David Cummings on Startups

Sales Commissions for Subscription Services

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David Cummings

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I was talking to a very successful entrepreneur a few days ago about sales rep compensation plans. In his model, they sell an annual subscription for several thousand dollars to their service. What I really liked about it was that quota was done on a monthly basis whereby no commission was paid at all until 60% of quota was reached for that month.

After 60% was reached, commission was paid on all previous deals and more sweetners were added when additional percentages of quota were reached. The result was that sales reps worked hard and that there was a spike in deals at the end of each month, when the reps could make the most money.

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3 responses to “Sales Commissions for Subscription Services”

  1. Teanna Spence Avatar
    Teanna Spence

    In my experience, a monthly plan with a threshold: that is no commissions paid until a certain sales number is reached, causes tremendous gaming of the plan. The rep is motivated not to close any deals until the sales volume he earns commission is reached, then he will close like crazy for the rest of the month. I have preformed numerous analyses on companies that have this kind of plan. The company is always paying more for performance than if they pay commission from the first sales dollar.

    The company thinks it is conserving cash, not paying commission until a threshold is met. In reality, they are encouraging the rep to hold sales until the threshold is met. There is no reward for closing the deals quickly until you cross the threshold. If the rep isn’t going to make the threshold this month, they will receive no commission, why would they close the deal?

    Also from a motivation standpoint, the rep will not see any commission for some of his sales until the threshold is met, then receive retroactive commissions for all his sales. This further solidifies his position of holding the sales until the threshold is crossed. Also selling something and not earning commissions on it at the time of sale is not very motivating for the rep.

    I challenge you to do your own analysis to see if this type of plan is effectively motivating the sales rep and if the company is using their commission dollars wisely.
    -Teanna Spence
    Compensation Director
    Makana Solutions

    Reply
  2. Erick Schmitt Avatar
    Erick Schmitt

    In his book “The Knack”, Norm Brodsky makes a case for paying sales people on salary. In fact he devotes much of a chapter to the topic he calls “The Trouble with Sales Commissions”. His main thesis is to focusing on selling as a team effort.

    Not sure if would be at all applicable to you, but the book is quiet interesting overall.

    Reply
  3. Hiring Your First Sales Person « 10,000 Startup Hours – David Cummings

    […] Sales Commissions for Subscription Services […]

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