Since my post entitled SaaS Sales Compensation Made Easy, I’ve received a number of inquires about how to adjust SaaS sales commission percentages for very short and very long term subscription contracts, e.g., renewal periods of 1 month vs. 2 years. Clearly a 2 year contract paid in advance is worth more than a monthly renewal and should pay a higher commission. But, how much more?

In the model, I propose as best practice that SaaS sales commissions should be paid 100% up-front in proportion to the lifetime value of the sale (LTV). But to keep things simple, recurring revenue (ARR, QRR, or MRR) is substituted as the everyday measure of LTV, because LTV is always directly proportionate to recurring revenue. Basically, pay on recurring revenue in SaaS just like you would pay on price for any other product. It’s that simple….provided: 1) contract terms don’t vary widely and 2) the churn rate is uniform across customers (no churn cohorts).

However, adjusting your SaaS sales commission plan for these two factors isn’t complicated. You can do the LTV math in the background to produce a simple table of adjustments to the baseline SaaS sales commission for each contract term and/or churn cohort. Then, include this simple table of adjustments in your SaaS sales commission plan. The spreadsheet below does exactly this. (you can “Click to Edit” and play with the numbers or download to Excel. Go ZOHO!).

This enhanced SaaS sales commission model incorporates the effect of payment terms
and churn on lifetime value. The top table adjusts for contract term only,
whereas the bottom table allows for churn cohorts as well.

From the previous SaaS sales commission model post, we know that the lifetime value of a SaaS sale comprised of recurring subscription payments made in advance is given by the following formula:

i = cost of capital; a = churn rate

It is evident from this formula that if either contract term (i) or churn (a) vary across a wide range, then the calculation of the SaaS sales commission based on LTV should be adjusted accordingly (see LTV notes in the spreadsheet for the impact of contract term on i ). Put simply, if your contract terms (renewal periods) vary from monthly to every 2 years, you should Read more »

I just have to say it. SaaS sales compensation is not nearly as complex and mysterious as it has been made out to be. I’ve read so many discussions on SaaS sales compensation that claim you should do this in one case and that in another case, such that by the time you finish you can’t see the forest for the trees. Since I’m in the middle of this series on SaaS metrics, it seems high time I got around to addressing this topic (which I’ve been avoiding simply because I did not want to plant yet another tree).
So, here is the scoop….

Wait! Relax. Although at first glance, lifetime value may appear to be an overly complex metric to use for sales compensation, it is always proportionate to recurring revenue. So, you simply have to replace “price” with MRR or QRR or ARR in your favorite sales compensation model and you are fine. That’s it! Now you can apply any of the various sales compensation models that you already know and love. Your particular choice should match the specific goals, products, pricing and culture of your specific business, as with any other sales compensation design challenge.

The primary principle of sales compensation is to pay the sales rep in proportion to the value of the deal, usually measured by the price of the product. The value of the deal in turn Read more »

The growth challenge of most SaaS vendors can be boiled down to the following simple formula:

revenue growth = price x volume = average MRR x new sales velocity

Delivering on the promise of low total cost of ownership, the price of SaaS is often an order of magnitude lower than the price of licensed enterprise software. This low price point creates enormous pressure on volume. Reaching profitability may require a new customer every week, every day or even every minute! Increasing sales velocity is the essence of the SaaS business challenge.

At each stage of the buying process, your SaaS prospect will encounter adoption costs and risks that reduce your sales velocity. I like to compare this to scaling a cliff where adoption costs are measured by the height of the cliff and adoption risks are measured by the difficulty of the climb.

How high are the adoption costs and risks that your SaaS prospects must surmount?

…Here are seven proven strategies for increasing SaaS sales velocity by reducing the adoption costs and risks more >>>

The preceding is an excerpt from a guest blog post by Chaotic Flow at Sandhill.com
Just click through for the complete post. Cheers! JY

If you read my SaaS Sales Management Tips series, then you may have noticed a glaring absence of detail with respect to specific SaaS sales organization strategies. The reason for this conscious omission is that there is no one right strategy. There are only the strategies that are right for your specific SaaS business at a specific point in time with your specific situation, i.e., customers, products, growth, maturity, etc. However, these strategic decisions can make or break the growth and profitability of the business, because more than any others they determine the balance between maximizing revenue and minimizing acquisition cost. They are some of the toughest choices a SaaS Sales VP or CEO has to make.

The SaaS Adoption Dilemma
The third post in the SaaS Sales Tips series discusses strategies for accelerating organic growth (SaaS Success Do #3) by making it possible for your customers to buy from you even if you don’t show up for work. But, what do you do when you need revenue today and your under-educated customers and your overly-complex SaaS product just can’t seem get it together on this approach? You’ve just encountered the SaaS Adoption Dilemma, a situation that arises when your adoption costs are way too high and you must choose a strategy for lowering them. Your very unpleasant short term choices are a) forego revenue until your online marketing and support reach maturity or b) cover up the problem with people and wreck your acquisition costs (SaaS Don’t #4). If you’re measured on revenue as opposed to margin and you earned your sales stripes in enterprise software, then you will probably choose option b) without a second thought. But, you may have just made your quarterly commission while sinking your company, your stock options and your job when the business runs out of cash.

The organizational strategies of option b) typically come in two flavors: pre-sale lead reps to find, educate and qualify prospects and pre/post-sale technical services reps to ensure successful on-boarding and ongoing use of the product. While the vision should be for these activities to be 100% automated, the reality is that they rarely are in the early days and that there is a limit at maturity to the achievable degree of automation set by the inherent complexity of your product and self-serviceability of your customer. These constraints imply a steady state organization at maturity–for example a ratio of 3 sales reps to one lead rep and one technical services rep–that you are sure to overstaff in the early stages before you have fully automated adoption through online marketing and support. The danger is that you lock into this bloated, early stage organization model and create excuses for not simplifying adoption through automation, thus killing your long term profitability. A great way to stay on top of this threat is to include all ancillary staff in your calculation of sales productivity: revenue per rep, where rep includes everyone required to acquire and keep a customer, not just the sale rep.

SaaS Sales Organization Options Arranged by the Strategic Dimensions They Address

Hunting, Farming, and Other Pastimes
Conventional wisdom holds that SaaS sales organizations should be split into separate sales and account management groups that are responsible for new business and recurring business, hunters and farmers respectfully. While this is a good rule of thumb, it is not always the case. Read more »

Revenue is the fuel that powers the engine of any business. It enables movement, acceleration and maneuverability. Without revenue, there is no profit and eventually you run out of gas. While venture funding may provide a startup with a temporary reprieve from this harsh reality, confusing revenue with cash will only result in failure and loss of what might be your lifelong dream. You can borrow cash, but you cannot borrow revenue.

So, it would seem like building a sales operation that generates sufficient revenue to cover costs and scale profitably would be axiomatic and there would be no need to include it in a list of tips for SaaS sales executives. Unfortunately, the characteristics of the software-as-a-service rental model–vertical integration requiring more up-front capital investment combined with low pay-as-you-go subscriptions–have conspired to obscure this unavoidable economic fact. The challenge of the SaaS sales executive is more subtle than that of the traditional enterprise counterpart. While large up-front enterprise license deals support an expenses-be-damned all out attack on revenue, the SaaS model requires a more measured approach that maintains a lock on acquisition expenses, high capital efficiency and a relentless drive toward profitability.

SaaS Sales Tip #10 – Match Supply to Demand
Selling enterprise software in 1995 was like expanding into a vacuum. Innovation was everywhere, business productivity leaps were huge, and new product categories were emerging everyday. If you sold well and could demonstrate immediate ROI, then you could close the deal. In many sectors, the sales rep could show up cold and single-handedly unleash latent demand. This is rarely the case today with SaaS. Most SaaS businesses are built on the premise of expanding to underserved market segments, e.g., SMBs out to the long tail, or replacing traditional enterprise systems for lower TCO. Either way, the sales hurdles are higher and they create scenarios where acquisition costs can overwhelm revenue potential. The secret to SaaS sales success is not selling harder, it is selling smarter.

Selling smarter entails distinguishing between where you can profitably create demand versus where you can only profitably service it. Then, matching that demand with the nominal sales investment required to close. For example, if you go to a trade show where there are too few prospects too early in the purchase process, then you may be pushing on a string. However, if your website brings in highly qualified prospects, then your sales investment should be well worth the return. Similarly, cold calling to a purchased list may return nothing, but calling to a targeted group of current customers or registered prospects with a specific offer might just work. Every SaaS business has a unique and complex mix of target prospects that vary by revenue potential, pain level, product understanding, reachability, etc. Knowing where to push and where to pull is not easy, but it is essential.

SaaS Sales Tip #11 – Consistently Increase Contribution
Assuming that you have mastered the art of knowing where to push and where to pull in your market, you still have the challenge of applying the exact amount of force required to close each individual deal. Read more »

This is the third post in a series of tips for SaaS sales executives. The first two posts focused on designing an effective SaaS sales organization and sales process efficiency, respectively. This post is concerned with accelerating revenue growth. The final post will discuss scaling the sales operation profitably in a high growth environment. Enjoy!

In its simplest mathematical form, revenue is equal to quantity of units sold times unit price.

revenue = volume x price

Strangely enough, this basic formula captures the essence of the SaaS sales challenge. Accelerating revenue growth amounts to increasing volume and increasing price. For most software-as-a-service businesses, volume equals the number of paying customers that are using the product and price equals the lifetime value of each customer’s subscription.

SaaS Sales Tip #7 – Lever-up through Marketing
In SaaS, particularly in a SaaS startup, it is very difficult and expensive to drive revenue by sales reps working alone. Outbound calling and offline meetings explode acquisition costs by applying too much sales investment where there is too little prospect commitment (see SaaS Sales Tip #6). The price point and complexity of the typical SaaS deal imply an extremely tight integration between sales and marketing. As a SaaS sales executive, you should never go it alone.

Marketing activities provide leverage to your sales investment, because they move customers through the purchase process many at a time, whereas sales moves them though one at a time. You should work closely with the marketing organziation to provide the feedback and direction necessary to create programs and content that bring in high quality leads, automatically nurture less committed prospects and accelerate active opportunities through to close.

SaaS Sales Tip #8 – Simplify, Standardize and Automate
In the Top Ten Dos and Don’ts of SaaS Success, I claim that you should accelerate organic growth by encouraging and enabling your customers to buy from you even if no one shows up for work. In this context, organic growth is defined as revenue aquired with zero marginal cost, now that is leverage! When you have achieved this level of marketing proficiency, then the SaaS sales executive can take a step back and apply precious sales resources to only the highest value activities for highly qualified prospects–those places where your prospects and your pipeline benefit the most from a personal touch to move a deal along or increase its value.
Read more »

This is the second post in a series of tips for SaaS sales executives. The first post addressed the challenge of designing an effective SaaS sales organization. This post is concerned with creating and managing an effective, efficient sales process. The last two posts will provide tips for accelerating revenue growth and scaling the sales operation profitably in a high growth environment.

In the first post in this series, I claimed that the essence of the SaaS sales operation is volume and speed, and that depending on average deal size each sales rep may need to close on the order of 100 opportunities to make quota. As such, a close ratio of 10% vs. 70% means the difference between having to manage 1000 opportunities vs. 150. The efficiency with which the sales process is orchestrated impacts the business from top to bottom. Strategically, it determines the sales expense contribution to acquisition cost, while its practical impact is personally felt on a daily basis by the sales team with a direct correlation to rep motivation, burnout and turnover. These tips address the challenge of getting the SaaS sales process under control, so that you can set proper expectations for your management and your team, increase sales performance through continuous improvement, and lay the foundation for accelerated, profitable growth.

SaaS Sales Tip #4 – Set Clear, Objective Sales Goals
Setting clear goals is good practice for any sales organization, but software-as-a-service sales managers don’t have it quite as easy as their software counterparts, because of the subscription model. The value of a deal is more difficult to measure. It depends on time, renewal rates, and future events beyond the initial salesperson’s control making it difficult to define exactly the dollar value of the salesperson’s contribution. However, this murkiness makes it all the more important to clarify sales goals and remove uncertainty around compensation by having objective, clear measures of goal achievement. Having a simple, objective formula that defines the value of a deal based on recurring revenue is the easiest approach. But, you should also have a solid model of lifetime customer value and the contribution of sales to total acquisition costs, so that you can design goals and commission plans that will scale profitably.

SaaS Sales Tip #5 – Measure, Measure, Measure
The old maxim that you can’t manage what you can’t measure is especially true in software-as-a-service sales. Once you achieve traction in your market your sales pipeline and database will quickly swell to an unmanageable number of opportunities and prospects with a wide range of revenue potential, qualification, and complexity. Read more »

The essence of the software-as-a-service sales model is volume and speed. It is a reflection of the larger SaaS business model that assumes large economies-of-scale and low subscription-based pricing. The result is that the SaaS sales operation needs to be managed as a tightly integrated service delivery system, like an airline or a luxury hotel, with each functional group working in tandem to deliver a coherent customer experience. It requires a motivated sales team on the front line that is backed by a strong process infrastructure and a service-oriented culture, as contrasted with the lone-wolf road-warrior approach of traditional enterprise software.

This is the first post in a series of 10 Tips for the SaaS Sales Executive tasked with growing revenue and building the sales capabilities at an ambitious software-as-a-service startup. This post will discuss key aspects of sales organization strategy. Future posts will provide additional tips for accelerating revenue growth, improving sales process efficiency, and finally scaling the sales operation profitably in a high growth environment.

SaaS Sales Tip #1 – Instill Customer Service Excellence
Customer focus is not a new idea, but the difference between theory and practice can be striking from one business to another. Achieving customer service excellence begins with values and culture, but in a high-volume business it must also be ingrained in process. The best values in the world will not help if your salesperson fails to satisfy your customer due to faulty systems or information. In fact, over time faulty service processes will erode even the strongest cultural values, because everyone will lose faith as they see the hypocrisy between what you promise and what you can actually deliver. Moreover, if your business is going after the SMB market or some other under-served segment, then service can be a critical differentiator. It is more likely than not that your high-end enterprise software competitor qualifies out and ignores your sweet spot prospects, because it cannot service them profitably. This creates frustration that you can turn to your advantage by outperforming the competition in good old fashioned customer service. However, this advantage will be forfeited if you fail to establish a strong service culture and back it up with the right sales support systems, including your web site, communications infrastructure, sales automation, selling tools, training and interdepartmental cooperation, so that your sales team can deliver the goods.

SaaS Sales Tip #2 – Build the Right Team for the Job and Keep it Motivated
Sales is a tough job in any industry, but it is particularly so in SaaS. The skills required to bring in a $1M quota when the average deal value is $10K are distinctively different from those required when the average deal value is $1M. That’s 100 deals vs. 1 deal, and that can easily translate into 100 times the activity level and 100 times the frustration if sales staff are not supported by the right management, process and culture. SaaS sales reps are a unique breed and must possess a personality with an extremely high level of energy and enthusiasm that thrives on human interaction and constant activity. Read more »

Here is a picture I find myself drawing often. It is closely related my last B2B SaaS post regarding old enterprise habits, but it is actually much more general. Most Web application / Software-as-a-Service companies will find themselves spending up to 50% of revenue on sales and marketing. But, how much should you spend on sales vs. marketing. And, how tightly integrated do these two functions need to be? Of course it is common wisdom that sales and marketing need to work together, but this need is acute for most Software-as-a-Service companies. In enterprise software, where the price point is $100-500K per transaction, the marketing organization is only loosely coupled to revenue through lead generation, messaging /collateral / website, and generating awareness through events and PR. Contrast this with a consumer application, where the tables are turned completely and what sales does exist typically takes the form of partnering and business development—which may be revenue generating, but is not aimed at closing revenue directly, i.e., getting more users.

Most B2B SaaS offerings and B2B2C Web applications (e.g., email marketing, Gadget platforms, online survey research, customer and channel support, etc.) tend to fall right in the middle of this graph. One reason for this is subscription/transaction- based pricing (as opposed to a three year, 1000 user enterprise agreement), as well as the general expectation of a Web or SaaS application to cost significantly less than software. The result is that SaaS companies must continually strive for reduced selling costs, increased marketing efficiency and tighter sales-marketing integration to create a revenue-generating machine—often by leveraging technology to automate as much of the sales cycle as possible from awareness to trial to acquisition and even through to support and add-on selling.