- Varicent Blog
- Why You Should Improve Your Sales Commission Planning
3 Reasons to Improve Your Sales Commission Planning
For sales managers and business leaders, a sales commission plan is the single most significant lever they can use to influence whether a sales year is successful or not. A sales commission plan is the most effective way of ensuring individual salespeople align themselves fully to the needs and direction of the business.
But this raises an intriguing question.
How often do people sit down and think about the ideal sales commission planning model for their business?
For most companies, there’s a tendency to fall back on last year's sales plan and tweak the numbers to meet this year's quota, and it’s job done.
All this seems like a slightly odd way of running a sales operation. After all, employee performance is constantly monitored, product line ups changed and updated, and business partnerships reviewed to make sure they still offer value.
So why not review your sales commission plan regularly too?
In fairness, the main reason is that, from a sales perspective, very little changes from one sales year to the next, so tweaking your sales planning model certainly used to be all that was necessary.
But now the world is changing super-fast, and the old ways probably need to be reviewed at the very least.
It’s worth bearing in mind that while your sales commission planning model might not change much, how your customers buy from you - and your competitors - will undoubtedly be changing. How your customers solve their problems or meet their needs will be changing. The products and services you offer are also changing, and the channels your customers buy through are evolving too.
If your sales commission planning doesn’t adapt to these changes, there’s a good chance that your trusty commission plans will begin to be ineffective.
We believe there are three reasons why you should re-think the way you plan your sales commission:
- To reduce the length of your sale cycle
- To secure larger average deals sizes
- To develop deeper and more valuable customer relationships
Let's explore the topic of commission plans in a bit more detail before exploring the options you have that can refresh and re-focus your sales commission plans.
- Why Do Sales Commission Plans Matter So Much?
- What Does a Sales Commission Plan Need to Achieve?
- What Options Do You Have in Designing a Better Sales Commission Plan?
- How to Upgrade Your Sales Commission Planning Model
- How Do you Translate this Approach into Your Sales Commission Planning Model?
Why Do Sales Commission Plans Matter So Much?
This may seem an odd question to ask. But given so much depends on a sales commission plan for so many people, we should explore it in some detail.
Sales is a unique profession. It isn't easy to assess, in real-time, how effectively your salespeople are working. The only real sign of success is when a customer signs a contract or doesn't, by which time it’s too late.
Sales commission plans help address this issue by keeping salespeople motivated and encouraging them to focus on those value-added activities that'll maximize results for the business.
A sales commission plan helps make sure that a salesperson focuses on those opportunities that’ll close and qualify out those that won’t.
Sales commission plans also encourage salespeople to focus on the revenues that the business values the most. Not all sales dollars are equal. The revenue most valued by the business are typically new business revenues and product revenues. New business rejuvenates a company, and the primary business revenues – whether product or services – enjoy the most significant margins, compared with other revenues a company may have.
Significantly, a sales commission plan forms an essential part of a business's compensation strategy, as it aims to attract the ideal salespeople for its business with the right level of experience, expertise, and the personal skills needed to engage effectively with your target audience.
What Does a Sales Commission Plan Need to Achieve?
The ideal sales commission plan will shape behavior by rewarding good sales behavior and not rewarding poor behaviors.
What is or isn't good behavior is decided by the customer in a sales situation.
A salesperson sensitive to their customers' commercial, professional, and emotional needs will surely prosper significantly more than a salesperson who takes a cookie-cutter approach to all sales situations. Salespeople who take a cookie-cutter approach tend to focus on how great their product is at the expense of taking the time to understand a prospect's needs and wishes fully. They won’t address their prospects' needs comprehensively and may find their competition doing a better job.
In a world of almost infinite choice, the ideal sales commission plan should be shaped by a customer's buying behavior so that customer-facing staff are rewarded for their commitment, effort, and results, regardless of how a customer ultimately buys from you.
This is especially important in complex sales situations where several employees may engage with the prospect during the sales process, including sales development representatives, pre-sales specialists, as well as product specialists, and account managers. All these people need to be mindful of the customer's needs and how they want to buy, rather than just how a company wants to sell to them.
What’s the Value of a Customer-focused Commission Planning Model?
Designing a sales commission plan used to be straightforward. Your customers either bought from you directly or from one of your business partners.
Now the situation is more complex. Now a customer buys in a multi-channel world. They can buy online, directly from an account manager, or through your third-party business, or maybe all three, simultaneously.
Customers expect significant flexibility in how they buy your products. It needs to be easy and convenient, and they don’t welcome being penalized for buying according to someone else's sales process.
But this new way of buying poses a problem for sales managers.
How do you best motivate a salesperson to support and engage with a customer when it isn’t a given that that customer will buy directly from that salesperson.
Equally, how do you best motivate a channel account manager or e-commerce manager to focus on supporting those sales campaigns when they have little direct engagement with the prospect?
If you are going to align your sales effort and your go-to-market plan around your customer's needs, surely it makes sense to align how you pay your sales teams with that process?
The value of this approach is that it focuses your salespeople on your customers' issues, not on how they’ll be paid. It allows them to spend time understanding their needs, the implications – commercial, professional, and personal – as well as the broad issues impacting the industry. The more a salesperson understands their industry and how their product can solve these problems, the more effective that person will be.
This ability to get under a customer's skin and understand their needs more deeply will set you apart from your competitors.
Having the deepest understanding of your customers' issues and how your solution can help them can help you qualify better, close more significant deals, and enjoy closer relationships because you pay your salespeople according to how the customer wants to buy.
This isn’t to say that your salespeople have carte blanche to take it easy and wait for the orders to roll in. Far from it, but it allows your salespeople to become problem-solvers for your clients, rather than simply trying to push the month's product. Let your competitors do that while you win over your customers and their deals.
Before we look at how you would implement that type of sales commission planning model, let's look at some of the variables you can work with as you develop your ideal sales commission plan.
What Options Do You Have in Designing a Better Sales Commission Plan?
Let's look at your options in developing the ideal sales commission plan.
Commission Only Sales
Here your salespeople get paid when they close. This approach can be an effective way to promote some products with short sales cycles. For extended, more complex enterprise sales engagements, commission-only sales can lead to higher staff turnover or high-pressure sales tactics that alienate prospects.
Base Salary Plus Commission
The base plus commission model is ideal for longer sales cycles, as it keeps salespeople engaged and focused on the customer's needs.
Here the picture becomes more complex. How do you pay salespeople when they close business? Numerous models abound, with options for a specific deal size percentage or quota achievement.
Kickers and Accelerators
To encourage over-performance, “sales kickers” – which offer additional commission payments - reward the closing of business earlier in the sales year or promote the closing of specific, often new, products. On top of kickers, “commission accelerators,” which provide yet more commission payments, usually apply when salespeople achieve their annual quota, as sales managers seek to keep them focused for the rest of the sales year.
Activity-based payments kick in for specific achievements valued by the business but which aren’t directly involved in revenue generation. For example, it might be arranging meetings with senior customer executives, presenting at highly valued industry events, or signing partner agreements. While generating no revenue directly, these potentially valuable commercial milestones often lay the foundations of future business development.
In some sales situations, especially more complex sales engagements with multiple touchpoints, it’s possible for several salespeople with distinct roles to engage at various times. For example, a new business development sales executive might initially engage and qualify the opportunity before passing it on to a sales specialist for further development. It’s also possible, in parallel, for a salesperson responsible for managing third-party relationships to become involved in the engagement, to support the third-party reseller or consultant in the engagement, as necessary.
Here, it might be practical to split the commission in some way to reflect the involvement of multiple teams.
Commission guarantees are often used to bridge the gap between starting a role and closing the first commissionable transaction. It can help keep new starters focused while getting their feet under the table. It can also be used to support salespeople taking on new roles in the business where they’re having to put in significant groundwork in preparing new relationships or market entry activities, for example.
Not all people who engage with customers are quota-carrying staff. Some have sales support roles, which might include pre-sales consultants whose role is to understand the deep technical or operational issues and help craft a solution that meets a customer's needs and is compelling and unique.
How to Upgrade Your Sales Commission Planning Model
So, if you like the idea of refreshing your sales commission planning model, read on. We'll show you how you can do it.
Having a sales commission model that’s focused on how your customer buys requires that you have an excellent grasp of how your customers buy from you.
The good news is that you already have access to the data you’ll need to do this. It’s really a question of how best to leverage powerful analytics to draw out the themes and highlights to help you create that sales commission model that puts how your customers buy at its center.
So, let's explore the fundamentals.
You Need Data
Understanding how best to shape and structure your commission plan is an exercise in accessing, consolidating, and analyzing large volumes of data, likely more than you have ever used or had access to.
Aligning your commission plan with how your customer buys means understanding their buying process and how it relates to your business.
This data can come from various sources, whether your finance systems, your sales CRM systems, your marketing systems, and your e-commerce systems.
Data can also come from a range of external sources relevant to your business and your target audience. This might cover demographic information, weather information, metrics about the installed base of products, employment figures, financial metrics – anything that you can quantify.
As well as having access to the essential data you need, you also need a straightforward way of capturing it, consolidating it, and integrating it, so you can start to analyze it. Ideally, this must be simply at the click of a mouse, without the need for complex scripting or complex systems integration effort.
You Need Analytics
Data alone won’t provide you with the insights you need. You also need powerful analytical capabilities to help you make sense of all the data you’ve collected.
Your challenge is, where do you look first? Sales is a complex area, and you don’t want to waste time exploring the wrong areas.
Having collaborated with customers and industry practitioners, we believe there are several areas you can start to look at first. Firstly, find out where your business comes from? B2B companies are typically interested in which sector their customers come from and which size of business, whether by headcount or turnover. Geographies are important too, as are the channels that business comes through, whether online, direct through a salesperson or via a third-party business partner. B2B customers are also typically interested in how they interact with a company before they fully engage, whether through events, webinars, online, or the consumption of digital artifacts.
B2C companies are typically interested in which demographics have the greatest propensity to buy from them, from which geographies, and how they buy – again direct, online, or through a third party.
With these revenue intelligence insights in place, you can start to understand the detail of the sales process. How long is the average sales cycle? How far along the sales process do people typically start to engage with an account manager or call center agent? How much do these sales cycles vary, and which sections generally are the most demanding? How much of a sales process is subject to customization, and how much is standardized?
You can also explore the relationship in the post-sales situation. Which customers upgrade their use of your product? Which go on to buy additional units? Which cease using your product?
This can give you an excellent starter to understand how you engage with your target audience. The next step is to build on that, which is where AI capabilities can prove especially valuable in developing these themes further. They can offer new insights that provide pointers about how best to design a sales commission plan.
You Need Inspiration
A sales operation is dynamic, changing and adapting as the business and its market change. While there’s value in running an assessment annually as part of a regular sales planning exercise, there’s significant value in running the process in the background – leveraging AI processes – to generate new insights that can provide more inspiration. You’ll see a nugget that catches your eye and makes you think about new opportunities in your customer base or in new areas. A chance conversation will encourage you to look at your data in a new way or maybe find a new data source that’ll enhance your analytics to provide new options and directions.
You Need Reports
While planning a sales commission model might be the responsibility of sales management and the HR function, taking a more sophisticated and value-added approach to sales commission planning means involving more people, each with their own perspective and insights that can give you the right answer that’ll maximize the chances of your success. It may be other sales managers; it may be those who have responsibility for managing your third-party relationships. Likely, your marketing function, product development, and customer support function can all contribute fresh eyes in helping you understand how your customers engage with you.
Coordinating the input of such a large – but vital - group in developing a key aspect of your go-to-market strategy is difficult. It requires a centralized reporting portal so that people can share their ideas and suggestions. It can also support “what-if” scenario planning so that managers can understand the ideal sales commission plan from a range of options, which is informed by how your customers actually engage with you.
You Need Integration
A sales commission plan can’t be considered in isolation. The quotas and sales territories that support a final sales commission plan need to be reviewed in parallel, ideally using the same data and information. This provides a plan that works from multiple perspectives and ensures that the results are achievable and realistic.
You also need to capture data from any source, within your business, or from your external data providers.
You Need Automation
There’s a great deal going on here clearly, but that isn’t to say it should increase your workload.
Use automation to see how your sales process works, so you can visualize how leads, opportunities, and deals move through your pipeline and their typical timescales.
Understand how your sales commission plan plays into the needs of the business and the revenue levels you’ll create based on historical and anticipated sales results. Use what-if scenario planning to decide the optimal commission model for your business. You can use it to create the multitude of sales commission plan templates your business will need and integrate them seamlessly into your territory and quota plans so you can ensure that your commission plans are viable and practical.
Get everything you need from the best practices of sales compensation to how to motivate your team with our Ultimate Guide to Sales Compensation.
How Do you Translate this Approach into Your Sales Commission Planning Model?
At the end of this process, you’ll have a detailed picture of the revenue intelligence that shows how your customers buy from you, what the sales cycle looks like in detail, and offers a clear picture of their buying channels. You’ll understand which companies, segments, and sectors buy from you and which can potentially buy from you. You’ll know how long it takes to convert new business and how long it takes to upgrade your existing customers. You’ll understand what compelling events are most valuable to you, whether it’s a significant discount or a significant market event, for example.
You’ll also know what your quota and territory plans will need to be, based on your business growth objectives, so you begin to align the needs of the business, the needs of your sales team, and the market opportunity. The smart move is to do this simultaneously, using the same data.
Out of this work will come your sales commission planning templates, which – through the power of automation, allow you to create and manage as many different sales plans as you need – by role, by geography, or by sector – whichever you wish.
The outcome of this analysis might generate some interesting options. As well as your traditional base plus commission models, you might have revenue recognition models that allow deals that a salesperson influences to achieve quota recognition and commission, as well as the more traditional deals closed directly.
Maybe you’ll pay your account managers for securing meetings with a broader array of decision-makers rather than sticking to the handful they normally engage with. Maybe it makes sense to pay your account managers to get your newer products on an approved supplier list.
Maybe you want to pay your business development executives an extra bonus when a deal they developed closes, as well as when they pass it on to the sales team.
The ultimate list of commission variables will depend on how your customers buy, but at least you’ll know what the right options will be to secure those shorter sales cycles and the more substantial deals.
So, what do you do next?
Keep the momentum going by downloading our free guide on How to Future-Proof Your Incentive Compensation for insights on how you can deliver this type of customer-driven commission planning approach.