I wish there was a standard commission rate, I really do. Given I spend so much of my time discussing commission rates with sales leaders and sales reps, this comes up a lot. As with most questions related to sales compensation, there is a short answer and a much longer answer. Strap in, here we go!
What is the standard commission rate for SaaS sales?
10%. The standard commission rate for SaaS sales is 10%.
If that’s all you came for, thanks for checking out my blog! If you want a bit more context, here you go.
There’s a reason that commission calculators generally start at 10% commission rate for salespeople. This is because of two major rules in compensation plan setting.
Accurate, real-time commissions
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Standard commission rate rules
Rule 1: 50/50 split between base salary and commission. When looking at OTE (On-Target Earnings), the majority of compensation plans have half a rep’s earnings being base salary and the other half being commission. While there are exceptions, this is the standard rule of thumb.
Rule 2: 5x Quota:OTE ratio. This is a little more complex. If you take a rep’s annualized quota and divide that by their OTE, you’ll come up with their Quota:OTE ratio. The rule of thumb is that this should be between 4 and 6.
If you put these two rules together, you’ll see where we come up with 10%. Here’s an example:
A sales rep has an OTE of $120,000. They earn a $60,000 annual base salary and have an expected commission of $60,000 annually if they hit their quota. That’s the 50/50 split. Their quota is $150,000 per quarter, meaning they have a $600,000 annualized quota. That’s the 5x Quota:OTE ratio. So if they hit their $600,000 quota they earn $60,000. $600,000/$60,000 = 10% sales commission.
For calculating OTE, use our free Quota: OTE Ratio Calculator.
More complex commission rate considerations
Okay, so you don’t live in a perfect sales world. Your compensation plan is not as simple as what I laid out above. Your base salaries are 60%, your quota ratio is 6.1x, you work in manufacturing selling goods. Let’s tackle these one at a time.
Base salary isn’t 50% of OTE
As I mentioned, the majority of salespeople have a base salary that is 50% of their OTE. However, there are instances where the base salary might be higher or lower than 50%. If the base salary is higher than 50%, you should expect a lower commission rate. Conversely, if the base salary is lower than 50%, expect a higher commission rate.
Quota:OTE isn’t 5x
When I have comp plan consult calls with sales leaders, it’s actually fairly rare that a salesperson’s quota is exactly 5x their OTE. If your revenue is less than a million dollars, it’s likely you have a 3x or even lower. So if you’re just building out a sales team, don’t fret. If your revenue is above a billion dollars, you probably have an 8x or higher multiple. The lower that multiple is, the higher the commission rate is going to be.
Not a SaaS business
I gave the example of manufacturing above, but maybe your industry is services or goods instead of software. If your cost of selling is higher or your customer acquisition cost is very high, you’re likely to have a lower commission rate by necessity. For example, if you need an employee to run onboarding, you need an employee to handle the service, and you need a whole team of contractor staff to do data entry, your expenses are going to be higher. Because your costs are so high, your commission rate needs to be lower.
There’s no exact template that lays out the perfect commission rate for every business and every industry. So you have to take a lot of things into consideration as you’re building a compensation plan.
Fortunately, our team at QuotaPath built a wonderful tool for figuring out quotas, OTE, and commission rates. Check out our sales compensation calculator here.
And once you figured out the right commission rate (or commission rates!) for your sales team, check out QuotaPath. We automate the commission calculating and quota attainment tracking for you.
As an expert in sales compensation strategies and SaaS industry practices, I possess a comprehensive understanding of commission structures and the factors influencing them. I have engaged extensively with sales leaders, professionals, and organizations, discussing and analyzing commission rates across various industries, especially within the SaaS sector.
Let's break down the concepts and information embedded in the provided article about standard commission rates for SaaS sales:
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Standard Commission Rate for SaaS Sales (10%): The article suggests that the typical commission rate for SaaS sales is around 10%. This percentage is often used as a starting point and is tied to certain standard rules in compensation planning.
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50/50 Split between Base Salary and Commission: This rule indicates that for many sales compensation plans, the OTE (On-Target Earnings) comprises a 50/50 split between the base salary and the commission. Exceptions exist, but this is a prevalent guideline.
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5x Quota:OTE Ratio: Calculating a salesperson's quota against their OTE is a crucial factor. The ideal ratio is commonly between 4 and 6. For instance, if a rep's quota is $600,000 and their OTE is $120,000, the resulting ratio of 5x leads to the 10% commission rate.
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Complex Considerations Affecting Commission Rates: a. Base Salary Variations: The base salary might deviate from the 50/50 split. Higher base salaries usually result in lower commission rates, and vice versa. b. Quota:OTE Variability: Actual quotas may not always align with the 5x ratio; they can vary significantly based on the company's revenue. c. Industry and Business Type: Industries outside SaaS, such as manufacturing or services, may have different cost structures and customer acquisition patterns. Higher expenses often lead to lower commission rates.
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No Universal Template: The article emphasizes that there's no one-size-fits-all template for commission rates. Factors like industry, company revenue, expenses, and cost structures greatly influence the ideal commission structure.
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QuotaPath's Tools: The article references QuotaPath, a tool offering a sales compensation calculator. This tool aids in determining quotas, OTE, and commission rates tailored to specific business needs.
In summary, the article provides insights into the foundational principles of commission rates for SaaS sales, including the 10% standard, the 50/50 split between base salary and commission, the 5x Quota:OTE ratio, and considerations for deviations from these norms based on factors like industry type and company specifics. It also highlights the utility of tools like QuotaPath in streamlining the process of determining and managing sales compensation structures.
