Outsourcing Sales

Startup dilemma: is 30% commission a good deal to boost sales?

timevault

September 12th, 2016

Hello there,
my startup is facing an interesting dilemma right now, whether or not use a sales contractor to conclude a deal worth 300k (on which he will take a 30% commission) or do it on our own but most likely ending up with less than 100k.
This sales guy is quite experienced and we saw him in action in the meetings with our customer so we are in no doubt that he can achieve that.
We are struggling to decide what to do because of the following:
1) we will be raising soon after our first seed round, so we are worried about how the future investor will react to seeing this (the sales guy has expressed no interest in being part of the company)
2) what is the average industry for such deals?
3) this deal in particular is quite good as it's a very influential customer for us

Any comments very much appreciated.
Thanks!

Geoff Tanham Author at Decision2buy Inc.

September 12th, 2016

Paolo,

You are getting some great feedback, both on the commission issues and the business/traction level. Some VC's will not invest unless they run the sales and set the processes in place for future sales, but those are not as common when selling services as with product in my experience. In your case,because I have no understanding of what you are offering to the prospect, i wonder why you have a challenge with a 100K deal, when is appears you are willing to triple the volume without any way of understanding if you can deliver it. I have worked with many start ups, sales and management of sales, and may I suggest another approach. If you are saying you are concerned with delivery, as stated above, and your sales guy proposed a 3 times of what you proposed, but the prospect worked with you first, how does the Prospect feel about this approach? Being new, would it not be a better approach to put in place a Master Contract for services, with a Statement of Work (SOW) for each project, breaking them down into sizes (I call this "Chunkation") that you feel you can deliver to the client successfully. Say in 50-100K increments.?This gives you room to deliver as you promise, you can learn about your client more, your processes will improve and the chance of success for the client improve greatly. Then you move to the next SOW for the next piece, delivering better from the learned experience. I have done this many times selling to Fortune 500 companies and in most cases did more than 20 SOW's, we were a service company and delivered services of various types over a period of years. They also became the best references as they felt we worked with them to integrate into their deliver process, shared in improvements and gained outstanding results. So, pay salesperson if you like, but my suggestion is break it down to deliverable pieces for the Prospect and do a master contract to allow for the full sales value going forward. Doing one deal, of any size well will preserve your investment in this prospect making them your client who should now be your best reference. This first success and reference in most cases for start ups is more valuable than the profit on that first deal. Great success! 

Shobhit Verma

September 12th, 2016

Just to be sure, if he is willing to put in all the work and you pay him only once you receive money from your customer (not when you sign the contract). 30% is not bad at all if it is a saas product.
Investor cares about traction and team. Once you have some good case studies of big brand customers, finding new customers becomes easier and maybe you can choose to do some of those deals yourself.
If you do not have experience selling, do the deal even if the commission is 100%(of net profit)

mike precobb sr. sales/mktg ex. accelerated early-stage firms

September 12th, 2016

This sounds more like a bribe than a commission.  I've hired scores of rep firms and distis as well as direct sales forces.  This is an account where you want to have a direct relationship.  I love sales people (sometimes, I am one), but this is not a good situation.  10 - 15% max.

  You need to fix the relationship with the prospect (or at least have one.

Rob G

September 13th, 2016

30% is reasonable, steep, but in this situation not unreasonable and not that uncommon.  Make sure you pay attention to the details and make sure you own the relationship going forward. 

Eric Sullivan CEO at FoundationLab

September 12th, 2016

That percentage is extremely high from anything I have seen. Traditionally I see from 8% - 15% which is very fair if someone is driving the deal to close.

Geoff Tanham Author at Decision2buy Inc.

September 12th, 2016

Never leave money on the table is a old sales adage, best follow it, take the deal and pay the commission. I am a bit confused with this scenario though, if the deal is for $300K, why if you do it yourself (this assumes you can close it) why would the value be so much less as in $100K? And if you can close the deal, do you still owe the salesperson some commission as these type of deals usually have a clause stating that if you close a deal that was generated by the contractor, they get a commission. So, on the face of this it seems pretty clear you will be $ 110K ahead if you do the deal with the salesperson closing the deal, but who will own the account, will they be referencable, is it a great company in a segment you want to sell into? These are the kinds of questions you must ask yourself. And one more, why would a contractor state they don't want to work with you while looking at a $90K commission on one deal? This strikes me as odd as we all have "what's in it for me value objectives, this makes little sense as sales people are trying to maximize their time to revenue and $90 is a nice chunk of change for one deal. Interesting scenario, but the information is lacking in real detail. Great success. And If I can help, please contract me. 

Ryan Shane More Video Views = More Revenue

September 12th, 2016

Having been both a hired sales person and an independent sales person, I can say that 30% is normal for a commission only sales person.  

Hired sales people at 5-15% commission will also receive a base, which reduces their risk while they get the sales process going.  Additionally, it will help them through the sales troughs.  They expect a sales process to be presented to them so they can follow it... think of following a rainbow to a pot of gold.

Commission only people take on a lot of risk as they put work in with no guarantee of result.  Additionally, it sounds like you do not already have a repeatable sales process in place.  You probably haven't done a deal of this magnitude, either, if the value of the deal is only $100k if you do it without the sale person.  The first big deal at any level is always more difficult than subsequent deals.

Pay the commission, track the experienced person's sales process, create a killer case study, then use that as a repeatable process for future sales people to follow (at a much lower commission rate).  You'll be able to hire a few with the additional $110k in revenue provided by the sales person.

As a side note, I know of Seed Investors that only invest if they can provide Sales/BD services for the first 1-3 deals.  They'll take up to 50% commission, but they know that the first few deals set the tone and make subsequent deals easier to close.  

More companies fold because of too little revenue vs. too much revenue.

Brent Laminack Principal at OpenFace Systems, Inc.

September 12th, 2016

In many industries, (such as publishing) 30% commission for an independent sales position is quite normal. Do the deal.

timevault

September 12th, 2016

Hello guys,
very constructive feedback so far.
To give me more contest and to answer Geoff's question, what happened was that we were engaged with the prospect customer and perhaps due to our inexperience we were pessimistic about our product's traction, than this sales guy came in and promised a larger volume hence increasing the value.
The problem is the way I see it now , he take the money and disappear and we then will be working hard to reach those promises.