#17: Your Perfect Sales Comp Starts Here
Sharing thoughts, examples, and benchmarks to assist you in building your sales team with less friction and succeeding in growing your agency.
People didn't respond well to my previous email about the sales career ladder; it only achieved a 47% open rate compared to the average of 52%. Is it sales you don't like, or have you just grown tired of me?
When working on a sales compensation structure, ultimately, it depends on the following factors:
Your ACV (Average Contract Value)
Your SC (Sales Cycle)
Your CR (Closing Ratio)
Your LTV (Lifetime Value)
Your CPD (Cost Per Deal)
All metrics, including ACV, SC, CR, LTV, and CPD, reflect your industry, payment model, and engagement types.
If you are working on it right at this moment, it’s a great time to review several previous newsletters that are focused on developing payment models and engagement types, which ultimately reflect how much money you make and can spend.
Sales Volume
One of the very important factors that affect sales compensation:
High volume sales (Low ACV, short SC, high CR, low LTV, low CPD)
Average volume sales (Average ACV, average SC, low CR, high LTV, average CPD)
Low volume sales (High ACV, long SC, high CR, high LTV, high CPD)
Typically, #1 ‘High volume’ sales cater to small businesses, #2 ‘Average volume sales’ focus on mid-size companies, and #3 ‘Low volume sales’ target enterprises.
Agencies usually drift in the transition:
From #1 high volume sales (for small businesses) to #2 average volume (to mid-size businesses)
From #2 average volume (from mid-size businesses) to #3 low volume (to enterprise sales)
If you have all three types instead, this usually means that you:
Don’t take advantage of your buyer personas
Are too spread out
Have sales compensation that is either too low or too high
All of this is definitely worth optimizing.
If you're uncertain about which sales category best describes your business, the following table serves as a benchmark, illustrating the relationship between key metrics to help you identify your position:
High Volume Sales
Low ACV: <$3,000
Short SC: <30 days
High CR: <25%
Low LTV: <$10,000
Low CPD: <$200
Average Volume Sales
Average ACV: <$10,000
Average SC: <6 months
Low CR: <10%
High LTV: >$50,000
Average CPD: >$500
Low Volume Sales
High ACV: >$15,000
Long SC: <12 months
High CR: <20%
High LTV: >$100,000
High CPD: <$1,000
According to Indeed, ZipRecruiter, and Glassdoor, the average baseline for Sales Executive total compensation is provided below. (This table gives a fair overview of the average compensation for SEs in professional services as well).
In fields like marketing services, advertising, branding, software services, IT, etc., Sales Executives often want earnings comparable to tier-1 tech sales, which presents a distinct set of challenges for happening:
Tech sales are characterized by high LTV and low churn. If an SE earns $150,000-$200,000, their KPI should be generating at least $1M in revenue/year (5x their salary). With most clients continuing into the 2nd, 3rd, and possibly 4th year, churn is typically <5%. Tier-1 tech companies might have high acquisition costs but offer low support costs.
VC-backed tech companies may have more leeway to spend, as they're investing capital to spur growth.
However, in the professional services mentioned above, the churn rate exceeds 10% or around that level, the average lifetime (LT) is around 12 months, and the cost of service (COS) is five times higher than tech maintenance costs, reducing the spending fraction compared to tech clients.
As a result, Sales Executives in professional services tend to earn less on average but report much higher satisfaction levels, as they witness the value creation for clients more directly and rapidly.
Sales Commission Conundrum
When deciding on the exact percentage for Sales Executives (SEs) to earn from a sale, consider the following:
What's the total Customer Acquisition Cost (CAC) of the Average Contract Value (ACV) or Lifetime Value (LTV) that I'm prepared to spend?
(Refer to my newsletter on Financial Planning for more details)
How will the CAC be allocated between marketing and sales?
Is adjusting the spending a company objective, and how will it influence growth?
Your ability to allocate between 10% and 30% of your total revenue to sales and marketing depends on your agency's current stage, competitive landscape, and growth rate. Typically, the distribution is 30%-40% to sales and 60%-70% to marketing.
The fundamental rule is: without investment in sales and marketing, there's no growth. The amount you're willing to invest dictates your growth pace. Finding a healthy balance between achieving up to 20% month-to-month growth with optimized associated CAC is what I personally recommend.
Many agencies establish a linear percentage of sales as the main commission for their SEs. For example, an SE with a base salary of $60k/year could earn an additional $40k/year in commissions, which equates to 5% of the LTV at closing. This sets the total sales cost at 12% of the LTV for such agencies. However, this linear commission allocation can become problematic over time since with increase in sales or pay, you’ll be spending the same 12% LTV. This often leads sales managers to revisit and revise the sales compensation every 6-12 months.
Sales professionals reading this will agree that frequent changes in compensation create uncertainty and negatively impact motivation. While adjusting compensation once every 12 months is well acceptable, if the optimization reduces the percentage of the commission, it will likely meet resistance from the sales team, complicating adoption.
Let's explore this compensation simulation together to arrive at a logical conclusion and discuss a broader concept I want to share with you today.
Compensation Simulation
My current MRR is $100K. With a churn rate of 10%, that's a loss of $10K/month. To achieve a growth target of 20%, we need an increase of $20K for the next month. So, to jump from $100K (factoring in the $10K churn) to $120K (adding $20K in new revenue), we require $30K in new revenue.
Imagine we're a content agency charging $10K/mo per client. This means we need 3 new clients to meet our goal. With an ACV of $10K, we fall into the “#2 Average Sales Volume” category, which involves up to 6 months for sales closing, a closing rate of about 10%, and an opportunity cost of more than $500.
By the calculations, to close 3 new clients, we need to invest in 30 opportunities, costing $500 each. This equates to a $15K marketing expenditure to acquire leads, aiming to close $30K in new revenue monthly. Here, you're already allocating 50% of your monthly revenue towards marketing. What about sales?
Handling 30 opportunities is a realistic workload for a Sales Executive (SE), and closing 3 deals is a feasible KPI. If they're in the “75th percentile”, making $100K/year or $8.5K/month, that's an additional 25% of your MRR from the $30K earned, leaving you with only 25% of revenue from your initial MRR. Considering the cost of service (COS) and associated costs for servicing this client - if you're a high-end content agency charging $10K/month - then you're looking at about 50% COS and an extra 25% in direct and indirect costs, totaling another 75% on top of the 75% spent on Customer Acquisition Cost (CAC). This results in 150% expenditure in the first month. Assuming your client stays for 9 months and you break even by month 3, from month-4 through 9, you can start to see your 20%-30% profit margin.
All looks good with this hypothetical exercise; however, in reality, there is a very high chance that:
With an average sales cycle of up to 6 months, you need to consistently invest in marketing to generate these leads, although they might not close at the percentage you want.
You might need more than $15K to acquire 30 opportunities, even if you outsource with someone like Belkins.
Your SE might not close 3 deals but 2 instead, or close nothing.
A 9-month LTV is a great balance, but I know lead gen agencies that have a 3-4 months LT, or those that work with even shorter terms.
In this scenario, you might never see the desirable profit margin, and your break-even point may never be reached.
What do you want to do to secure yourself?
You want to acquire leads/opportunities at a lower cost than >$500 per unit, the key here is over time. This means consistent investment in your marketing.
You want your SEs to convert more deals (higher CR) or spend less time closing (shorter SC), also over time.
Only if you optimize your CAC over time will you be able to reduce the risk of not reaching the break-even point or generating enough margins.
In my two previous newsletters, #15 and #16, I talked about designing sales systems to move in the direction of sales optimization.
The Big Takeaway
The linear compensation (same percentage) that most companies have for Sales Comp. doesn’t work over time, as whatever CAC percentage you set up today won’t lead you to optimization and usually will drag you down.
What’s the solution, then?
Use your current comp. as a starting point but build a system that optimizes itself over time, to reduce CAC in the LTV percentage.
It took us nearly seven years to come to this realization, and only recently have we begun to implement a system in the sales department designed to gradually reduce costs based on the Sales Executive level (S1-S5).
With five levels (note: the following are hypothetical, not actual Belkins figures):
S1 - Junior Sales Executive: <5% closing, 3-month cycle, 3% commission
S2 - Junior Sales Executive: <5% closing, 3-month cycle, 3% commission
S3 - Mid Sales Executive: <8% closing, 2-month cycle, 4% commission
S4 - Mid Sales Executive: <8% closing, 2-month cycle, 4% commission
S5 - Senior Sales Executive: <10% closing, 2-month cycle, 5% commission
Linking these S1-S5 levels to ACV, SC, CR, LTV ensures that as individuals progress through each level, they earn higher compensation, yet overall CAC is reduced as improvements in these quality metrics significantly impact marketing and sales expenses.
The sales career ladder system described in the previous newsletter will also assist you in visualizing the metrics, forecasting, and actual budget spent on CAC.
At Belkins, by adopting a similar system, our objective has been to decrease CAC investment from 30% to 20% over time while maintaining our typical growth levels.
Commission Ratio
Many reading this must have asked themselves: what’s the % of the total comp that would be okay for a sales role? 30% base / 70% commission? 40%/60%? or 50%/50%?
To balance your cash flow, it will depend on the type of sales volume that I’ve mentioned earlier in this newsletter:
If it’s high-volume sales (low ticket size and short sales cycle), then a successful SE could make up 50% to 70% of the total comp with the commission. (paid from the entire contract closed)
If it’s an average volume sales (average ticket size and 3-6 months closing), then 50%/50% or 60% base and 40% commission is preferable. (paid from MRR or the whole contract)
However, with low-volume enterprise sales, you should be aiming for 70% base and 30% commission, as it would take considerable time to get anything close. In this scenario, the commission can also be modified to add a small % over time from LTV, the next client purchase, or any other incentives to keep the “enterprise sales exec. happy”.
Thank you for reading From Zero To Agency Hero!
good one, I like sales especially sales ops