Unlocking Sales Success: The New Rules for Cloud Commission Plans in an MRR World

Commission Plans for New Customers

As a board member and mentor to technology companies, I’ve reviewed countless cloud commission plans. However, lately, discussing commissions feels like "Fight Club"—no one wants to talk about what their company pays. I believe the opposite should be true. The more transparency, the better. With the rise of monthly recurring revenue (MRR), it's time to have an open conversation about sales commission compensation. The MRR model has disrupted traditional commission structures, making it essential to adopt a plan that balances attracting top talent and sustaining long-term profitability.

The Shift in Commission Models

Historically, calculating commissions was simple: subtract fully burdened costs from the sale price, then pay a percentage of the margin. You might have included accelerator tiers, where sales reps earned higher percentages for exceeding certain thresholds. But MRR has changed that simplicity. Now, determining and deploying the right commission structure is crucial for motivating your sales team while avoiding attrition.

Key Commission Models for MRR Sales

There are three primary models for compensating sales in an MRR-based environment:

1. Upfront Payment for the Life of the Contract

- This model involves paying the full commission for the entire contract term as soon as the deal is closed.

- Pros: It motivates sales reps to close deals quickly and go after larger opportunities.

- Cons: Sellers may lose interest in maintaining client relationships post-sale, and complications arise if the customer cancels the contract early.

2. Monthly/Quarterly Payments as Revenue Comes In

- In this model, commissions are paid in alignment with customer payments—typically monthly or quarterly.

- Pros: It keeps the sales team invested in the long-term success of their clients, ensuring ongoing engagement.

- Cons: It can cause new sales efforts to stall as sellers begin to rely on commissions from previous deals.

3. Quota-Based Commission on MRR

- Here, commissions are tied to quota attainment, where sellers earn based on hitting and exceeding targets.

- Pros: This model balances immediate motivation to close deals and sustained long-term effort. It aligns the interests of the seller with both short-term and long-term company goals.

- Cons: Quota-setting needs to be well-calibrated to ensure it remains achievable and motivating.

At Henson Group, we use the quota-based commission model, which we find to be the most effective balance between motivating immediate performance and sustaining long-term engagement.

Best Practices for Structuring a Commission Plan

While there is no one-size-fits-all approach, here are three essential rules I recommend when building a commission plan for MRR-based sales:

1. Don’t Cap Commissions

- If you offer a base salary plus commission, avoid capping earnings. The best salespeople thrive on limitless potential. Capping commissions can lead to demotivation and even loss of top talent.

2. Pay Based on Revenue, Not Profit

- Calculating commissions on revenue rather than profit is simpler to administer and prevents potential disputes over how profit is calculated. The exception is if you’re brokering cloud services where the cost is fixed, in which case you can factor in profit without confusion.

3. Set Challenging but Achievable Quotas

- Targets should push your sales team to perform at a high level, but they must also be realistic. I recommend setting quotas that 70% of your team can achieve or exceed. This balance fosters healthy competition and retains top performers.

Commission Plans for Retaining Clients and Driving Client Growth

While initial client acquisition is essential, long-term success in the cloud services industry heavily depends on retaining clients and driving continuous growth. Sales compensation plans should account for these important factors to ensure that your team remains focused not only on closing deals but also on nurturing relationships and expanding customer engagement. Below are two commission plans specifically designed for client retention and growth, along with recommended commission percentage ranges.

Client Retention Commission Plan

In cloud services, keeping a client over the long term is as important—if not more so—than acquiring a new one. A client retention commission plan incentivizes your team to ensure that clients continue to use your services and renew contracts year after year.

- How it Works:

This model rewards sales reps for successfully maintaining client accounts and ensuring contract renewals. Commissions are paid when a client renews their contract, typically on an annual basis.

- Recommended Commission Percentage Range:

5% to 10% of the renewal value, depending on the size of the client and the length of the contract renewal.

Client Growth/Expansion Commission Plan

In addition to retention, growing an existing account by expanding services or increasing usage is a critical driver of revenue. The Client Growth Commission Plan encourages sales reps to identify upsell and cross-sell opportunities within existing accounts, driving further value for both the client and the company.

- How it Works:

Commissions are awarded based on any upsells, cross-sells, or increased usage of the company's services by existing clients. This is particularly effective in MRR-based businesses where usage and service needs can expand as the client’s business grows.

- Recommended Commission Percentage Range:

10% to 15% of the additional revenue generated from the upsell or expansion.

Best Practices for Balancing Retention and Growth

While these commission plans for client retention and growth are highly effective, they must be balanced with new business acquisition strategies. Here are some best practices to consider:

- Blend New Sales, Retention, and Growth Commissions: To ensure that sales reps remain focused on both acquiring new clients and nurturing existing ones, consider blending new sales commissions with retention and growth bonuses. This creates a balanced incentive structure.

- Set Reasonable Growth Targets: Make sure that the growth targets for upselling and cross-selling are ambitious but realistic, encouraging sales reps to expand accounts without overwhelming clients with constant upsell attempts.

- Incorporate Regular Client Check-ins: Encourage sales reps to maintain regular contact with clients through check-ins and reviews, making it easier to identify opportunities for both renewal and growth.

By adding these client retention and growth commission plans, you ensure that your sales team is not only closing new deals but also maintaining strong client relationships and driving long-term revenue growth. This holistic approach to commission structures will help you attract top sales talent, keep them motivated, and promote sustainable business growth.

Final Thoughts

These commission structures and rules are designed primarily for initial sales and client acquisition. However, as the industry continues to evolve, it’s crucial to review and refine your compensation plan regularly to ensure that it remains fair, motivating, and aligned with your company’s long-term goals. By keeping commissions uncapped, tying them to revenue, and setting reasonable quotas, you'll be positioned to attract top sales talent while driving sustainable growth in an MRR-driven world.