Let’s look at an example.
If an integration sales person sells a $50,000 system at 20 percent blended margin, they create $10,000 in gross margin and will make somewhere between $750-$3,000 on that single sale depending on their specific comp plan. Given that a successful integration sales professional sells more than $1,000,000 and likely closer to $2,000,000 and beyond, that provides a solid opportunity to earn.
Now, let’s look at a $2,000 a month recurring revenue sale at 30 percent margin. In this case the sales person creates $6,000 in profit over a year and their compensation will range from $375-$1750 for the year. If you are trying to make a similar income to the first example you would need to sell 30-40 subscriptions of this size per year.
Making Compensation Work for Recurring Revenue
As you can see, the recurring compensation on a per deal basis doesn’t work particularly well when it is rolled into legacy comp packages. Albeit there is one thing not being considered and that is the residual building that sales pros can create as they roll into year two, three and beyond. So really the issue is how does the sales person build a base of recurring revenue that turns into a residual much like a financial services or insurance professional?
The key is modifying the compensation to reward greater amounts for signing the recurring revenue, with a greater payout over the first year of the contract followed by a residual percentage over the life of the customer.
Related: Counterpoint: Disagreeing with Taking the Margin Out of Product
Let’s take a look at how this can work.
On the same $2,000 a month sale, a more favorable compensation may be 30 percent of first months revenue plus 10 percent of the monthly for the first year, followed by five percent thereafter. Therefore the sales person makes $3,000 over the year on that particular sale and then makes $1,000 per year moving forward. On the same sale the company makes $4,200 for the first year and then makes $6,200 a year as long as the contract stays in tact.
If the sales person can blend in 10-15 of these types of sales per year moving forward (in addition to continued sales of integration services) they can augment their revenue substantially with first year payments (30-45k) and ongoing residuals of 10-15k per year. All the while creating all the profit and cash flow benefits of recurring revenue for the organization.
Of course every organization, including yours is slightly unique, there are ways to build recurring revenue programs that are good for sales people and management alike, it just takes a little work to get there. But once it is done, everyone wins!
