Altered Energy – Alternative Energy news
Except in rare sales positions, earning commission has been an expected part of the job. Having skin in the game provides the incentive people need to act with urgency and land new deals.
In the solar industry, salespeople are almost always paid on commission. The majority of those are paid commission only with no base salary whatsoever. There are a variety of payment schemes that determine the amount solar salespeople reap on each deal. As you’ll soon find out, there are hidden costs associated with running different types of commission payouts to your salespeople.
In this article, we’ll first review common commission sales arrangements in the solar industry, provide examples of how they work, and evaluate their effectiveness. Then, we’ll recommend optimal payment arrangements based on the maturity of your solar business. Finally, we’ll provide guidance on maximizing solar sales revenue and minimizing losses for your company.
Solar Commission Structures: How you pay your solar salespeople matters!
There are several common ways to pay commissioned solar salespeople. Payouts can be set up as a percentage of the overall contract price, based on a percentage of margin, constructed as a combination of contract price commission plus a split of margin above a base price, or reflected as a simple cut of the base contract price.
For the sake of simplicity, we’ll use a 6kW system installed when running through the following payment examples.
1. Overall contract price
Paying commission on the basis of the overall contract amount is perhaps the most straightforward example. However, there are issues with setting up your commission structure this way.
In practice: Lisa is on a 5% commission and sells a 6kW system for $20,000. She pockets $1,000. Lisa is referred to a neighbor who she also sells a 6kW system to. They have a complicated, steep roof and will be using lower-margin inverters for $25,000. She pockets $1,250.
Takeaways: It’s a simple calculation and easy for a salesperson to know how much to expect out of each deal. On the other hand, this flat commission structure incentivizes your salespeople to sell more solar than may be optimal for each client.
Lisa may also inflate the installed price per watt, which could lead to possibly losing out on more closed deals. If a customer has a challenging roof, needs multiple inverters, or other work needs to be completed onsite, these fees are added onto the final contract amount.
Paying your salespeople commission based on the overall contract price can, in turn, have the effect of rewarding them for seeking out complicated work, which may not be best for company margins.
2. Percentage of margin
When you pay commissions on gross margin instead of sales, you can expect your salespeople to stop cutting prices and focus on selling more profitable components.
In practice: Corey sells a 6kW system for $20,000 at 20% gross margin. His commission is 50% of gross margin, so he walks away with $2,000.
Takeaways: If your product and distribution costs change frequently enough, calculating margins regularly can become a headache – especially across large regions or territories. Also, if you want to keep your profit margins confidential, you may want to avoid sharing this information with salespeople.
To help you figure out if the margin-based commission is right for your company, you should be considering whether or not profitability is strategic right now. If you’re a new installer and looking to make a big splash into the market, paying a commission on profitability may not make much sense.
It’s challenging to reward salespeople for above-average sales if you don’t know what “average” is. Therefore, some solar companies calculate their base commission rate on the average solar system size and cost to install the system. Then, they’ll couple this base rate with incentive multipliers to encourage better-than-average sales.
Say your average system size is 6kW, and your average installation cost per watt is $3.00. Your average revenue per installed system would be $18,000. You know you have $0.30 per watt you can comfortably allocate to sales commissions as part of your installation cost. In this instance, that amounts to $1,800.
To be conservative, you may then set a base commission of $1,000, which can be expanded up to $1,500 to incentivize above-average sale amounts.
For example, deals booked at 5% below your average base price of $18,000 earn the base commission rate of $1,000. Deals booked within 5% of base earn a base commission times a 110% multiplier for $1,100. For deals booked at more than 5% of base, the salespeople get the base rate times a 125% multiplier:
|Deal Amount||Multiplier||Total Commission|
|$17,100 – $18,900||110%||$1,100|
In practice: Eva is paid a base rate of $1,000 per closed deal. She sells a 6kW system for $19,500, qualifying for a 125% base rate multiplier, earning $1,250 total for the job.
Takeaways: This payment arrangement offers a nice alternative to encourage profitable selling, especially if you want to keep your profit margins a secret. Slight differences in commission payouts tied to above-average sales can send your salespeople a subtle, yet powerful message: seek out above-average deal amounts, but keep the pricing reasonable.
However, salespeople may still be tempted to inflate solar system costs above the market rate under this incentive framework. That’s especially the case if there are large differences in commission amounts for different multipliers.
Therefore, if using this structure, we recommend a more conservative approach which offers slight commission bonuses for larger deal amounts as in the table above.
Any time you allow salespeople to set their own prices, you’re playing with fire. Close rates may suffer greatly, even though some deals are going through at higher-average margins.
If you are mostly generating your own leads which are less likely to shop around, you may see success with this arrangement. On the other hand, if you are mainly purchasing sales leads who are actively shopping around, you may be burning through your advertising budget without enough to show for it.
There is also risk in your customers sharing pricing information with each other. If a referred customer gets relatively poor pricing and they speak regularly with the person who referred them to you, expect some public blowback.
4, Margin splits the above base
Some installers use margin splits instead of flat percentages above base. In a similar example to the multipliers above, salespeople are rewarded for higher-margin sales. Deals booked at more than say, 5% of base qualify for a base compensation plus a margin split between the company and salesperson above the base amount.
In practice: Marty sells a 6kW system for $22,000, which is more than 5% of the expected sales amount of $20,000 for a system this size. Marty gets a base payment of $1,000 for the deal, and the additional $2,000 gets split 50/50 between the installer and Marty. Marty pockets a total of $2,000.
Takeaways: This margin split arrangement heavily incentivizes Marty to jack prices up. Instead of netting $1,000 for a job, he can double his paycheck by adding a few thousand dollars to the installed price.
The risks outlined in the above multiplier tier example are multiplied by at least a factor of two here. Expect lower close rates. Marty is going to attempt to add $2,000 to the price of every job. Unless you are closely monitoring expected value per close, you may lose sight of the heap of revenue you could have been earning by winning more deals instead of higher-margin deals.
5. Paying on sales by product grouping
Your company strategy may help shape what your salespeople are paid. For example, say you have just sourced high-margin battery backup and inverter suppliers. You may consider bundling groups of these high-margin products together into separate sales commission percentages.
In practice: Elise sells a 6kW solar-plus-DC-coupled battery system for $30,000, qualifying for an 8% base commission instead of 5% for the solar installation alone. She pockets $2,400.
Takeaways: This commission structure encourages salespeople to spend time learning about and selling strategically important products. The commission difference between 5% and 8% for a particular battery supplier was noticeable enough to turn focus toward discussion of their solutions, ramping up profitability. This approach can make a lot of sense for a variety of solar installers.
6. Paying commissions based on system size
In this commission arrangement, your salespeople get paid at set system size amounts. The base price commission is static, and published in tiers linked to system sizes.
In practice: Jeff sells four solar systems over the course of a week. Two are 6kW, one is 4kW, and another is 10kW. He gets $1,000 apiece for the 4 and 6kW systems, and $1,400 for the 10kW system.
Takeaways: The salesperson has no individual incentive to inflate the price of that size system higher, since they will not receive more commission for doing so. It protects both the customer and the company from estimates that are way out of range.
However, care needs to be taken to properly ensure each system is sized appropriately to the amount of usage of your customers. Jeff may be tempted to sell more solar than is actually needed, so you may have to regularly ensure your customers’ best interests are honored.
While there is limited consideration for profitability in this model, the benefit to this structure is its focus on sales volume instead of profit per deal. If your business is in a mature place where you can readily ramp up sales, this structure is worthy of your sincere consideration.
Choosing the best compensation model for your solar business
Setting up optimal solar salesperson compensation heavily depends on your business model. The most successful sales organizations model their compensation thoughtfully, based on strategy, the maturity of the business, and what a strong salesperson can earn in the market selling a similar product or service.
As we’ve seen above, there are some payment schemes that make much more sense for new entrants into a market. Under that condition, you may be looking at breaking even or even taking a slight loss on some of your installations to get started.
In this scenario, it won’t make much sense to design your compensation model on margins, since there’s very little to share with your salespeople. Instead, you could offer a volume-based compensation structure, focusing mainly on base sales.
For example, perhaps your salespeople get a flat $1,000 per deal, regardless of margin. However, once they hit 20 deals won within a year, they move up to $1,200 per deal, and so on.
This compensation structure would also work well for a mature solar business with plenty of capacity to install new solar systems. The strategic focus for this type of organization is to be focused less on margins and more on volume. Therefore, salesperson compensation should not be linked to compensation tiers by job profitability.
On the other hand, if your business is just getting moving with its operations, and has limited bandwidth to complete many installations, you’re going to have to offer a different compensation structure to your salespeople to keep them around. Perhaps consider offering a hefty split of gross margin, so that they look for and nab juicy, profitable jobs.
As your business matures, you can consider adding in volume and product category multipliers to align your compensation model with your strategic trajectory. You may also find it useful to consider team commission bonuses. This setup encourages your sales team to hold each other accountable and help each other follow-up with clients more urgently.
Maximizing solar sales revenue and minimizing losses
If you’re looking to maximize your solar sales revenue, you need to focus on the quality of the people on your sales team. In our experience working with solar installers, while price is important to many customers, more than 80% of people don’t go with the cheapest option.
If your customers can be shown why your service may be more expensive, and your salespeople can successfully sell your company and its products, you’re on solid footing to succeed well into the future.
Paying for your solar sales team to be trained correctly and to be educated goes a very long way. We recommend paying for at least their first several months on the job, so they can learn in detail how your sales process works and ride along with other sales reps.
If they’re new to the solar industry, have them shadow your installation crews regularly. They will be able to win more deals by being up on roofs and understanding how components work and what considerations need to be made across a variety of installation conditions.
Other experiences for new hires could include assisting with the permitting process, helping with paperwork, and warehousing.
We highly discourage putting green salespeople on the phone to qualify new inquiries. If someone on the other end of the line gets a whiff this person doesn’t know what they’re talking about, you’ve just potentially lost thousands of dollars in revenue in less than 30 seconds.
Seasoned solar professionals should be in this role instead. If you don’t have someone solar-competent on the phones ready to pick up when a potential customer calls, you’re shooting yourself in the foot.
Paying your salespeople to get proper training is profitable
In the solar industry there are two main configurations for sales teams:
- Inside sales teams – Make extensive use of CRM software, process a high volume of inquiries, sell over the phone, email contract and details, do not come to the house until inspection.
- Outside sales teams – Appointment setting teams set appointments for salespeople. More common, and relationships built face-to-face have a higher chance of closing.
Each of the above frameworks has advantages and drawbacks. You should be evaluating whether it’s more profitable to have your salespeople close a higher percentage of deals by being there in person, or if it will be more worthwhile for you to process a higher volume of inquiries in-house.
Whether an appointment setter or an outside salesperson, education is paramount. Otherwise, you easily leave the impression that your customer is just a number, and that isn’t good for building a solid base of referrals.
The more your salespeople know, the more deals they are going to close. If they know in advance a main circuit breaker board needs to be moved and are adding that expense into the contract from the outset, it saves a lot of money for the company by using less resources later.
Most companies send out a salesperson, and then a technician to ensure the roof is in good shape and that needed setbacks around potential panel layouts are present.
This is a waste of money. If your service technician comes out later and informs the client your pricing will need to change, you will lose deals.
If your salesperson already sold a deal without even getting up on the roof to have knowledge to properly price the system in the first place, they now will have to resell the whole deal again if your technician finds an issue.
If there’s anyone at the house from your company, salespeople included, they should be trained to check the electrical board, get up on the roof, and make sure it’s in good shape. That person should be able to check the rafters and potential setbacks in a particular area.
From a business point of view, paying your salespeople to get properly trained saves a lot of time and money. For every job you sell, having well-educated salespeople could be worth an easy $500 to $1000 or more per install if you take the time to measure how many deals are lost due to unexpected project changes. That’s money you could be splitting with your salesperson to be more well-informed.
Measuring the salesperson’s performance
You need to have sales software that will allow you to easily access data like the number of sales you have, the number of completed sales from set appointments, goal value of sales, and system sizes by the salesperson.
These insights allow you to see who on your team may be better-suited to selling larger jobs. You should devote some resources to properly assigning leads to your team based on their performance in each of these areas.
The cost of replacing a seasoned solar salesperson
There’s a misconception that commissions-only salespeople don’t cost your business anything. If someone has four or five years of experience, they’ve built up an extremely valuable amount of institutional knowledge, and a much higher conversion rate. How long is it going to take you to train up and replace someone like that?
Certainly, there’s a cost associated with churning through salespeople.
Your commission structure should be beneficial to both salespeople and the company, taking into account added costs. If you pay your salespeople less commission than can be had by competitors, you’re probably not going to keep them for longer than a year. If average salesperson tenure amounts to a year, your recruiting and training costs need to be factored into your business model.
Part of your culture should be earmarked to fluid communication, feedback, and strong employee recognition as part of regular sales meetings. Meetings also encourage salespeople to learn from one another. For example, in this venue they can teach each other how to handle customer objections more smoothly.
Strong attention should be paid to measuring overall job satisfaction on a regular basis. Predictors of employee tenure and satisfaction are autonomy, purpose, and mastery. So, If you can help your salespeople be more self-directed, see the strong purpose in what your organization’s mission is, and get better at their job on a regular basis, you’ll be on a winning path.
Your satisfied salespeople will perform stronger for your business year after year. You also won’t need to be spending as much time, money and effort recruiting new employees.
About the author:
Dan Hahn | Solar Journalist
Dan is a solar journalist and content advisor with SolarReviews. He also works with solar installers and solar nonprofits to develop and execute strategic plans.
Dan Hahn founded residential solar energy information and policy resource, Solar Power Rocks, in 2007. As the site’s chief architect and senior editor, he developed a national framework for evaluating the impact of residential solar energy policy.
Dan is a solar journalist and content advisor with SolarReviews. He also works with solar installers and solar nonprofits to develop and execute strategic plans. Dan Hahn founded residential solar energy information and policy resource, Solar Power Rocks, in 2007. As the site’s chief architect and senior editor, he developed a national framework for evaluating the impact of residential solar energy policy
Altered Energy – Alternative Energy news