We do about $1Mil in sales for our SaaS B2B product. The average deal size is $3-5K, however we have smaller deals for less than $1K and larger deals of $10-15K.
To make things worse, we have both monthly and annual subscriptions, so have to deal with compensation for recurring payments.
What are the best practices for setting up compensation for inside sales in this environment?
I'd highly recommend that you read http://saastr.quora.com/. Jason has written extensively on this subject and knows of what he speaks.
Good question. A few comments on sales comp and SaaS.
The comp plan should be tied to desired rep behaviors and outcomes. Pay the most for the things that are best for the business (ie. larger deals or higher profit deals) and less for things that are not as critical.
Keep the plan as simple as possible, as that will ensure the reps focus on what matters most to the business. At the simplest end of the spectrum you have one commission rate on all revenues, then at the other end of the spectrum you have different rates on different products and services. The latter requires a commission guide to decipher and reps will default to what either pays the most or is easiest to close which is not always aligned with business goals. A good balance is often a straight line commission plan with accelerators at various thresholds and special incentives for deals that are highly desirable for the company. In my experience, if the rep can't forecast their commission check in their head, the plan is too complicated.
When it comes to SaaS deals, often commissions are front end loaded - ie. reps are paid only on the upfront contract, first year's revenue, or the the commissions on revenues decline over time. This keeps the sales person focussed on acquiring new accounts vs living on existing accounts.
Hope this helps. Good luck!
PS - congrats on getting to $1M. It is the minority of start-ups that get there.
It all depends what kind of deals you want to attract. It is healthy to have a good mix between smaller and bigger deals. Bigger deals are often more time consuming and from a risk perspective quite dangerous. I have seen many companies go bust because they lost their biggest client. Revenue is a bit like a layercake. You want some bigger deals and lot's of smaller ones. The bigger deals are your spungecake layers and the smaller ones are your filling.
I would therefore suggest to pay out a fixed fee whenever a small deal is signed (this will incentivize your salesforce to sign the small deals that you need to decrease revenue volatility and not waste their time on very big deals). At the same time you do want to reward signing bigger deals. All deals big and small should therefore count towards a set revenue target. The trick here is to implement ramps, decelerators, and accelerators. No compensation is payed out when all deals combined remain under 60% of the set target, from 60-100% of target your compensation follows a linear function, from 101% you pay out following an exponential function.
I'm happy to schedule a call with you to discuss all this in more detail. Do not hesitate to contact me.