Software sales compensation models have evolved with new licensing models. The mega-deals based on multiple years of customer’s projected need and licensed perpetually are now rare. More common today is the subscription license and with it a requirement to recognize revenue over the term of the contract. In the subscription model commissions are usually tied to Monthly Recurring Revenue (MRR). When the minimum contract term is twelve months, MRR is annualized to determine a booking value for commission purposes. For multi-year contacts, commissions on the out years may either be deferred until the next anniversary date of the contract term or paid at time of booking based on a discounted expected revenue from future years. The discount amounts in the second case may be based on the desirability of multi-year agreements for your company or the level of difficulty in renewing the contract. Both the anniversary and discount approaches have advantages and disadvantages and the choice should be based on your Go-To-Market (GTM) strategy.
If your GTM strategy favors hunter reps responsible for closing new business while upsell and renewals are handled by a different team then the “paid up front” model is the better sales role alignment. This approach relieves the sales rep from having to reengage with his customer and allows him to move on to complete his primary mission of finding and selling to more new accounts. If the sales rep is of the farmer variety then paying out commission on a multiyear contract over time keeps them engaged with the customer, maintaining their relationship and paves the way for both renewal of the contract as well as upsell/cross sell opportunities during the contract term.
However, when your GTM strategy involves delayed monetization based on product use, as is the case with the conversion of some freemium models, neither of the above approaches seems optimized since both rely on the date the contract is booked. Thus the question, “How do we motivate a sales team when the commissionable event is several weeks or months beyond the contract date? I don’t necessarily have an answer but I do have a theory and would like to hear your thoughts on this issue.
When product usage is the gating factor for recognizable revenue the mission of the selling organization needs to extend beyond closing the deal. It means that in order to retain the relationship between individual production and quota, Sales now has a vested interest in the customer’s successful implementation and adoption of your product. While on the surface this seems like a good thing it also means your most expensive sales resources are engaged in tasks that are more administrative or technical, not usually in their wheelhouse.
It seems to me that this scenario is highly analogous to the Partner Manager role where the contract is equivalent to a partner agreement (no revenue) and booking of utilization are much like subsequent sell-through. Usually the Partner Manager role is less leveraged making their variable cost lower than a hunter or farmer. This role should have a better understanding of the implementation/adoption challenges since that’s a pillar in the foundation of their selling process.
So, what do you think? Is this GTM model better aligned to the compensation structure typically used for a Partner Manager or are there better solutions to keep your team motivated while they drive for customer utilization? Your feedback is welcome below… Thanks!
Cheers!
Bob Bacon
This is related to how you incentivize sales in a pay-as-you-go business model that is contingent on customers’ timelines to develop and then launch apps into their own marketplaces. How much to pay now, and how much to pay when things roll out…..?
Thanks for your response Mary Sue! Yes, that’s an accurate description, “pay as you go”. The roles aspect creates the challenge from my perspective. Too often the mega deal, “A” players from the perpetual world get hired into this design and then are unhappy with the comp plan that doesn’t pay on booking. I am amazed at the number of times I send comp plans to a new hire rep and they are surprised by this detail!
Hello Bob, for the role of implementation and onboarding, what I’ve been seen in the SaaS/Cloud industry is the creation of a Customer Success and Growth group, with their variable incentive tied to customer satisfaction, adoption/health, churn and renewal rates. Those roles less focused on new logos but more involved in guaranteeing successful implementations, tracking account usage and health, farming for upsell opportunities and contract extensions and minimizing churn/attrition. The group/department often works close to or blended with sales engineers and customer service.
Hi Bob, yes this is an issue in the SaaS industry where revenue recognition and invoicing is tied to delivery of the service.
Here’s a couple of ways I’ve addressed this in the past:
1. Create a Compensation plan based on Committed Revenue i.e. put milestones in the contract that both the customer and the company sign up for. This forces both parties to sit down and realistically negotiate how much of the software will be used by when, how much money the company can expect to get by when and when the services will be delivered. Companies like Salesforce actually expect you to pay the full Annual amount upfront but most others will do Quarterly billings with some form of true-up reconciliation that’s spelled out in the contract.
2. Provide 100% quota relief and pay a large % of the commission based on the booking (typically 50-75%) and then pay the remaining as deferred commission within 1-2 quarters. Incent the sales person with commissions for additional upsell sold within the first year before the account gets handed off to an Account Management or Customer Success team. This process of deferred compensation also allows you to incorporate clawback terms but hopefully it’s more about getting to steady state and getting all parties paid.
Hope that helps. Reach out directly if you want to bounce other ideas.