The technology industry, and specifically software, continues to grow at a rapid rate. According to Gartner, the software market is expected to reach more than $1 billion by the year 2025, with business-to-business sales being a primary driver of this market. This is because businesses are beginning to rely more on software to provide efficiency to their operations by automating tedious and time-consuming tasks.
Buying software can be a large investment for any business, and because of this, they will dedicate a significant amount of time to research, compare, and vet a variety of software before making a decision. To match this consumer energy, most software companies divide their sales efforts into different roles in order to maximize their lead conversions while maintaining relationships with current customers. Business development representatives, account executives, and customer success managers all have their hands in the sales process and can earn incentive based-earnings such as bonuses and commissions as a result. Each role is focused on a specific aspect of the sales process and therefore their pay is determined based on the sales actions that they perform.
Who is Paid Commission?
There are three main roles involved in software sales that receive commissions. These include:
Business Development Representatives: At the top of the sales funnel, business development representatives are responsible for lead generation, cold calls, networking, and continuous follow-up with prospective customers. Because they have less influence over the actual sale, their commission earnings make up a much smaller ratio of their total take-home. They are typically not paid on revenue generated, but instead, they are paid based on how many meetings or appointments that they are able to schedule each month.
Account Executives: In the middle of the funnel are account executives, who are responsible for closing deals with new customers. At this stage of the buying process, customers are focused on research, so it is important for sales reps to have extensive knowledge of product features and capabilities as well as a well-rounded understanding of each customer’s unique needs. Since account executives are directly involved with signing new customers on, commissions are a primary source of income for them. Account executives generally earn commissions off the annual contract value (ACV).
Client Success Managers: After customers have converted and subscribed to the product, a client success manager is responsible for doing regular check-ins with customers to ensure that they’re happy and satisfied with the software and services that they have purchased. They continue to provide guidance and support to customers throughout their subscription. Client success managers are also responsible for upselling products and services to a customer’s existing contract. In this role, commissions stem from contract renewals and expansion commissions.
Commissions Structures for Software Sales
The sales compensation structure for business development representatives, account executives, and client success managers varies based on the type of software, the fee model for the software, where the company is located, and many other variables. Below are some of the common ways that commissions can be structured for software sales.
- Base Salary and Commission: In most cases, companies will pay a base salary with commissions being an additional source of income. According to PayScale, software sales reps can make anywhere between $35,000 – $109,000 before commissions and bonuses and can earn as much as $43,000 a year in commissions.
- Commission-Only Compensation: As one would expect, a commission-only structure is when sales reps only get paid when they make sales. In this scenario, reps do not receive a salary and their entire paycheck is made up of incentive-based earnings. This can be a more desirable structure for more seasoned sales reps who are confident in closing sales, but could cause income insecurity for newer reps who may not be able to make sales as fast.
- Expansion Commissions: Commissions earned from upgrades or add-ons are considered expansion commissions. It can be a good source of revenue and is advantageous for companies to devote time and resources toward nurturing their existing customers and upselling them on products and services to add their subscription.
- Residual Commission: Similar to other industries where customers have a monthly or recurring subscription fee, software sales reps earn residual commissions each time the customer makes a payment. Also known as recurring commissions, this type of commission structure rewards sales reps for maintaining customer relationships. The commission rate is usually lower than commission earned from the initial sale, but the sales rep will continue to earn commissions for as long as the customer remains a subscriber.
- Tiered Commission: Some companies may utilize a tiered commission structure as a way to incentivize reps to exceed sales quotas. The tiered structure is built around certain sales milestones that reps must reach in order to receive the higher commission rate. Each milestone achieved by the sales rep earns them a higher commission rate.
Additional Components of Software Sales Commission
In addition to the types of commissions outlined above, there may be other factors that contribute to the amount of commission a rep makes:
Accelerators: Quota attainment is an important aspect for sales reps in the software sector. When sales reps meet or surpass their quotas, they can become eligible for accelerators, which increase their commission rate.
Minimum Quotas: Because quota attainment is so important, some companies may choose to only pay commissions once a sales rep meets specific quota milestones. For example, reps may only be eligible for commissions once they reach at least 50% of their quota.
On-Target Earnings: Many software companies determine pay for their reps by calculating on-target earnings, which factors in base salary and commission. A ratio of 1:1 for on-target earnings is common in software sales, which would mean for on-target earnings of $80,000, a sales rep would have a base salary of $40,000 and would be expected to make $40,000 in sales compensation.
Commission Automation for Software Sales
Software sales is a growing industry and Core provides a scalable solution to automate your commission processes as your business grows. Core’s customizable sales compensation application has all of the tools you need to accurately calculate your reps pay, model your sales performance trends through reports and dashboards, and give your reps visibility to the components that make up their pay with access to our online portal.