Congrats! You’re taking the next step to increasing your bottom line and profitability by bringing on a business development and sales expert. You’ve identified the right person, you’ve asked the right questions, you’re ready to hire. Your company has an opportunity to move forward with a new Business Development-as-a-Service model (Link to BDaaS for Revenue Growth blog) that will help accelerate your revenue opportunities.
This BDaaS model is beneficial to your company since it will save you time, maximize value, and reduce the need to hire a full-time business development W2 employee right away.
You are excited to get started, but a few questions remain: ”What do I pay a business development and sales professional? And what is the best compensation model?”
When it comes to compensating BDaaS, here’s some good news:
- It’s easy to align compensation for your new BDaaS professional with your revenue growth and goals.
- Think of it as “Apples to Apples” – compensation model alternatives are costly and often add a fixed cost.
- The risk of failure and experimentation cost is low.
Use The “Volume Knob” Compensation Method.
The Volume Knob method matches your compensation for your BDaaS professional with the revenue opportunity, required effort, revenue goals, and growth objectives. This framework is straightforward for figuring out BDaaS compensation quickly and can even be applied to compensation for other members on your team.
The “volume knob” is simply that: a dial that can be cranked up or down to provide a range of compensation options based on your goals. By dialing up the revenue, your BDaaS professional earns a related commission. The “volume knob” illustration below provides some overview ranges for BDaaS and Sales compensation — let’s assume a 100% Contribution Margin*, a monthly retainer, & 15% commission.
*Contribution Margin is simply Revenue minus Variable Cost. You can think of it as a project’s gross margin. Most digital consulting projects are 100% Contribution Margin if all the engineers, designers, and strategists are salaried employees.
Here are some examples on the “Volume Knob” - the calculations follow.
With a little math and some critical thinking, you can set the compensation dial for your business to a pleasing volume that aligns the expected value of the opportunity you have to grow and the compensation you’ll pay to get there.
First, figure out the answers to these three questions.
- What is your actual additional revenue goal?
- What is your contribution margin and gross margin?
- What are your direct project costs, either variable or fixed? An example of a direct variable project cost is a contract software engineer who develops the project that was sold. An example of a direct fixed project cost is the hourly rate you pay a salaried software engineer to develop the project that was sold.
Next, do the math to explore different compensation options.
The below model and analysis* is used to create the Volume Knob Method and provides several different compensation ranges based on: revenue, contribution margin, retainer, and bonus.
*I’m happy to share the model with you so you can customize for your business. Just hit me up in the comments or send a message.
The Assumptions for the analysis includes a minimum annual revenue target of $100,000, annual retainer of $24,000, contribution margin, and bonus/commission percentage.
The Analysis table provides a detailed look at how various revenue points affect compensation and contribution given a $24,000/year base retainer for your BDaaS professional. It also provides breakeven amounts of new revenue, just $28,235. This means that all sales over $28,235 produce incremental dollars for your business.
The Two-Way Table Analysis shows a range of contribution margin dollars and percentages for different annual revenues and annual retainers.
All of these combinations are feasible except one: an annual retainer of $96,000 and a revenue target of $100,000 — yeah, don’t do that!
The Formulas table explains the calculations for the analysis.
Finally, use these two questions to pick a starting point for total compensation for your BDaaS professional.
- What percentage of revenue do you want total business development and sales compensation to be? It will depend on margin, total revenue, and average deal size along with the skill of the person and value of the opportunities they bring.
- What percentage of that revenue should go the team members — sales, engineers, staff, and owners? There is only 100% and it all needs to be budgeted into compensation and profit.
Start with total compensation between 0% and 100% of the incremental revenue & contribution margin. For example; If $250,000 of contribution margin is created, then paying your BDaaS $1 is okay as is paying them $249,999. In either case, your business now has more dollars to use for fixed costs and profit. Consider these soft limits that need to be adjusted for your business.
Last but not least: decide on how to split compensation.
Here is a visual breakdown of a $500,000 incremental revenue opportunity with $125,000 allocated for total BD & Sales compensation.
So, how do you split the $125,000 between base and commission?
Business Development is often split — base salary plus commission or base salary plus bonus. I like to think of it as a slider that can be moved between the limits of 100% retainer/base and 100% commission/bonus. Start somewhere in the middle and adjust for your business and team.
Where you land will depend on your current goals and risk tolerance for that first sale. Once all inputs — financials, risk, company goals, and level of effort for achieving the growth — are understood, a fair and equitable compensation plan can be worked out.
Here is how it breaks down in our working example:
- $500,000 new revenue
- $250,000 for direct project costs
- $123,000 in total business development compensation split between $48,000(39%) retainer and $75,000(61%) commission
- $127,000 retained for fixed costs, gross margin, and owner profit.
Pay your sales, BD, and team anywhere between 0% and 100% of the contribution margin they create! As long as real CM% is greater than compensation percentage, then go for it.
Hit me up in the comments — Let me know what improvements to make and send me your thoughts below!
Also, let me know if you would like to customize the model and analysis for your own business. I will happily send it to you.
Chris Filipiak is “The Connector.” He’s a trusted partner for innovative businesses and organizations looking to increase revenue, achieve their goals, and have more fun by establishing strategic connections.