Sales Commissions: A New Payment Model

I just had a conversation with Mark Roberge, the VP of sales at the software firm Hubspot. They've developed a commission model that overcomes the limitations of traditional sales compensation. I think it's interesting enough to be considered inside other sales environments.

The main problem with commissions is that they're typically paid when a deal closes, making it in the sales rep's interest to close as many deals as possible, regardless of whether they're profitable in the long term.

While some commission structures pay for ongoing business from an account that the rep brought into the company, reps generally get paid more if they close more deals. As a result, for most sales reps, creating loyal customers is often less important than loading up the pipeline.

However, Hubspot's business model is based upon selling subscriptions to use their software, and each customer has an initial start-up cost. It's therefore unprofitable for them to have lots of new customers rather than lots of long-term customers.

Hubspot experimented with a several different commission models, but the one that seems to be driving the right behavior is to increase the commission percentage on current sales, based upon the longevity of customers that the sales rep originally recruited.

It works like this. Sales rep "A" starting at Hubspot can make big commissions in the first year by selling lots of stuff to customers who don't stick around. However, if sales rep "B" spends the first year building up a smaller number of loyal customers will end up making more money, per customer, in year 2 than sales rep "A".

In other words, under this system you get paid more when you sell to profitable customers (i.e. loyal ones that keep buying), even if you sell to fewer of them than somebody who's always out there hunting for a quick sale.

By the way, this isn't just wild theory. According to Mark, Hubspot is hiring about 4 sales reps a month, with 25 applicants per job, and some reps who have been working there for a while are making serious money.

READERS: Your thoughts? Ever seen anything like this? I believe this answers some of the objections and controversies surfaced in the recent post "Sales Commissions: Revenue-based or Profit-based?"