Subscription Sales Compensation: 4 Tips for Building an Incentive Plan
With the subscription economy comes sales operational complexity. The structure of sales compensation needs to change in order to drive sales motivation aligned with recurring revenue. Erik Charles, Vice President, Product Marketing at Xactly, explains how to sell for long-term customer relationships and provides tips for how to build a subscription sales compensation plan that works.
Once upon a time, a sales rep would fight their way into a meeting, duke it out with the competition, close the deal, take their commission, and then never be heard from again. Once the product was delivered, there might be a service component, but the role of the sales organization (beyond asking for referrals) was typically over. The commission plan reflected the close, but not the customer.
But the subscription economy has changed selling.
Now that we’ve entered the age of the subscription economy with more and more companies offering a more comprehensive customer solution — rather than a “one and done” drive-by sales pitch — subscription sales commission plans have to change.
SELLING FOR LONG-TERM CUSTOMER RELATIONSHIPS
For everything from SaaS software to the Hello Fresh food box that arrives on my doorstep every week, sales teams now need to think about long-term customer relationships. This subscription revenue relationship brings new complexities when building a sales strategy, which includes changing the incentive plan that is needed to drive the right sales rep behavior.
This new market approach results in companies employing increasingly complex go-to-market strategies that involve multiple channels and complex sales models that make annual quota setting difficult, and mid-year adjustments even harder.
In addition to multiple channels, there are multiple roles, geographies, and verticals involved— creating segmentation within sales teams. A Deloitte study identified that 46% of the SaaS industry employs segmentation or specialization within their sales teams whereas only 24% of non-SaaS companies do so. This can make sales crediting a challenge when the orders start rolling in.
Subscription Sales: Incentivizing the Entire Customer Relationship
To approach this, a new type of incentive and bonus plan is needed. Instead of just measuring the value of the initial sale the entire customer relationship needs to be measured, tracked, and incentivized. Sales teams are now selling multiple types of business— new, existing, renewals, and upsells.
They sell on multiple measures like recurring revenue stream (measured in monthly recurring revenue or ARR), Total Contract Value (TCV) and the length of the subscription term. There are multiple potential payment triggers such as contract signature, billing and invoicing, revenue recognition, and finally cash collected. The sales world has become much more complicated with subscriptions.
4 Tips for Building an Incentive Plan for a Subscription Business Model
1. Pay early and pay often. The temptation to pay on cash collected over the period of the relationship will be high— but that puts the sales team into a situation where they are making money off of an annuity stream instead of adding clients. The subscription revenue stream is great for companies, but does not drive the team to get out and close the next deal.
2. Track the contract length. A one-year deal is great, but a three-year deal is better. This is where measuring TCV (Total Contract Value) comes into play. Develop a model where the value of the deal is understood at signing, and pay for that. You should make sure that you have an element of breakage (clients who never go live) in your incentive plan to make sure that you don’t reward closing business that was never going to go live.
3. Separate your Hunters from your Farmers. Once the deal is done, you want your Hunter to go out and bring in more new business. The Farmers should be taking over and managing the relationship now. Their measures are going to be growth, renewal, and churn rates.
4. Split upselling opportunities. Upselling opportunities will be split depending on your business model. It might require the sales rep to come back into the relationship, or it could be handled by the Farmers. Make sure you identify this early and have clear rules of engagement for your teams so that you can avoid conflict.
Managing Incentive Compensation
As the industry continues to grow and mature, transaction volumes are going to be very high as each new customer continues to trigger measurable activity that should be reflected in sales plans. As the number of transactions increases, managing incentive compensation can get out of hand.
Multiple data sources may be used, and the sales operations team will find itself needing to sift through and manipulate these disparate data sources when calculating incentive comp at the end of each pay period.
As the data and team size grows, multiple spreadsheets are created, or a complex homegrown system is built on the fly. Errors will creep in, and, with growth, those errors will compound which will ultimately impact sales productivity as the team spends more time fighting over their commission check instead of taking care of the customer. Running this operation off of the back of the envelope (or from a quick spreadsheet) is not going to work well.
Ensure that you have a system and have established a process to track transactions and properly manage compensation.