Executive summary:
TL;DR there are broadly two categories: deal-based and invoice-based components.
If you’re gunning for growth at all costs, pay only on deals. If not, have a combination of both.
Regarding factors to incentivize, sales incentives can be broadly categorized into two main types: deal-based and invoice-based.
Deal-based factors involve paying out commissions to sales representatives before the money from the sale actually comes in. This approach is often crucial in motivating the reps to pursue closed-won deals, as the promise of immediate rewards can be a powerful incentive.
On the other hand, invoice-based factors provide more stability and cash flow to the business, as commissions are paid out only when an invoice or cash is received. This ensures that the company is incentivizing based on actual revenue generated.
If you want to explore when to use either of these factors in more detail, check out our eBook.
Deal-based factors:
Deal-based factors in sales incentives revolve around variables related to closed deals.
Deal Amount
This is one of the most straightforward factors. The higher the deal amount, the higher commissions should be. This can be structured using a tier-based system, where different commission rates are set based on specific deal amounts.
By aligning incentives with deals, you can motivate your sales reps to pursue more lucrative deals, driving growth.
Logo type
Another important aspect to consider is the type of logo. The kind of logo can play a significant role in the company's growth potential and customer base. Different logo types should be incentivized differently to reflect their varying impact.
By tailoring the incentives based on logo types, sales teams are encouraged to prioritize strategic deals that can potentially drive long-term success for the business.
Number of products sold
In addition to deal amount and logo types, the number of products sold is another crucial factor that can be incentivized in sales programs, especially for businesses offering multiple products or product lines. Generally, the more products a sales rep sells, the higher their commissions should be.
However, there are cases where the sales emphasis needs to be placed on a particular product line. In such instances, commission structures can be tailored to incentivize improved sales performance specifically for that product line. This could be due to the product being new to the market or requiring a boost in sales.
Products vs. services
Many companies offer a combination of products and services. It's important to recognize that these two components may have different unit profitability, requiring distinct incentivization approaches.
In hardware sales, the profitability of products is often lower compared to services. Consequently, commissions on services should be set at a higher rate to ensure sales reps prioritize and promote these offerings.
On the other hand, in software sales, products tend to be more profitable than services. Therefore, it is appropriate to structure incentives to reflect the higher profitability of products.
By aligning commission structures with the relative profitability of products versus services, you can effectively motivate your reps to drive sales in a manner that optimizes overall profitability.
Invoice-based factors
There are variables based on invoices that you can use to determine commission payments.
Payment terms
Payment terms encompass various aspects that can incentivize. For instance, incentivizing upfront payments can improve cash flow for the business, making it beneficial to offer higher commissions. In scenarios where payments are staggered, it is essential to define the parameters on which you’d pay the commissions. This ensures clarity and fairness, incentivizing sales representatives.
By incentivizing these invoice-based factors, businesses can gain more predictability and stability in expected revenue and effectively align their commission structures with their cash flow needs.
Multi-year components
In deals that span multiple years, your reps have effectively secured revenue for the company over an extended period, and they should be incentivized accordingly - rightly so.
There are various ways to incentivize multi-year deals. Commissions can be paid when booking the deal, recognizing the long-term commitment and value the sales rep brings.
Alternatively, commissions can be structured to be paid out at the start of each subsequent year, reinforcing the ongoing relationship and providing incentives for continued account management and customer satisfaction.
You can motivate your reps to pursue and nurture long-term client partnerships by incentivizing multi-year deals, ensuring immediate and sustained revenue growth.
Wrapping Up
In conclusion, it is important to balance motivating sales representatives and keeping the compensation structure manageable when designing a comprehensive sales incentive plan.
By selecting a limited number of factors, you can provide clear and meaningful incentives to their sales teams. Too many factors can create complexity and confusion, diluting the impact of the incentive plan.
By carefully selecting and prioritizing the factors that best reflect the company's priorities, sales leaders can create a streamlined and effective compensation structure that drives results and motivates their reps to excel.
