How much commission to pay salesperson for selling Consulting Services?
2 comments
Ok, so I have started 3 different consultancies which I sold 2 (failed horrible at the other) and I have run larger groups too. My 2 cents:
1. Do not hire traditional sales staff and base compensation on a commission structure. It is the 100% wrong structure for a consultancy.
2. Do not hire sales staff before you have excess capacity in the form of employees, beside yourself.
3. When you do hire sales staff, do not hire sales in the form of client closers, instead hire lead generation staff that finds clients and passes "hot leads" to the principle for closing.
4. If you need help getting deals moving, you can initially reach out to a friend or others, but very specifically structure it as a referral fee for any deal you can close. e.g. you own the customer, they bring the customer to you, you set the terms, project guidelines and tone for the entire relationship with the customer. Once the deal is closed the referral gets paid a fee (8-15%), usually deferred until the client has made their first payment. So this way they can't bring you someone, then the client closes a deal but never pays you but you still had to pay a referral. Sometimes people balk at this, but to me it is non-negotiable, and the first time you ignore it and pay out a $10k referral for a client that cancels or stiffs you, it will become non-negotiable to you too.
Traditional sales staff is motivated by getting the client through the door and tells them all kinds of wonky things to get that done and get a signature on the dotted line. Then you have to live with that in the deal because the customer will come back and say, well I was told XYZ. Then you are caught between a rock and a hard place, even if the contract doesn't state it, you could still be on the hook if for no other reason then to keep a customer happy. This doesn't happen when the PM or Principle manages the customer because they own the project to completion. Hence, when you get bigger, let the lead generation staff get you the clients to talk to, you or an account/project manager then close the deals.
If you were selling product it would be totally different, but you are selling your and other peoples time which is much harder to do correctly. I have probably made most mistakes possible and paid some heavy prices for them in the past, but using referrals and lead people always worked well.
1. Do not hire traditional sales staff and base compensation on a commission structure. It is the 100% wrong structure for a consultancy.
2. Do not hire sales staff before you have excess capacity in the form of employees, beside yourself.
3. When you do hire sales staff, do not hire sales in the form of client closers, instead hire lead generation staff that finds clients and passes "hot leads" to the principle for closing.
4. If you need help getting deals moving, you can initially reach out to a friend or others, but very specifically structure it as a referral fee for any deal you can close. e.g. you own the customer, they bring the customer to you, you set the terms, project guidelines and tone for the entire relationship with the customer. Once the deal is closed the referral gets paid a fee (8-15%), usually deferred until the client has made their first payment. So this way they can't bring you someone, then the client closes a deal but never pays you but you still had to pay a referral. Sometimes people balk at this, but to me it is non-negotiable, and the first time you ignore it and pay out a $10k referral for a client that cancels or stiffs you, it will become non-negotiable to you too.
Traditional sales staff is motivated by getting the client through the door and tells them all kinds of wonky things to get that done and get a signature on the dotted line. Then you have to live with that in the deal because the customer will come back and say, well I was told XYZ. Then you are caught between a rock and a hard place, even if the contract doesn't state it, you could still be on the hook if for no other reason then to keep a customer happy. This doesn't happen when the PM or Principle manages the customer because they own the project to completion. Hence, when you get bigger, let the lead generation staff get you the clients to talk to, you or an account/project manager then close the deals.
If you were selling product it would be totally different, but you are selling your and other peoples time which is much harder to do correctly. I have probably made most mistakes possible and paid some heavy prices for them in the past, but using referrals and lead people always worked well.
Sound advice, particularly about focusing on generating leads rather than closing deals and on the scale. I'd add that by the time a principal of a small firm explains what sort of lead they wish to pursue and what sort they do not, it will take more time than just digging up the leads. There's just too much capacity planning with a small staff to ignore small variations in workflow and backlog with generic instructions.
{My random opinion from the internet} This is a really bad idea for a software consulting business because the incentives are grossly misaligned.
With fixed fee work the sales person's income is orthogonal to the company's profit. A $100k project with an 8% margin is better for them than a $12k project with a 50% margin, even though the smaller project's lower opportunity cost is probably worth the $2k difference in net profit. Of course if you are paying commission on sales, a $100k project that loses money is as good as a $100k project that makes money. That's the essence of commissions.
Suppose, on the other hand, that the consultants are billed by the hour with a nice healthy 24% margin. An 8% commission essentially amounts to 1/3 ownership for spare time work if and when the salesperson feels like it...maybe they go to the beach with their friends instead of chasing a $12k project because recovering from the rough week at their regular job is more valuable than $960 that they might make if the deal closes -- last week all their work to close a deal went to naught because there was no production capacity to complete the work on the potential client's timeline.
Typically, the principals of a consultancy do most of the sales work...though with multiple principals it might be some but not others as roles diversify. This is because clients are the principal's clients first and foremost.
If you can't resist hiring a salesperson, just pay the salesperson a salary, keep open books, and share the profits. A contract that intrudes on all conversations makes for bad personal relationships...it has to cover things like commission on change orders or simply when a previous client calls you about a new project.
For a one person firm, there is a reasonable probability that this will just turn into a mess and a distraction.
Good luck.
With fixed fee work the sales person's income is orthogonal to the company's profit. A $100k project with an 8% margin is better for them than a $12k project with a 50% margin, even though the smaller project's lower opportunity cost is probably worth the $2k difference in net profit. Of course if you are paying commission on sales, a $100k project that loses money is as good as a $100k project that makes money. That's the essence of commissions.
Suppose, on the other hand, that the consultants are billed by the hour with a nice healthy 24% margin. An 8% commission essentially amounts to 1/3 ownership for spare time work if and when the salesperson feels like it...maybe they go to the beach with their friends instead of chasing a $12k project because recovering from the rough week at their regular job is more valuable than $960 that they might make if the deal closes -- last week all their work to close a deal went to naught because there was no production capacity to complete the work on the potential client's timeline.
Typically, the principals of a consultancy do most of the sales work...though with multiple principals it might be some but not others as roles diversify. This is because clients are the principal's clients first and foremost.
If you can't resist hiring a salesperson, just pay the salesperson a salary, keep open books, and share the profits. A contract that intrudes on all conversations makes for bad personal relationships...it has to cover things like commission on change orders or simply when a previous client calls you about a new project.
For a one person firm, there is a reasonable probability that this will just turn into a mess and a distraction.
Good luck.
> Typically, the principals of a consultancy do most of the sales work...
There's nothing more impressive than hiring the actual principal to do the work versus dealing with a flunky sales rep.
What to do?
Aggressively read up on how market & pitch your services. Become an expert on consultative selling. You might even enroll in a professional sales program like Miller Heiman. Ultimately, this is a core competency needed to grow any business.
BTW, Alan Weiss has great food-for-thought on Value Based Fees, separates you from the hourly bozos > http://www.goodreads.com/book/show/1145457.Value_Based_Fees
There's nothing more impressive than hiring the actual principal to do the work versus dealing with a flunky sales rep.
What to do?
Aggressively read up on how market & pitch your services. Become an expert on consultative selling. You might even enroll in a professional sales program like Miller Heiman. Ultimately, this is a core competency needed to grow any business.
BTW, Alan Weiss has great food-for-thought on Value Based Fees, separates you from the hourly bozos > http://www.goodreads.com/book/show/1145457.Value_Based_Fees
This was a great write-up. I haven't been able to find any outside advice, so thank you!
My first hire will be a friend doing some sales efforts part-time (lunch-breaks, after-work, weekends) on a contractor agreement, and I’m offering 8% commission on gross sales generated. i.e. 100k project = 8k in commission. The thought is that if we start landing some sales, I’ll bring them on full-time, in which I would then offer a base-salary in addition to the 8% commission.
I don’t want to cap commission, and I want the formula to be very easy for the time being (hence the % of gross sales approach).
In your experience, is 8% of gross sales generated by the salesperson considered high, or low, in the custom software consulting field? At a full-time capacity, I’d be looking to pay a base salary of around $30-40k with health benefits.