Sales

Why using ramps in your sales comp. is critical for new reps

Alexander Green
April 29, 2021

Preparing for your new sales hire

You've put the work in to hire rock star sales reps that have a history of high-performance in your industry, now they need to be setup for success. How well you onboard your new sales rep., coupled with your sales comp. design can determine how quickly they will become fully productive team members. It's critical to understand that by motivating your new reps to hit their targets faster will have a direct impact on revenue growth, and the wrong sales comp. design could cause a cash flow nightmare.

A well defined onboarding process will translate to success

David Skok believes that when creating an onboarding process for your new sales reps, you should be very clear on what each person needs to know to have what they call “baseline viability”. This involves deciding on what the core knowledge points and functional skills are that a new hire needs in order to start making a contribution. 'The goal should be to give new hires all the things they need to ramp quickly and successfully in their new role at the company.' Outside of your defined onboarding process, you should also consider an appropriate sales compensation plan to suit this process for a new sales hire. It's here where we need to consider the sales ramp-up period.

Sales ramp-up period

Sales ramp-up period is determined from the day a new sales rep is hired, until the day they reach full productivity and hit their targets. Even for the most experienced sales reps, it will take time to fully understand their new company's sales process, the customer and competitive landscape, and the products and solutions they need to sell.

Why is it important?

The sales ramp-up period is a critical time in every salesperson's tenure with a company. A great ramp-up period sets the sales rep. up for success, while a sub-par process can have the opposite effect. Equally, ramping new hires quickly is key to accelerating business growth. It is critical for a sales organisation to understand its sales ramp time to accurately forecast, recruit, and plan for resource capacity needs.

How should it be calculated?

There are many ways to calculate the average sales ramp up as it can depend on the complexity of the market, sales process, and length of the sales cycle or product that a rep is selling. Ambition outlines three of the most common ways to calculate sales ramp time:

  1. Historical data: Many organisations will use an average of how long their sales reps have taken to ramp-up previously as the baseline. This is also called 'time-to-quota' and looks at the historical average and assumes that what worked in the past will continue to work. This is fine if you have enough data to work from and the data can support the different sales roles you have in the team.
  2. Including sales cycle: Depending on your product sales cycle, 'another way to calculate ramp-up time is: Onboarding time + 3 months + average sales cycle length. This allows the seller to understand the basic onboarding of their new company, such as policies, personas, and product lessons'. This way of calculating sales ramp can work well if the product is simple to learn and the sales cycle is shorter. However, if your company sells more complex enterprise software for example, the sales cycle can be very long (up to a year). Such a long sales cycle gives your reps fewer opportunities to learn and generally would extend the average sales ramp up time.
  3. By experience: Another option is to base your sales ramp time on how much experience your new sales rep has. If you onboard an experienced seller who has a wealth of experience in your market and understands your product, they do not need a lengthy ramp time as other much less experienced sales reps would need. This could include someone coming from a competitor, a customer of your product or from a partner organisation. By building an onboarding program designed to suit the individual, you can cater to those who need more support and those who can ramp up more quickly.

How ramp affects your sales comp.

We discussed previously that ramp time equates to the average length of time it takes to meet 100% of a quota. But what many organisations fail to recognise is the importance of adjusting your sales quotas and compensation to match the ramp time (this is called 'ramping quota'). Ramping quota is reducing quota to be more attainable in the early days and ensure there is ongoing motivation.

The way we do this is by setting up a sales rep's fully productive compensation plan and then adjusting quota to the sales ramp-up period. For example, if there is a 4-month sales ramp-up period for a new employee, then the quota will be adjusted to suit:

Month 1: 25%

month 2: 50%

Month 3: 75%

Month 4: 100%

(4 month ramp period = 100% / 4 = 25% increments).

The OTE remains the same, but the salesperson's ability to achieve their target in these first 4 months are made to be easier, and reflect their ongoing learnings of the sales process until they are a fully productive sales rep.

Example of adjusting quotas in the motiveOS app

Other considerations:

How does paying out on the ramp rate affect your cash flow as a SaaS business?

Knowing that your new sales rep will take a set amount of time to onboard and become a fully productive member of your sales team, there will need to be some investment up-front. This investment should be returned once your new employee is fully trained and starts hitting their full quota.

Adjusting a sales rep's quota means your cash flow and net profit will be affected (i.e. paying a rep to achieve lower quotas will result in a higher payout, and affect the cash flow of the business). For Entrepreneurs calls this the 'SaaS cash flow problem'. The below graphs show that it can take on average, 10-11 months before a new sales hire will start to become productive and consistently hit quota.

In the left-hand graph, we can see how expenses stay roughly flat, but MRR grows slowly over time. This creates the SaaS Cash Flow problem- https://www.forentrepreneurs.com/saas-economics-1/


Offsetting the cash flow issue

One way to offset this 'SaaS cash flow problem' and to limit your up-front investment is, instead of billing your customers monthly, bill for a year's worth of payments up-front. An example of how this affects cash flow can be seen below. Many subscription-based models now offer a discount to customers for paying for a full year up-front instead of paying monthly recurring fees.

https://www.forentrepreneurs.com/saas-economics-2/

Draws:

Finally, another way to help accelerate ramp is to recruit more experienced sale reps and offer a draw on commissions. A draw is a pay advance against expected earnings or commissions. This is more common with enterprise sales due to the long sales cycles to ensure motivation stays high. Businesses commonly use this approach when poaching a rep from a competitor. This is one way of guaranteeing wages and allowing reps to make the move to a new business relatively risk-free.

A comprehensive onboarding strategy and comp. plan can make or break your new sales hires and their success in your business. If you want to learn more about ramping quota for your reps, or review your current sales compensation plan, contact us for a no-obligation discussion.

CEO at motiveOS, a realtime commission app that provides accuracy and visibility to the sales, finance and management teams, whilst automating the entire process for our customers. Our vision is to help growing businesses build world-class revenue teams. Previously the Co-Founder and CEO for HANDS HQ, a profitable prop. tech. startup in London. I studied Building and Construction Project Management and led the refurbishment teams of many global head offices in London.