Compensating Your SaaS Sales Team

Jul 31, 2008 by Sinclair Schuller

On many occasions, I’ve heard people discuss the issues regarding compensation strategy for a SaaS sales team. The one thing I rarely hear, however, is either how folks are dealing with it in the real world or proposals/frameworks that attempt to solve many of the sales compensation problems. My goal with this post is to provide a “rough draft” framework for compensation and to provide a sounding board for SaaS Blogs readers so we can use our collective brains to discuss potential solutions. Before jumping into the post, let’s recap the issues with compensating your SaaS sales team:

1. Tradition - Sales teams are accustomed to large commissions associated with the large license fees tacked on to on-premise software. This creates significant incentive to sell, sell, sell! SaaS, however, takes an “amortized approach” to the traditional lump sum revenue. This puts the company in a position where giving a life time value or term value commission is at odds with the companies sales position since the funds from the sale have not been realized and/or collected at the time of commission payout. This can cause negative cash flow, force underfunding of growth initiatives, and a slew of other issues.
2. Disincentivization via Annuities - If an ISV decides to avoid the cash-flow problems associated with the paying out of commission on contract or lifetime value, they generally try to do so via an annuity approach to commission. Although this aligns with the corporate revenue cycle and cash position, it tends to do a poor job at providing incentive. Furthermore, a successful sales person may focus strictly on account management of existing clients since commission is paid out in annuities and keeping existing customers happy (and collecting the ongoing annuity payment) is easier than landing new customers.
3. New Job Role - Unless your organization separates the function of account manager from sales, odds are your sales people will also serve as account managers, which might be a new concept to your sales folks but also justifies continuing to payout commissions even after discrete sale events. Sales teams are responsible for keeping your existing customers happy since, as an ISV, you must now provide them recurring value for their recurring money, and part of that value comes from their relationship with you.

We can definitely find many more issues to deal with, but tackling just this set is challenge enough. An idea I’ve been tossing around is assigning “age” to generated SaaS revenue, where a salesperson receives the highest % commission at the beginning of a contract and that as the revenue stream becomes older, the % commission drops.

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The early commission could be pegged large enough to give significant new customer acquisition incentive, but low enough to not create a negative cash flow situation. At the tail end, commission can drop significantly but remain part of the salesperson’s overall compensation, incentivizing long term account management commitment with “base farming” offset by the bloated commission associated with new customer acquisition.

I think something like this might help out, although I’ve never put it into practice. I’m curious as to how people feel about it, and if anyone has used any other compensation mechanisms that either worked or didn’t, so please chime in!

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When Should Software be Sold Pay Per Use?

Jul 2, 2008 by Sinclair Schuller

Part of defining your SaaS business is determining a pricing strategy. Two primary categories of pricing taxonomy in the SaaS space are pay per use (each time a user uses your software, you charge a well known amount. Much like buying beer at the bar) vs. fixed recurring pricing (much like paying for cable television, where you pay some periodic fee for generally unlimited access). As a SaaS ISV, when should you choose one vs the other?

The decision really boils down to understanding value acquisition from the customers perspective. In order to charge on a recurring basis, you need to be able to justify your pricing with a measure of the magnitude of value acquired by your customer along with value acquisition frequency. For example, if you’ve designed a very valuable piece of software that might be used once or twice a month by your customer in their business processes, odds are they would prefer to “pay per drink” rather than a recurring fee since theoretically you should be able to charge less in an absolute sense for that one time used instead of unlimited for a given month (they would generally be willing to pay a premium as long as total cost is lower than recurring fee models). However, if your offering has frequently recurring value acquisition from your customer’s perspective, odds are they’d prefer to pay a fixed fee at some frequency knowing that the firepower is available to them when needed and that cost is fixed but value acquisition has no ceiling.

Clearly, what I’ve described is a trivial rule of thumb. If you’ve  ever encountered this decision or have thought about the differences in these models, what other components should be considered? Have you ever offered a SaaS service in one model and then switched, or ended up offering both?

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