How to Design Your Very First Sales Comp Plan

At the end of the day, there are sales. Sales does have to bring in more revenue than it consumes, right? So you got to start with some first principles. At scale, at scale across almost any industry there is from, from, from automobile sales to back in the old days, photocopier sales, whatever it is, sales tends to take home 10 of the profit as bonus of the profit, okay? Not of the revenue. And what happened in SaaS and software is because in most categories of software, the gross margins traditionally have been so high, right? You know, write once and use a million times. Margins were 90%. Margins are still 90% at Adobe and Microsoft and Intuit that we basically gave the sales reps 10% of all the revenue instead of 10% of the profit, right? So a sales rep might make a hundred bucks when they sell you a $40,000 car because the profit's $1,000. So we, so we simplified that to 10% and then we got to a basic model of 10 and 10. So, so that basically a sales rep should keep about 10% of the deal they closed and make another 10% in base salary. Historically successful software with decent price points, there's a 5x spread, right? In other words, sales rep should close 5 times what they make, right? The 10 and 10 is 20 times 5 is 100. So, so a very simple way to saying is, hey, sales reps, if you want to make $100,000, you have to close 500,000. If you want to make 200,000, you have to close a million, okay? That's the basic math. And then as time has gone by, we've stretched that a little bit. And first we've said, hey, look for SMBs, it's harder for SMBs. It's pretty hard to close a million dollars if your price point is $3,000 a year, right? It's just so many deals. So we started to see that drift down to 3 or 4x, right? And we kind of came up with a model of 3, 4, 5x. 3x for S&P, right? 4x for mid market deals, 20, 30, 40k and 5x for true enterprise. And I think that was mostly true through about 2019 or so. And then so much capital flooded into SaaS companies that it all, it all broke down, right? People would give large draws, people would give guarantees. People became obsessed with the whole SaaS. There was inflation, like sales reps would ask for more and more ot. So how do you deal with that? Right? And so this 3,4x5x broke down the last two years and it's going to create some sad stories and some pain. But we have to get back to business models that make sense. So if you sit on a Google sheet and you just design 3, 4 or 5X, you'll be fine. You'll be fine. That's the way to do it. And in the early days, if you're, if you're early and your marketing costs aren't high, you can put more of it into sales. That's what I have done twice as a founder year. I've built companies that had relatively low marketing costs. Not that we didn't do marketing, but relied on social media, viral and others. And I put that extra money into sales. So I paid sales more than that. 3, 4, 5x, not dramatically more, but enough more but enough so that the math worked out. And if you can, in the early, early days, you gotta, you have to make sure that sales can eat. So sometimes your first rep could not only take home 20% of what they close, in fact, in the very early days, it's often 1x. In the very early days, like you bring your first rep and you'll say, look, for the first 90 days, for the first four months, you'll, you take home everything you close because we wouldn't have closed anything without you anyway. So just, just keep it all. And then after that we'll, we'll scale up to 3,4,5x so there's more content on disaster, but hopefully that, that's a good framework. They have to eat, you have to make money. But some of the insanity the last two years, it's got to go because the ma that we're burning too much cash.