Tom Ryan’s Four Ps of Sales: Finding the Compensation Breakeven Point

Four Ps 2016Now that we’ve established how sales compensation works, it’s time to get specific on the dollar amounts. What does a great salesperson cost? How much will it cost you to attract them, pay them what they expect, and deliver the right level of incentive to them on board? More importantly, what does this dollar amount mean as a percentage of each sale?

Let’s take a look at some examples of real-world sales compensation. I’ll be focusing on active selling, where the sales team’s job is to get out there and find prospects, and to turn those prospects into completed sales. This can mean anything from a phone-based process of generating leads and making cold calls, or it can be a field-based approach where the salespeople are engaging prospects face to face.

A good scenario to start with is hiring an inside sales rep. Once you have identified the need for this position, the next step is to get a good idea what other businesses are paying salespeople in similar positions. This means reaching out to other entrepreneurs and business owners who already employ the kinds of salespeople that you want to have.

In my home market of Asheville, NC, a high-quality inside sales rep will expect to see a base salary of at least $36,000. This is the minimum it will take to even start a conversation with someone who has the professional skill level needed to hit the ground running. Once you factor in the commission expectation, however, that number quickly goes up. All told, a great inside sales rep in my area expects to make about $50,000 per year.

Now comes a the big question: Can you actually afford them? In an earlier post, we talked about the total amount of sales you need to make in order for your business to be viable. Now it’s time to apply that same thinking to the individual salesperson. Salespeople only have one job — to sell — and we need to know exactly how many sales they need to make to pay for themselves.

Calculating this isn’t too painful. Let’s say you have a SAAS (software as a service) company aimed at the commercial real-estate market. It’s a specialized B2B product, and the average sale is an annual contract of $10,000. On your side of the deal, you have significant customer acquisition and licensing costs, and it ultimately costs you $4,000 to sell your product. The remaining $6,000 needs to cover a huge range of overhead expenses and other costs before you can even think about a profit, not the least of which is the cost of the salesperson.

How much of that $6,000 gross profit will ultimately need to go to the salesperson? You know you need to spend at least $36,000 just to get them on board, and they expect to make at least $50,000 by the end of the year. How much do they need to sell for this to happen?

Let’s look at this in the simplest possible terms. We already know that each sale is worth $6,000, so now all we need to do is divide that gross profit by the salesperson’s guarantee. This math is also fairly simple: $6,000 divided by $3,000 is 2. To make the minimum of $36,000 a year, they need to bring in $3,000 a month. In other words, this means making one sale every two months.

We’re not done, of course. The sales rep hasn’t actually paid for themselves yet, we’ve just established the absolute minimum they need to sell just to offset their own base pay. We have plenty of other expenses to take into consideration, including things like payroll and overhead. Not only that, but we haven’t even established the amount needed to get that salesperson to their actual annual goal of $50,000.

This means we need to re-run our equation, only this time we have a lot of other factors to take into consideration. These factors can include things like:

  • Commission: How much does the rep make on top of their base from each sale?
  • Overhead and business costs: How much of the sale needs to go to keeping the business open?
  • Average sales cycle: How long does it take to complete a sale?
  • Training period: How long will it take to get the sales rep up to speed?
  • Payment terms: Do you collect all your sales revenue up front or incrementally?

That’s just scratching the surface. Unlike the earlier example, the math involved here can quickly become very complex. Each of these factors have their own formulas, and most of them will involve a certain level of projection and estimation that will need to be revised.

It might turn out that the sales rep in our hypothetical SAAS company needs to make five sales a month to cover all the business overhead, pay for their own base salary, and generate enough commission to hit $50,000 a year. In another company with a different product, this might be 30 sales. In other industries, a rep who makes one big sale per quarter could be truly exceptional. It’s not a problem with a one-size-fits-all solution.

The good news is that this isn’t impossible stuff to figure out. It’s too complicated to cover all the possible variables within a single blog post, but it’s solvable if you’re willing to put in the time to crunch the numbers. And here’s another silver lining: Once you’ve created this equation for your business, it’s easy to adapt it and change as your business scales.

Knowing what to pay a salesperson isn’t the whole story. You also need to make sure you hire the right kinds of people to hit these carefully constructed targets. I’ll talk about that in my next post.