Learn about the five most common commission or incentive models for software sales:
- Commission-only
- Base salary plus commission
- Profit-based commission
- Tiered commission
- Residual commission
Also, look at a few proven tips to set your own commission rate and create a software sales commission structure.
Selling requires people skills. However, selling software requires people and technical skills.
For a company to find good, committed sales reps who have either of those skill sets is hard enough. To find reps who have both … is like rolling a hard eight at a craps table.
That’s why software firms do everything they can to identify, hire and retain the best of the best — which includes paying top dollar for top talent.
In this article, let’s look at the five most common commission models for software sales, and the average salaries for different sales roles. I’ll also provide some tips for creating your own software commission structure, including how you can determine your commission percentage.
Top 5 Software Sales Commission Structure
A software sales commission or incentive is a type of compensation where sales reps are paid commissions for selling company software to clients in various markets. These clients could be other businesses (B2B) or end users (B2C).
Now, let’s look at the five types of commission models commonly used in software sales.
Commission-only model
The commission-only model is also known as the straight commission model. Here, sales reps only earn money when they make the firm money. If they sell nothing, they earn nothing.
Given the risky pay structure, commission rates in this model tend to be higher than those in other models.
While the commission-only model is undoubtedly aggressive, it does suit certain kinds of sales roles, such as channel partners and sales agencies. In these cases, you can skip the base pay/fixed salary and only pay commissions.
Base salary plus commission model
Almost every software firm you come across has used or is using this model.
Sort of like the gold standard!
The base salary plus commission model involves a fixed component (base salary) and a variable component (commission). This model suits most companies and reps. It allows companies to budget their expenses well. And it offers reps some financial stability, plus the incentive to sell.
For example, Sally is an Account Executive at a SaaS firm that sells ERP software. Her salary breakup is as follows:
- Base pay: $70,000
- Commission: $40,000
- Quota: $5,00,000/yr
In the above example, Sally will get her base pay of $70,000 no matter how well she performs. But if she wants to take home that neat $40,000 commission as well, she will need to meet quota, i.e., sell $5,00,000 worth of ERP software in a year.
Profit-based commission model
Unlike most models that offer commissions on revenue, the profit-based commission model only considers the profits made on a sale.
For example, a software firm with a varied product portfolio might offer its reps a fixed 15% commission on the profits from each sale. So, if rep A sells CRM software for $30,000, and the profit on that sale is $20,000, rep A will earn $3,000 (15% of $20,000) in commission.
Companies like this model because it:
- Discourages reps from giving very high discounts.
- Encourages reps to close high-value deals that have higher profit margins.
- Allows companies to budget better since they pay commissions on profits, not revenue.
Tiered commission model
In the tiered commission model, reps who make quota (hit their annual targets) are incentivized to sell more through higher commission rates.
So, let’s take the same example as that of the base salary plus commission model.
Here, Sally’s commission rate per deal is 8% (40,000 / 500,000 * 100).
But what if Sally makes quota within just eight months?
What motive does she have to sell for the remaining four months?
Short answer: She doesn’t!
This is where a tiered commission model can help.
If Sally was on a tiered commission model, her commission structure might look something like this:
As you can see, tiered commission models help keep your overachievers motivated by always giving them the incentive to sell more.
PS: The increased commission rates post 100% quota attainment are known as accelerators.
Residual commission model
A residual commission also known as recurring commission model incentivizes reps to retain old clients by offering them commissions on product renewals.
This model is mostly used by subscription-based businesses like digital streaming platforms and cloud storage providers, where a majority of the customer’s value is realized after they sign up.
This model can be easily combined with any of the above models.
Note: This model should only be used if your sales reps are actively involved in customer retention after the deal is closed.
3 Proven Tips for Creating a Software Sales Commission Structure
Here are three tips for you to keep in mind when planning a commission structure for your sales team:
Define your business goals
The best sales commission structures are those that align sales efforts with company objectives.
Some common business goals a software sales team might work towards include:
- Maximizing upfront payments.
- Signing long-term contracts.
- Increasing product renewal rates.
- Improving customer satisfaction.
- Generating referrals from existing clients.
Work within your budgets
While chalking up your commission structure, it’s a good idea to keep your finance and accounting teams in the know.
So, if you’re planning on including a spiff or prefer a base plus commission model, and cash flow is tight, it’s better to go for a commission-only model.
This will ensure things run smoothly across departments.
Use clear and precise language
Your commission structure should be clear enough for reps to know exactly what they stand to earn if they hit, miss, or exceed their targets.
How do you ensure this?
Through simple and concise language that sets clear expectations for your sales team. That means no fancy words, no complicated tables, and definitely no confusing phrases. You can communicate via a publicly accessible sales commission plan document.
How to Determine Your Ideal Commission Rate
Average commission rates for software sales range anywhere between 8-12%.
However, here are the five key factors you should consider when setting your own rate:
Competitor rates
What sort of commission rates are your competitors offering?
You don’t have to copy them, of course.
Their commission structures might be different from yours, but it’s always good to know what the competition is up to.
Contract length
With subscription-based services, you ideally want customers to commit for the long haul. But getting them to sign a one, two, or multi-year contract is no mean feat.
That’s why it’s a good idea to offer higher rates to reps who bring in long-term clients.
Sales cycle length
The shorter your quota term, the higher your commission rate should be.
That’s why companies with shorter sales cycles (<45 days) often set monthly quotas. And those with longer sales cycles (>90 days) set quotas every quarter.
Upfront payments
If you’re selling software of high contract value, your clients will likely want a staggered payment schedule with a modest initial payment.
In such cases, you should consider offering higher commission rates to reps who bring in larger upfront payments.
A-Listers
Sometimes it’s not about how much a client is paying you, but the client themselves.
For example, in the tech space, every vendor would love to boast about having an Apple or a Google in their client list, no matter the size of the contract.
Your industry likely has its own A-listers. If you want those A-listers on your roster, you should consider offering higher commissions to reps who rope them in.
Wrapping Up
The software industry is a different beast altogether.
Product trends change and markets evolve at a far quicker pace than more traditional industries like manufacturing or retail. That’s why you need to always keep your eye on the ball when it comes to your commission or incentive strategy.
If your reps aren’t happy, or if something isn’t working the way it should, make the changes that need to be made – and make them pronto.
Because if you don’t, your best guys will get poached before you can say, ‘Let’s go to market!’
