Forums: Discussions for entrepreneurs and small business.

So I`m writing my forecasting for sales and I`m trying to figure out how many calls and closing ratios in addition to compensation requirements. I`ve posted my questions below and I would love to hear any feedback :)

1) Selling a $2500 avg sale product with a 3-6 week sales cycle, what commission percentage is appropriate? I`m considering an 8-16% comm structure (the less discount the salesperson sells the product at, the higher of a comm they make) which would make the avg comm around 12.5% (a guess). Salespeople will have some leads to work from but will be expected to generate their own leads primarily. Does this percentage seem appropraite, too generous or too stingy?

2) Base pay required or a draw? Will I limit myself to only finding newbies if I go with a draw?

My guesstimations currently are to provide a $2500/mth base salary with the comm structure above along with a 75% salary bonus if the salesperson meets yearly quota. Total comp would be around $75 under this plan given my sales quotas.

Any feedback is appreciated!

Just to continue along the path of your numbers -

I infer that this is a one time sale per customer so:

at 12.5% commission, a person will need to make 240 sales in a year. That is one a day. Given a 6 week cycle, this translates into moving 30 active prospects through the conversion cycle.

In order to maintain this type of que - requires at least 25 new leads per week.

From my experience, if you set projections on these expectations - you may be disappointed with the results especially if this is an outside sales type situation.

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Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
http://www.bizgrowthmasters.com
info@bizgrowthmasters.com

Thanks for writing and thanks for giving some context to the numbers! If you will re-read my previous comments, to reach $75,000 would NOT require 240 sales. If they meet yearly quota, then only $25,000 of the $75,000 was truly in commission - the rest was salary ($30k) + quota bonus ($20k).

This means that a salesperson would need about 80 sales to meet yearly quota. With a 6-week sales cycle, this means running about 9 sales per cycle. My guess is that, to generate 9 sales in the 6-week cycle will require about 45 interested people. To get to 45 interested people would require  talking to  about 1.5 interested people per day (with a 20% closing ratio). To get to 1.5 interested people per day should require 30-40 calls/emails.

The above are my estimates/assumptions - does that make more sense?

And sorry that I didn`t include it before: there will be a percentage of renewal sales - I would estimate around 25% - and we have an existing client base as well. Salespeople will be expected, though, to generate new and renewal business from their own leads primarily.

Angola,

If one sales person makes 80 sales per year at an average of $2500 per, that will mean $200,000 in revenue to the company. Your projected annual compensation of $75,000 would be 37.5% of the gross revenue generated.

So let`s look at it another way.

1. How much compensation will you have to provide to each sales person - in order to attract "good" ones and keep them?
2. What is the gross profit (margin) on each sale?
3. How much of those dollars, can you afford to use to pay for the sales person?

 

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Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
http://www.bizgrowthmasters.com
info@bizgrowthmasters.com

Thanks again, robert, for your detailed reply :)

1) Good question - and one that I don`t know precisely how to answer. I chose $2500/mth because I felt that a a salesperson of modest experience would be comfortable with that figure as a base. I`m sort of struggling with what the figure *should* be to attract a quality salesperson though. I`m just not sure, give a $2500 product for a company that is still young but w/ a proven product, what the base should be. With a $2500 sale price and only 80 sales per year, I don`t believe I can afford a higher base than $3,000 per month (and I don`t want to go that high if I can get away from it). I want a base that attracts quality salespeople who do not yet have a ton of experience but will be hungry and haev a desire to learn the business.

2) We sell software and the gross margin is around 90%

3) I`m comfortable with 37.5% in a vaccuum - if that was all there was - but I`m thinking that there will be other significant costs associated with this process. I plan on sending them to conferences - which will cost me quite a bit - and helping them with lead generation in whatever ways that I can. All of that will get chalked up to marketing costs, I feel, but still it is support for this salesperson. If I pay 37.5% of gross sales to one salesperson and then spend another $12,500 directly supporting this salesperson throughout the year, then my cost basis is $87,500 or 43.5%. Adding in benefits adds another $5000 so total comp equates to 46.25% of revenue goes towards supporting this salesperson who brings in $200,000. If I add in training costs - sales training - of another $3000, then my base cost of this employee is 46.75% of the revenue they bring in.

Your last point makes me wonder whether my expectations are way off: do you think 37.5% is too high of a number? I`m a software guy so thinking about this type of thing is all new to me :) Here I am thinking that 43.5% is fine but someone with more experience may look at that number and see that I have operating costs and other costs and that I`ll never do anything more than breakeven if I give up that much. After all, there will be employees who do not directly bring in revenue ergo this person`s revenue generation must go towards those salaries as well.

Help :)

Here are questions that I am internally struggling with:

   1. Given a $2500 sales price and a 6-week cycle on a 90% gross margin product, what commission percentage range is correct given a $2,500 base salary? I want a happy salesperson who will be loyal. I want to pay this person well and I want them to feel the company will help them in whatever ways that they need. I felt a range of 8-16% was appropriate - retail price sales get 16% of commission and, the more discount you give the customer, the lower your comm.
   
   2. As a salesperson, would you prefer a higher base salary and lower commissions or vice versa? I have my assumptions but I`d like to hear from others. I could lower the base to $0 and give a 30% commission for example but I felt, initially when I was determining this model, that to attract a top quality salesperson would require a base. Maybe I`m wrong?
   
   3. Would a salesperson for a startup expect/require benefits? For my first saleperson, I want to hire this person - not use an independent - and I feel that a basic benefits package would be attractive.
   
   4. I have equity at my disposal as well however, in targeting a salesperson who will only bring in $200,000 of business per year, I didn`t think it was necessary. If I was looking for a salesperson who could bring in $500k+ then I would consider equity as a "If you meet your quota, you`ll earn x% equity". Thoughts?
   
I`m just at the beginning of writing my business plan and trying to get all of this right. Will my product actually sell for an average of $2500? Dunno - I think so based on past sales but, once a "real" salesperson gets on board, things could go higher or lower. Will a salesperson be able to make 80 sales? Dunno - I`m trying to set an attainable quota that makes the salesperson want to work hard yet still is profitable for the company.
   
I`m so new to all of this so any advice thoughts that anyone has are appreciated. I`m just trying to wade my way  through the basic startup decisions of how to hire and compensate my first salesperson. I really appreciate any and all help/feedback!

angola,

You`ve got a lot to consider as you develop your business model and plan.

Bear in mind that (in my opinion -from experience) the more "non-sales" things you want /expect them to do - the higher the base that will be needed.

I would determine what amount of compensation (total) is appropriate for your area. If you are planning to hire outside sales people - you will probably need them to generate considerably more than $200,000 in annual revenue.

-------------------------

Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
http://www.bizgrowthmasters.com
info@bizgrowthmasters.com

Thanks, Robert :)

Glad I could help.

You`re welcome to contact me privately, if you want to delve into the specific details of your situation.

-------------------------

Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
http://www.bizgrowthmasters.com
info@bizgrowthmasters.com

I would consider giving a flat 2K Salary with 5%-10% commission that is scalable based on the targets achieved.

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