SaaS Sales Commissions: Better to Base on MRR or Bookings?
When it comes to sales commissions, you must always start with your strategic objectives. Then translate these objectives into your sales strategy and then sales objectives. And only after do you align your sales team’s incentives to the strategy and the objectives.
Salespeople tend to be one-track minded. For them, its all about making the most money with the least effort. So whatever direction you point them through sales incentives will be the direction they will go. In fact, if you design the incentives in a way that is not perfectly aligned with your objectives, you will most certainly miss those objectives (or at least not get the sales team’s support) — and you will only have yourself to blame.
Unlike other groups in your company, sales people are not designed to align themselves to corporate objectives… Unless their compensation is set up to do so.
So back to the question we started with.
Which is better: paying commissions on MRR or bookings?
Well, it depends on your objectives. Which is more important to your corporate objectives?
Typically, the SaaS businesses that should focus on driving MRR growth are ones where the offering is sold as relatively small transactions (and short sales cycles). In this case, licensing tends to be at a recurring monthly basis, where sales does not have to follow up on renewals (rather the product needs to please enough to prevent customer churn). These companies tend to be ones that sell to consumers or small businesses.
SaaS companies that should focus on bookings growth are ones where their offering is sold in relatively large transactions with long sales cycles. Licenses in this case tend to be purchased on an annual recurring basis, and annual renewals are significant enough to require sales team involvement. These companies tend to sell to the range of small business to very large enterprises.
I have oversimplified this answer quite a bit. The real answer starts with a clear definition of the economic model that best suits your company, the economic goals you aspire to, the licensing/pricing model that best suits your customer, and the distribution model that best suits your market. Once you’ve defined all these variables, you will have a clearer picture of how you should commission your sales team.