by Gordon Graham, Editor, SoftwareCEO
We hear wildly different views from CEOs on how to compensate a SaaS sales team.
Among the many questions to sort out:
- Do you pay commissions up-front on signing, or over time as customers renew each month?
- Who gets compensated for growing the installed base within a customer's site?
- When users can sign up from anywhere, how do you set up territories?
The SaaS business model isn't exactly new. So we went looking for any emerging "best practices" on these questions.
Along the way, we discovered an affordable new service that can help any software biz — SaaS or not — set up better sales comp plans. (Hint: If you're not selling SaaS, skip to the end of this article to learn about it.)
But did we find answers that cut through this debate once and for all? Well, yes and no. There are certainly a few sound ideas on managing and compensating a SaaS sales force.
But the SaaS marketplace is already so vast that it's not useful to generalize about it. The most realistic answer to many questions is "that all depends."
Here are the two experts we asked about SaaS sales forces:
Liz Cobb is CEO of SaaS company Makana Solutions that provides compensation plans for other firms. This is Cobb's third company in this space, so she knows all about comp plans, the special twists of the software biz, and the new realities of SaaS.
Jeff Kaplan is a consultant and frequent speaker on SaaS who will deliver a Software University lecture on July 24 called "Selling SaaS: Why your current sales structure won't work... and how to fix it."
And here are their nine "best practices" for compensating a SaaS sales force.
SaaS compensation best practice #1: Teach your sales force what they're really selling with SaaS
The process, the decision-makers, the value proposition, the customer experience, the price points, and even how you measure success are all radically different with SaaS, compared to licensed software.
"The fundamental thing SaaS companies have to realize — especially those transitioning to SaaS from a more traditional model — is that they're selling a service, as opposed to selling software," says Kaplan.
That sounds basic, but it permeates every aspect of how to compensate a SaaS sales force.
Here are four key differences from a licensed software sale that Kaplan points out.
SaaS selling difference #1. SaaS salespeople will likely be speaking to business end users, as well as IT managers.
"From a sales point of view, that means having salespeople who can convey the business benefits, and sell the ability of the software vendor to deliver on that promise," says Kaplan.
SaaS selling difference #2. They will likely be selling over the phone.
Because of the lower price-points, not many SaaS firms can afford to fly salespeople around the country. So most of the selling happens over the phone or in webinars, not in person.
SaaS selling difference #3. The prospect will likely know the product, from an online demo or using a trial version.
Since prospects already know the key features, going through those all over again will just bore them to tears.
"I tell sales people they don't have to convince the customer of the functional characteristics, but instead convince them that the SaaS vendor is a viable provider."
SaaS selling difference #4. The prospect will be less concerned about your software, and more concerned about your company.
"Rather than saying, 'Hey, we'll be here if you need us, here's our 1-800 number you can call' the salespeople have to talk about how your company ensures the availability, the performance, the security, the privacy, as well as the success of your solution," says Kaplan.
In all these ways, and more, selling SaaS is different. Make sure to help your sales team realize this.
SaaS compensation best practice #2: No one comp plan can cover all SaaS offerings
And one size does not fit all.
"There isn't one best practice that applies to all SaaS situations," says Kaplan. "We're talking about a SaaS marketplace that's now as broad as the overall software industry."
At one end, he points to a simple SaaS service like Constant Contact for e-newsletter services. It's available for such a low fee — $15 a month — that it's essentially an impulse buy, with no salesperson needed.
So a salesperson may be critical to help guide an enterprise through their decision to go with one of these higher-order SaaS solutions.
The SaaS market is too vast for one-size-fits-all advice on comp plans. It all depends what you're trying to achieve, and how much effort and ingenuity it takes to deliver results.
For example, if your SaaS solution sells itself — like Constant Contact — you'll more likely pay a smaller commission and spread around bonuses to everyone helping build the company.
If it's a solution that takes considerable time and skill to sell, but brings in enterprise-class clients, you'll likely pay more of a traditional commission weighted to the initial signing.
And if you take a land-and-expand strategy, where you start small but continually bring on more users from each client, you'll likely want to pay more commissions or bonuses with each wave of growth.
It all depends on your goals. More on this in the next tip.
SaaS compensation best practice #3: Pay according to your company's evolution
In the spirit of "it all depends" you should analyze where your company stands in its evolution.
"Look at your company stage," says Liz Cobb. "Are you really trying to grow market share, or are you trying to milk what you've got already?"
"If you're a startup, you really focus more on bookings, because that's how you grow: You acquire a new customer.
"If you are later in your cycle as a company, and everybody's coming to you anyway, you want to make sure your margins are effective."
This means to focus on profitability, and discourage discounting.
"If you're a very mature business, and you have a lot of competition, there's an argument for paying off margins instead of paying off bookings," she says.
"In the beginning, maybe you don't care so much because you are just trying to grab market share, but later on the profitability is important, and you take that into account."
This is how designing an effective SaaS sales comp plan is clearly, as Kaplan says, "part art and part science."
SaaS compensation best practice #4: Don't design a comp plan in a vacuum
"I don't think it's a good idea to do compensation plans in a void," says Cobb.
"To come up with a good plan, you have to look at all the job roles that contribute to getting that sale, because you want everyone to work together."
She's noticed there are more people in different roles contributing to a SaaS sale than a licensed software sale.
"There is more emphasis on the marketing driving the traffic to the web, there's telemarketing to warm up those leads; there are a lot of different points in the sales cycle where a prospect gets touched."
There are the online demos that prospects can try before they buy. And of course, there's account management to make sure that customers are happy and continue to renew every month.
Marketing, account management, and support people all play a role in a SaaS sale, and so do the R&D people who put together the online demo.
In fact, some SaaS firms don't even have salespeople by that name. So the key is to think of everyone who touches a prospect and make sure they benefit from converting them to a customer.
SaaS compensation best practice #5: Pay as close to the sale as possible
"The over-arching philosophy is to reward at the point of influence," says Cobb.
"You really want to pay people at the point of influence. If it's their job to help bring the sale to closure, then you want to reward them as close to that as possible.
"If you're talking about customer retention, you're probably invoicing for services, so it's really much more about the invoicing."
If you have account managers who get compensated for retaining and expanding the installed base in a customer, pay their incentives after the monthly invoices go out (or after they're paid).
In any SaaS firm that lives or dies by monthly renewals, that Christmas bonus looks a long way off from the dog-days of summer.
SaaS compensation best practice #6: Assign territories by whatever makes sense
So what about territories? How do you set up territories, when customers can subscribe from anywhere in the world?
"In the beginning, you sell anywhere you can, so it's probably geographic," says Cobb.
"But once you've got a lot of traction in a particular vertical, you might want to carve that out to make that a territory in its own right, and give that to somebody with a vertical specialty."
In other words, do whatever makes sense. Kaplan agrees.
"It could be by organization, geography, vertical market; it could be by type of service," says Kaplan.
"All those kind of segmentations can still work, as long as you have the right systems in place to properly identify prospects as they arrive at your door."
SaaS compensation best practice #7: Keep it simple
A huge pitfall for many companies, both SaaS and licensed, is to make their comp plans way too complicated.
"I've looked at these plans from thousands of companies, and I'm shocked at how difficult it is to read them," says Cobb.
In fact, this is one of the key selling points of her firm's offering. Makana's plans are short, with clear graphics that show every person their earning potential.
"That way, people don't have to spend hours digging through the fine print, they can just see it."
OK, we all love to see a simple plan. But how do you achieve it? Keep reading.
SaaS compensation best practice #8: Compensate on only three factors
"One of the biggest things I see in all these comp plans is unnecessary complexity. So keep it down to three measures, that's kind of a best practice," says Cobb.
"In the original comp plan, there might be five, 10, 15 kinds of incentives, because everybody is saying, 'Oh, we should get them to do this, we should get them to do that' and they just end up confusing the message."
What three measures would she suggest?
Again, that all depends. Cobb suggests three likely factors would be bookings, new customers, and product mix, if you have more than one product.
"In some companies that are slightly more mature, it's really easy to sell one product, and it's probably profitable, and another one is not as profitable. So you'd probably want to split out your metrics so that you can pay different rates to better align with the long-term benefit to the company."
Just don't over-complicate your comp plan with too many factors. This opens up your firm to the risk of sales people "gaming" your plan and the unintended consequences that often brings.
SaaS compensation best practice #9: Don't overcompensate channel partners
Cobb says she views the channel as another job role, so to speak.
"You have to understand what the partnership is bringing to you, and how much they are actually doing, and how much you want to pay them.
"Ultimately you want to look at your incentive costs, and roll that all up together.
"Over the years, some of the biggest mishaps in the industry, the things where a major company ends up having trouble with their SEC filings, are often because of sales commissions.
"I gather those train-wreck stories, and almost all of them have occurred because they have a channel partner that they failed to estimate as part of their modeling when they created these incentive plans.
"And suddenly they have double the costs going out than they anticipated. Everybody wants their cut, and suddenly you've cut more than 100 percent, and it doesn't work."
While many SaaS firms are still figuring out their channels — if any — this is a good warning to remember. At the lower print point and trickle of revenue from a SaaS sale, you can't afford to be overly generous with any partners... or compensate them the same way they might be used to from licensed sales.
Building sales comp plans with Makana Motivator
Whether your software firm sells licensed or SaaS, this service can help you build better comp plans.
The software enables you to tinker with base pay, commissions, and bonuses, and see the results instantly in a simple graphic. You can cover non-sales roles just as easily, including just a base salary and bonus.
You can see best-practice recommendations at every step. When you're done, you can generate an easy-to-read PDF for everyone whose job role you defined.
The benefits are obvious: Makana Motivator can deliver more rational, more bulletproof, and ultimately more profitable comp plans.
And the pricing is very cost-effective. For up to 20 employees, it's $49 per user per month, or $490 if you pay for a year in one shot (that's two months free).
For 21 to 100 employees, it's $690 a year. And for 100+ employees, it's $1,490 a year.
We think you would be hard pressed not to get Makana to pay for itself, many times over.
"Most of Makana's customers have one license," says Arthur Gehring, director of marketing. "That's very often the CEO or the VP Sales. Because it's all done on the web, the VP can work up a plan, go into the CEO's office, and bring it up on the screen to finalize it right there with him."
There's lots more discussion about SaaS compensation in the webinars the company has presented; you can see them all here.