SaaS Sales Commission Calculator for Long Term Contracts
Since my post entitled SaaS Sales Compensation Made Easy, I’ve received a number of inquires about how to adjust SaaS sales commission percentages for very short and very long term subscription contracts, e.g., renewal periods of 1 month vs. 2 years. Clearly a 2 year contract paid in advance is worth more than a monthly renewal and should pay a higher commission. But, how much more?
In the model, I propose as best practice that SaaS sales commissions should be paid 100% up-front in proportion to the lifetime value of the sale (LTV). But to keep things simple, recurring revenue (ARR, QRR, or MRR) is substituted as the everyday measure of LTV, because LTV is always directly proportionate to recurring revenue. Basically, pay on recurring revenue in SaaS just like you would pay on price for any other product. It’s that simple….provided: 1) contract terms don’t vary widely and 2) the churn rate is uniform across customers (no churn cohorts).
However, adjusting your SaaS sales commission plan for these two factors isn’t complicated. You can do the LTV math in the background to produce a simple table of adjustments to the baseline SaaS sales commission for each contract term and/or churn cohort. Then, include this simple table of adjustments in your SaaS sales commission plan. The spreadsheet below does exactly this. (you can “Click to Edit” and play with the numbers or download to Excel. Go ZOHO!).
This enhanced SaaS sales commission model incorporates the effect of payment terms
and churn on lifetime value. The top table adjusts for contract term only,
whereas the bottom table allows for churn cohorts as well.
From the previous SaaS sales commission model post, we know that the lifetime value of a SaaS sale comprised of recurring subscription payments made in advance is given by the following formula:
| SaaS Subscription Sale LTV | = | recurring payment x ( 1 + i ) |
| i + a |
i = cost of capital; a = churn rate
It is evident from this formula that if either contract term (i) or churn (a) vary across a wide range, then the calculation of the SaaS sales commission based on LTV should be adjusted accordingly (see LTV notes in the spreadsheet for the impact of contract term on i ). Put simply, if your contract terms (renewal periods) vary from monthly to every 2 years, you should Read more »



The goal of this blog is to share knowledge and opinions that will help executives at Internet software companies that create and deliver SaaS, PaaS, and IaaS applications critically analyze real-world, go-to-market strategies and tactics by applying sound business principles
