One of the largest challenges solutions providers face when they transition from a project-based to the as a Service business model is how to handle sales compensation. When a sales representative closes a deal on a one-time project or sells hardware or software outright, it’s easy to do the math. You pay them the percentage they earn on that type of sale as their commission.
It’s not as cut and dried for Software as a Service (SaaS) or other types of as a Service sale. You can’t know with certainty the total revenue a SaaS sale will bring in since it’s based on monthly payments over time. The customer may use the solution for a year — or 10 years.
VAR and MSP SaaS Sales Compensation Plans
To understand how VARs and MSPs compensate their sales reps selling SaaS solutions, the Retail Solutions Providers Association (RSPA) members polled 54 of its member organizations that primarily serve the restaurant, retail, and grocery verticals.
The majority of these businesses, 55.8 percent have different sales compensation for SaaS vs. traditional sales:
- 34.6 percent pay an upfront lump sum commission.
- 17.3 percent pay a consistent commission rate over a set period.
- 3.9 percent pay a declining amount over time.
- 28.9 percent have a hybrid plan that uses different sales compensation methods.
- 15.4 percent don’t sell SaaS.
The poll revealed that how much recurring revenue VARs or MSPs receive influences the sales compensation methods they choose. For example, 33.3 percent of VARs who describe their recurring revenue stream as “some/barely” pay a lump sum for a SaaS sale vs. 50 percent of those who say “all/most” of their income is recurring revenue. VARs or MSPs with less recurring revenue are more likely to pay consistently over time (19.1 percent) vs. those with the majority income from recurring revenue (7.1 percent).
If You Don’t Pay a Lump Sum, How Long Do You Pay?
It’s reasonable for VARs or MSPs with less recurring revenue not to pay commission in a lump sum right after a sale — a larger portion of the revenue from each sale may be funding progress toward more of their business operating under the as a Service model. But if you choose to pay the commission amount that you and your sales reps agree on over time, how long do you pay?
Of the VARs in the RSPA study, aside from the 15.4 percent that don’t sell SaaS solutions and the 28.9 percent that pay in a lump sum:
- 13.5 percent pay over 1 to 6 months.
- 5.8 percent pay over 13-18 months.
- 3.9 percent pay over 31-36 months.
- The balance of VARs and MSPs, 30.8 percent, pay as long as the customer continues with their contract.
RSPA reports that about one-third of the VARs and MSPs in the survey claw back sales rep compensation due to churn within a specified period, but about 52 percent do not.
Insights into Overall Sales Compensation Plans
The RSPA survey also found:
- 30.8 percent of businesses pay commission based on gross sale; 63.5 base commission on gross margin.
- 50 percent adjust their sales compensation plans annually; 26.9 percent adjust every year or less often.
- 70.8 percent of managers use a combination of data-based decision making and their gut to establish or change sales compensation plans; 13.7 use purely data; 7.8 percent go by intuition alone.
RSPA also asked what the total compensation a high-performing sales rep receives annually. Responses ranged from up to $30,000 to more than $200,000, with the most common base salary of between $41K and $60K.
For additional insights on how VARs and MSPs are designing their sales compensation plans, download the 2020 RSPA VAR Sales Compensation Study.