How Do You Incentivise SaaS Sales?

Software-as-a-Service (SaaS) is generally thought to be a challenge for incentive plan designers—but is this true? Why is it important and what are some of the key considerations in getting the design right?

What Makes SaaS Sales Compensation Plans Difficult?

SaaS sales models are a challenge as an incentive designer, or for someone in sales operations or finance for a number of reasons. The main reason, though, is that actual realized revenue is unpredictable—something finance folks loathe.

To further exasperate the complexity, the sales and revenue model is primarily driven by the customer, so the control is no longer driven by the business. For instance, a customer may sign a multi-year contract for services, but only be charged for quantum of services they use. Or, a customer may also be buying other company products or services e.g. licenses, design, implementation fees, which then increases the complexity of the relationship, and becomes an even bigger challenge for the salesperson. Last, a customer may also renegotiate the contract mid-term, adding or subtracting products/services or the company may add new products/services to its portfolio, which it wants the customer to take up.

This lack of predictability spans new business sales, existing business, upsell and renewals.

Why Should Businesses Care About Getting SaaS Sales Commission Right?

This is a critical issue for businesses. It is no longer just a technology issue. You have this same model being leveraged across industries as the consumer is driving the need for “sticky business models” and cloud-based services. Markets are becoming highly competitive like you see in technology, communications, finance and life sciences.

What is clear is that the SaaS model is here to stay. And soon enough, there will be another model that businesses will adopt in order to support their customers, as the customer is driving the markets now. This means that business plans, sales and finance plans, as well as the variable incentives to motivate and reward performance need to be sensitive and agile to balance risk and reward more keenly.

Plus the debate between Sales and Finance over the point of sales credit is an important one. Sales will want to reward new business contracts based on contract signature(s). Finance will want to credit once services have been billed or even paid out (rather than when the sales booking takes place). This creates a lag in recognition which is demotivating for the sales rep. Our experience is that the more critical the growth imperative, the more sales will be willing to take risks on where credit sits in the sales process.

So, Then, How do you Handle Commission Structure?

What approaches to plan design will work in this situation—role clarity, definition of sales credit, plan structure? There are three key aspects here.

1. Role Clarity

Businesses may have pure hunters, pure account managers/farmers, hybrid hunter/farmer roles or pure renewals-based roles, although there are far fewer of these than other sectors e.g. telco. Businesses need to be very clear around the responsibilities of each roles and how they work together.

A critical issue is account handover. We know that line of sight and role accountability issue is vital for motivation. If a hunter is commissioned on actual billed revenue, yet has to hand over account control after contract signature, they will experience frustration over not being able to influence customer buying.

2. Sales Credit

The second aspect is how to incentivize different types of sales—new contract sales, account drawdown, upsell, and renewal.

  • New name contracts – Reward on the expected actual contract value (ACV). There will be a calculation for ACV based on the cost of delivering the contract. The reduction from total contract value (TCV) will vary depending on what is included in the contract. This can be a whole contract or just first year ACV. The actual value of the business contract will depend on the relative value of the elements within it. For example, payment up front is more valuable than ‘pay as you go.’ If the contract contains specific strategic products/services, they will have a higher value, others a lower value. Therefore, a contract that has a headline ACV value of $1 million might be calculated as having a value of $1.2 million once all the relative values have been calculated.
  • Account Drawdown: When it comes to the account manager compensation structure, they are in the best place to influence how the customer draws down on the contract. Actual billed revenue is the most common approach. Realized revenue (i.e. based on when the customer pays) is another popular approach. To some extent, it does not matter to the account manager, so long as quotas are set with the credit rule in mind.
  • Upsell: This is relatively straightforward if an account manager is upselling quantity of existing products/services e.g. a customer installs an extra 100 seats in their call center. New products/services cause more issues as they will bring quota accuracy into question. There are two ways to tackle this situation which are complimentary. Incentivize new product sales separately through spiffs to start without incorporation into quota. (Typically, this should be a preferred approach until the economics of the new product/service is proved, then it can be incorporated into the main plan.) Alternatively, amend quota. In this case, having a quarterly performance and payout cycle will provide sufficient flexibility to adapt quotas.
  • Renewals: We have found that businesses have a different view of the relative value of renewals and the relative value of the sale. The approach which is most logical is to either count the whole ACV of the new value but give it a lower weighting. This can vary whether the renewal is competitive or non-competitive. Alternatively, recognition can be limited to the increase in ACV of the contract.

What Components Should be Included in Plan Structure?

In terms of plan structure, we have the found the following aspects to be critical:

The first is paymix and the link to on target payout and quota.

As with all plans, it is important to have the right paymix. This means as a consequence, defining an on target variable element for which a level of sales value will need to be delivered. Setting a quota can be more or less difficult depending on the frequency and size of typical sales for each role. For example, an Enterprise level hunter may have a small number of large opportunities on long sales cycles. There needs to be an assumption of how many of these are required to support the sales strategy and how many can reasonably be delivered each year. Linked to this then is whether to pay against a quota or pay deal by deal. The problem is less of an issue if the rep has many smaller opportunities with shorter sales cycles

The second is payout timing. Practice here varies. It is largely driven by the need to drive growth and risk and tends to be an issue for new contracts and renewals. Companies split payout in different ways, for example:

  • 30% on contract signature, 40% on first billing, 30% after a further period of time. This is worth consideration if actual contract value is unpredictable.
  • 50% on contract signature, 50% after a specific time period. The balance of risk moves more towards the company.
  • 100% on contract signature. The risk is all with the company and occurs typically when the need for new business to fuel growth is critical and when there is less likelihood of the customer reneging on the contract. Some technologies are more or less difficult to change. 

The third is above target incentive structure.

Given the need for growth, it important to recognize above target performance and not to apply caps. There is a need to balance risk and there will be a different level of difficulty in identifying the right level of risk depending on the market. The point of excellence, the point of performance for the 90%ile performer is easier to determine when there is more sales history. Certainly that level will be lower for account managers than new business roles as it is more difficult for account managers to double target revenue.

Where to Go From Here?

In conclusion, incentivizing SaaS sales presents various levels of complexity. The risk without proper planning in advance may be high, with poorly constructed incentives. On the positive side, the benefits can be extremely high with customer acquisition, retention, and a properly designed plan supported by an agile technology solution can differentiate your business by attracting and retaining both customers. It’s worth the investment to get it right.

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