The article originally appeared on The Visitec Blog.
A Conversation on Sales Compensation for Recurring Revenue
Sales Manager: “I really need you focusing on more recurring revenue services. You know, subscription video, service contracts, network monitoring.”
Account Executive: “Okay, so if I sell a subscription contract for $2,000-a-month of recurring revenue for cloud video services, how much do I make?”
Sales Manager: “Great question, based on your current model where you make 10 percent of gross margin, you would make about $580.”
Account Executive: “$580? It takes me almost as long to sell this type of service as it does an installed system where I can make 5-10 times that much!”
Sales Manager: “Well, we need more recurring revenue so while I understand your dilemma, I need you to focus on service sales.”
It is at this moment that the sales person grows flustered and the well-intended efforts to have a discussion about moving from capex to opex sales stalls.
How Should Recurring Revenue be Compensated?
Many integrators have stuck to a compensation model for a long time that is based mostly on the sale of integrated systems where the majority of the income for the sales person is based on the equipment sold because it generally represented the largest portion of the sale.
With hardware margins shrinking over the past couple of decades, this has forced account executives to sell more to offset the lessening profit per dollar of sales. What has also helped to lessen the blow of lower margin has been the increased integration work that tends to provide greater margins so long as projects are completed in close to their budgeted time frames.
Nevertheless, compensation has been massaged to support the ebb and flow of product and integration sales, but what has been done for recurring revenue sales?
While every company’s approach is little different, we are seeing recurring revenue sales being squeezed into a legacy compensation model because it’s either easiest to do, or because it hasn’t been thought about.
Begging the question, can this work? If so, when will it work, when won’t it work and how may it be done differently?
Crunching the Numbers on Recurring Revenue Compensation
It would be great if we could speculate into every type of compensation for integrators these days, but for the sake of doing some number crunching, let’s discuss the two most popular.
Higher Base + – Some integrators opt to pay their sales teams a higher base salary that usually includes a plus commission at a lower rate.
Lower Base + – Other integrators set up their compensation with greater risk reward where the sales person can make as much as 30 percent (usually more like 15-20 percent) of margin but may have little or no guaranteed income.
In either scenario, the sales person is generally paid on a percentage of margin and in some cases they may receive a percentage of revenue, however that has become less popular as margins have declined. While these compensation setups have worked well in the industry, it is because the sales numbers are generally larger with installation and hardware sales which gives the sales person a good chance to meet their target earnings.