed up to build on. Clients are there and we all know people who get prescription benefits in our network and the associated organization they are in.
Here are some positive angles I have adapted that have helped me address the relationship issue and getting to the client:
a - I ask the sales person as to what level of income that they would like to make per year.
b - Then I say based on that income what would be the commission they would seek and the associated number of clients or the volume associated with that client level of engagement.
c - Most often they can't get the math and only focused on % commission and that often tells me that they are interested in the share of my company for which I have put in my blood sweat and tears and want to take a free ride regardless of what the market pays. What the company makes is not really of their concern as there is work even after the sales process. Referrals, Closure, Sales Completion, Order Execution, and Relationship Sustenance. So in most cases I go for someone who can handle all of this down the road by shadowing with me as opposed to here today closed a sale, took the commission and gone tomorrow leaving me in the dark (heck I can't even get them to reply an email or call back as there is no skin the game for them).
d - So when I focus on getting the right person in, there is no argument on the % but on their desired level of annual income and so I ask them to come up with a sales plan that would get them to a FTE role down the road (maybe a lower base salary and high benefits in commission and even bonuses).
e - So this doesn't have much to do with whether one's enterprise is a startup or large company, but something to do with accountability and whether they are in for the long haul.
f - The other approach is start them with something your enterprise as a startup can afford and then pay them retroactively at the end of the year if they deliver to the scale you would expect if they asked for a higher level in commission. With commission based payments it is 100 % of 0.0 = 0.0 and we all know that. Easy to talk and tough to walk.
g - Sliding scale is available and one can given them commission, bonus, stretch bonus and other great things even a FTE type arrangement so that they are now innovative in thinking rather than constantly looking to see as to who else can give me a higher commission and I am going over there. The grass is always greener somewhere, however, the gardner isn't around.
Hope this gives you some idea on how I think and have used it and maybe we could take it offline to discuss further if you are interested.
Your network is well developed and diversified and adding your finance and academic background I can see that it is more than sufficient enough for you to understand this basic math I posted (no insult to your intelligence) and a few pilot engagements with commission based payments should give you an idea of which fish is biting and is coming back for the positive bait you offer (lack of a better phrase - more so bait = long term relationship and sustainable revenue and/or income for sales professionals).
Cheers and good luck. Go Thunderbird! (heard that it is a great school)!
Here is an edited version of an article i did titled: "Compensation Cost Guidelines". You might find it helpful.
Sales teams or salespeople are classed as being high, normal, or low maintenance depending upon their cost to the organization. Like any expense, the lower the cost the better.
These are guidelines only and the actual percentages can (and do) vary between industries and markets.
A high maintenance salesperson (or sales team) is one where the salesperson’s direct and indirect costs exceed 40% of the profits generated by the salesperson.
A normal maintenance salesperson (or sales team) is one where the salesperson’s direct and indirect costs range from 30% to 40% of the profits generated by the salesperson.
A low maintenance salesperson (or sales team) is one where the salesperson’s direct and indirect costs are less than 30% of the profits generated by the salesperson.
Direct costs: salaries, commissions, & expenses.
Indirect costs: benefits, support staff, supervision.
Commission Conversion Formulas
Converting %GP to %GS
To convert commissions as a percent gross profit (GP) to percent gross sales (GS), multiply the commission rate by the %GP. I.E. If the commission rate is 10% and the gross profit is 25%, then 10% of 25% = 2.5% of Gross Sales.
Converting %GS to %GP
To convert commissions as a percent of gross sales (GS) to percent gross profit (GP), divide the commission rate by the percent GS and multiply by 100. I.E. If the commission rate is 2.5% and the gross profit is 25%, then 10% divided by 25% times 100 = 10% of Gross Profit.
A couple of questions and one suggestion...
What are your net gross margins not including a 1st yr. commission payout?
Is your salesperson expected to manage that account personally after it
has been sold, or do you provide an account assistant to help them with
that on-going and most important work.
Do you also provide a profit sharing pool for all your salespersons to share
in accordingly every year in addition to 1st year and renewable commissions?
Do you provide a monthly expense account for your sales force, to be utilized
in a manner that will assist them impactfully in their marketing and sales efforts?
And finally a suggestion...
Have your entire sales force and your executive team to read, embrace, and
methodically implement the strategies and tactics in...
The Ultimate Sales Machine - by Chet Holmes
My first reaction was Wow! 40% of the revenue lost for investment in the business in the first year, I'm assuming that's a ton of margin. Then I thought about how much you're expecting sales people to sell in a year. That drives annual income and expectations.
I've never been a 100% commission salesperson, however, I've never seen a percentage that large either. I've seen 15% range a few times before.
I would consider a smaller up-front commission with a residual that carries over for the life of the client. Much more attractive to a sales person whom wishes to be involved and not just a one time transaction. This will bring you much better partners who care about "how" they sell the deal. I have something similar in the Cost Recovery space and this method has worked well and keeps them motivated even in slow times. Good Luck.
I have found that the simpler the commission plan the better. Do not overestimate the fact that the sales rep built the initial relationship and worked probably more than the 3+ months to close the deal. I would pay a straight 30% - 40% every year as long as you keep the business and the customer pays their bills. Also the commission is based on the overall Net Revenue Generated not the Gross so keep that in mind. Do not put any ceilings on the commission plan or you will have reps that sell to that point and stop.
Keep it simple and easy to calculate and you will be successful.
Because of the lead time involved with your IC I would suggest a 50% split on the initial sale with 10% for all renewals.
Note that my auto-bio talks about sales techniques. The stories are funny but all true: www.thecrazylifeofakidfrombrooklyn.com
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.
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?
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.
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:
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!
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.
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.
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