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My start-up is going to provide B2B custom software development services on a project by project basis. I have been talking to a prospective sales agent, who would take over the following responsibilities:

  • establishing relations to prospective customers (we both have good connections in the target industry)
  • presenting our technology, bringing customer to the table
  • gathering requirements (joined by me)
  • negotiating a price based on the minimum estimation I would give him
  • closing the deal

My estimation is that a project would bring in about 50k at first and the turnover rate would be a couple of months.

What would be a fair commissioned-based compensation scheme (i.e. percentage)? Are there any "hard facts" I could use when negotiating this?

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On a side note, you are not a startup if you simply offer custom development services. – Dario Solera Feb 2 '12 at 15:33
@Dario - why not? – Ryan Feb 2 '12 at 23:16
@Ryan it's not cast in stone, but usually when we talk about software startup, we do not include companies providing development services only. There must be a product/service with a somewhat scalable business model. – Dario Solera Feb 3 '12 at 7:45
@Dario - where has that been decided and by whom? Quick scan of the FAQ and meta and I couldn't see it. Not picking a fight, genuine question. – Ryan Feb 3 '12 at 8:43
@Ryan I don't know, it's just the common assumption you usually see. – Dario Solera Feb 3 '12 at 11:38
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2 Answers

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Commissions could range anywhere from 5% to 50% depending on your involvement and what you are providing the salesperson.

Let's say he's completely independent and receives no salary. You don't give him any leads or manage him in any way -- only provide the product to sell. In this case, I'd say you'd be looking at 50%.

If you provide him/her an office, a salary with benefits, the leads that they are following up on, as well as training on your product, you could get to 5-10%.

You'd be better off working backwards. Set a minimum target for sales volume for the salesperson, and figure out a total compensation at that level. Set a stretch goal target for amazing sales volume and figure out the total compensation at that level. Then work backwards to figure out what % commission to use.

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It's not a product but a service - i.e. let's say he doesn't have an office and leads - so he closes a deal for 6 months worth of developing a project in a week, is this really 50%? – Phil Feb 2 '12 at 17:54
@Phil It should be whatever you both think is fair. But if he's the only source of sales for you, then it could be 50%. But if he's basically acting as a broker for your consulting services, then I would say something in the 10% range. – Michael Pryor Feb 2 '12 at 18:51
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No offence, but I think you're certifiably insane trying to run with this model with external sales agents and "Custom Software Solutions" rather not a defined product.

So sales person Bob talks to a customer, gathers requirements etc. etc. You (presumably) spec the job and price it. Bob negotiates with customer and is so focused on closing the deal that all sorts of promises are made (some verbal, some written) and discounts given.

Deal Closed! Bob gets his cheque and goes off to spend it however salespeople do.

Now you come along and try and build the thing - its already going to be tight to make a profit cos Bob was more focused on his commission than profit and gave a good discount. Oh and of course he promised everything under the sun and customer now has HUGE expectations. What about the bondoogle thing, what about the wifidooda - that was only a little addition right? You get the idea?

  • Fixed price custom development is hard to get right (as accurately estimating a software project is hard) without conflicts of interest.

  • Managing internal sales people who are selling custom dev is super hard.

  • Managing external sales agents - impossible I would have thought.

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I would of course sit in on requirements talks with the customer, sign off the final spec and give a minimum estimated price - how is this insane? I just want to off-source the time consuming task of finding prospective customers and bringing them to the table, not completely surrender any control over pricing and specs. – Phil Feb 2 '12 at 17:46
In addition, all change requests during a project are priced independently of course. – Phil Feb 2 '12 at 17:58
In an ideal world then yes change requests priced independently etc. - but in my experience a spec is never that water tight nor understood by all parties, there is always some movement. My point is that the customers expectations will largely be set by what your sales guy says 'to close the deal'. From my previous experiences I just can't see this working in reality but maybe you can make it work. Sincere good luck with your venture! – Ryan Feb 2 '12 at 23:20
Yes, there's some truth to that, we'll see how it turns out - thanks a lot for the advice! – Phil Feb 3 '12 at 17:38
Ryan makes valid points, but I have always thought that conventional commission structures are ludicrous. If you pay a salesperson as a percentage of gross, then yes. I always pay them a larger percentage, but it is a percentage of net profit. If they sell a job that makes no money, they make no money. As they should. When you change your commission structure to that, you will notice their attention level goes way up on the RFP's and contracts. Then they will start saying things like, "We need to amend this so it is stated that this price does not include the Whozit and Whatfor." – NeedAGeekIndy Sep 17 '12 at 17:27

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