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Page 1 Moving from Traditional Licenses to Subscription – Better Sales Compensation Practices By Clinton Gott, Principal at Better Sales Comp Consultants One of the most common questions we receive from software organizations today is how the sales compensation program can support the strategic evolution from traditional licenses to subscription-based (SaaS) models. Wall Street and company valuation methodologies all seem to reward for it, and many have to come to label this the new “strategy du jour”. It’s not always the easiest change to make and the change itself may mean different things and have different implications to those espousing such a strategy. While each organization’s specific needs, opportunities, and intentions may be unique, there are a number of considerations that we recommend keeping in mind. Subscription Sales – “New to Some but Not to Others” It’s helpful to first realize that subscription or recurring revenue transactions may be somewhat new to software companies but they are not new to a wide range of industries. Consider insurance premiums that renew each year and thus represent run rate business. Or consider an organization that sells credit information to banks for loan processing; they buy that information each and every year. From the Consumer Packaged Goods space, channel managers who sell through retail chains clearly experience run rate revenue. For those who want to go way back and may have hoofed it as a newspaper delivery person, that too is a run rate or recurring revenue model. I recall getting my $1/month for each house on my route; I didn’t know I was at the cutting edge of strategic evolution. The key distinction is company serving as an ongoing supplier of products or services versus one with one-time or intermittent purchases. Clearly, many industries have been wrestling with this topic for a long time, while some software organizations are facing it for the first time, at least for software licenses although not necessarily for maintenance and/or services. In some of these industries, such as insurance, compensation is paid on the run rate business, which creates a familiar annuity stream that is often common and accepted. In some worlds, these plans will utilize a hard threshold (compensation payouts occur only after a certain point of results) or a soft threshold (compensation payouts start at first dollar but at a lower rate and increase as results progress toward a performance expectation or goal); these pay line features can help focus sales energy on the portion of the achievement curve most under a rep’s control, e.g., where they control protection and growth, rather than purely absolute volume. These are not necessarily models that the software industry typically tries to emulate nor should, but it’s a good reality check to understand that the situation is not truly new.

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Page 1: Moving from Traditional Licenses to Subscription – Better Sales ... · Moving from Traditional Licenses to Subscription – Better Sales Compensation Practices By Clinton Gott,

Page 1

MovingfromTraditionalLicensestoSubscription–BetterSalesCompensationPractices

ByClintonGott,PrincipalatBetterSalesCompConsultantsOneofthemostcommonquestionswereceivefromsoftwareorganizationstodayishowthesalescompensationprogramcansupportthestrategicevolutionfromtraditionallicensestosubscription-based(SaaS)models.WallStreetandcompanyvaluationmethodologiesallseemtorewardforit,andmanyhavetocometolabelthisthenew“strategydujour”.It’snotalwaystheeasiestchangetomakeandthechangeitselfmaymeandifferentthingsandhavedifferentimplicationstothoseespousingsuchastrategy.Whileeachorganization’sspecificneeds,opportunities,andintentionsmaybeunique,thereareanumberofconsiderationsthatwerecommendkeepinginmind.SubscriptionSales–“NewtoSomebutNottoOthers”It’shelpfultofirstrealizethatsubscriptionorrecurringrevenuetransactionsmaybesomewhatnewtosoftwarecompaniesbuttheyarenotnewtoawiderangeofindustries.Considerinsurancepremiumsthatreneweachyearandthusrepresentrunratebusiness.Orconsideranorganizationthatsellscreditinformationtobanksforloanprocessing;theybuythatinformationeachandeveryyear.FromtheConsumerPackagedGoodsspace,channelmanagerswhosellthroughretailchainsclearlyexperiencerunraterevenue.Forthosewhowanttogowaybackandmayhavehoofeditasanewspaperdeliveryperson,thattooisarunrateorrecurringrevenuemodel.Irecallgettingmy$1/monthforeachhouseonmyroute;Ididn’tknowIwasatthecuttingedgeofstrategicevolution.Thekeydistinctioniscompanyservingasanongoingsupplierofproductsorservicesversusonewithone-timeorintermittentpurchases.Clearly,manyindustrieshavebeenwrestlingwiththistopicforalongtime,whilesomesoftwareorganizationsarefacingitforthefirsttime,atleastforsoftwarelicensesalthoughnotnecessarilyformaintenanceand/orservices.Insomeoftheseindustries,suchasinsurance,compensationispaidontherunratebusiness,whichcreatesafamiliarannuitystreamthatisoftencommonandaccepted.Insomeworlds,theseplanswillutilizeahardthreshold(compensationpayoutsoccuronlyafteracertainpointofresults)orasoftthreshold(compensationpayoutsstartatfirstdollarbutatalowerrateandincreaseasresultsprogresstowardaperformanceexpectationorgoal);thesepaylinefeaturescanhelpfocussalesenergyontheportionoftheachievementcurvemostunderarep’scontrol,e.g.,wheretheycontrolprotectionandgrowth,ratherthanpurelyabsolutevolume.Thesearenotnecessarilymodelsthatthesoftwareindustrytypicallytriestoemulatenorshould,butit’sagoodrealitychecktounderstandthatthesituationisnottrulynew.

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SoftwareandtheFocusonBookingsSoftwareisoneindustrywithalegacyofpayingonbookings.Comparedtosomepurerevenuebasedmodels,payingonbookingsorcontractsigningmorecloselytiesthecompensationpayoutstothesoftwarelicensesalesdirectlyunderasalesperson’scontrol.Folksoftenfeelbooking-basedplanscreatemoresalesenergy,inspiremoremotivatedreps,andaligntoexcitingsalescultures.Andbookingsofcourseavoidstheannuityfeelinhighrunratemodelsandavoidsthechallengesofusingthresholdstocreatetherightenergy.[Onesidenoteofcourseconcernstheneedforroleclarityandwhosupportsnewvs.existingaccounts,butthat’sbroaderthanthisarticleandisbestleftforanotherday.]Intermsofsalescomppractices,wefindsoftwareorganizationsaremostinterestedincontinuingtopaysalesincentivesonsomeformofbooking,andsomostdesignsattempttoaligntothisobjective.Buthowandwheredosubscriptionlicensesfit?SoftwareEvolutionPartI–“LivinginBothWorlds”Inmanycases,whensoftwarecompaniestalkaboutevolvingfromtraditionallicensestosubscriptionlicenses,theyrarelymeanasuddenandwholesalechangefromsellingperpetuallicensestotermand/orSaaS.ParticularlyinlargesoftwaretransactionsinaB2Bspace,wefindmostcompaniesreallymeantheywanttosupportacustomerbuyingthesoftwareinanynumberofways–perpetual,term,orSaaS.Theorganizationwantstosupportanyandallsoftwarelicensesales,whilestillencouragingasteadyandgradualmigrationtowardsubscriptiondeals.Eventhenthough,manyacknowledgethatcustomersneedtobeallowedtobuythewaytheywanttobuy,orsomecompetitorwillswoopinandoffertheflexibilitythecustomerdesires.

Inthesecases,themostimportantfeatureofasalescompensationplanisthatitdoesnotpushasalespersontoforceacustomertobuyinanuncomfortableway.

Oneimportantconceptcompaniesconsiderishowtocreatedealneutralityordealagnosticismforthesalesrep.Thismeansthatnomatterhowthecustomerwantstobuy,thesalescreditandtheincentivepaymentiskeptrelativelyconsistent.Ifwepaythesameeffectivecommissionratesforaperpetualdealvs.anannuallicense,it’seasytoseetherepwillonlypushforthemuchlargerperpetualdeal.

Poorlydesignedsalescompplanscansabotageratherthanenableanevolvingsubscriptionstrategy.

Oneofthemostcommonapproachesistofindwaystonormalizethecreditofeachlicense.OnetechniqueistodecreasethesalescreditforaperpetualdealtoaligntotheAnnualContractValue(ACV)forcomparablesubscriptiondeals.WealsoofcourseneedtoconsiderhowtohandleMaintenanceaswellasProfessionalServices,allundertheconstructofpaying

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onbookings.Inthespacebelow,weprovideanexampleofhowoneorganizationchosetocreatedealneutrality.

Category Type CoreCreditingRules

License Perpetual TotalDollars/5years

Term TotalDollars/TermYears

SaaS AnnualizedValue

ProfessionalServices(PS)

NewDeals PSDollars/3years

Upgrade PSDollars/3years

Maintenance NewDeals 1stYearDollars

Thistablewasspecifictooneorganization’sbusinessandwillalmostsurelynotbeperfectlyapplicabletoanother.Buttheoverallconceptsareworthconsideration.ThisclientdeterminedtheirCoreCreditingRulesbasedonahistoricalanalysisofpriordealsandanestimateofhowtheycouldcreatedealneutralityforfuturedeals.Thesalespersonwasbasicallykeptwholeintermsofsalescreditingandcompensation,regardlessofhowthecustomerwantedtobuy.Inothercases,we’veseenexamplesofcreditingrulesthatslightlyovervaluetheresultsforSaaSversustraditionallicenses.Orwe’veseencreditingupticksontheACVvaluebasedonthenumberofbindingyearsinthecontract.Again,eachcaseisdifferent,buttheoverallconceptisoneofthebettersalescompensationpracticescompaniesshouldconsiderwhenmovingfromtraditionallicensestosubscription-basedopportunities.SoftwareEvolutionPartII–“DivinginwithBothFeet”Inmuchlesscommoncases,acompanymaysimplydecidetoactivelyendsalesoftraditionallicensesandmove100%tosubscription-basedsales.ThecaseofAdobeseveralyearsagoisonecommonlycitedexamplewhereanorganizationmadeanaggressiveandnearfullscalemove.Inthesecases,thenecessarysalescompensationplandesignapproachstillgoesbacktobestpractices–identifytherightmeasures,determinethebestmechanics,andworkontheplandetailstoaccomplishyourobjectives.Inmanyways,companiesthatgoinwithbothfeetareresurrectingaspureplaySaaSorganizations,andtermslikeMRR,QRR,andARRwillallarise.Inreality,thebuildingblocksofanACVbasedplan,potentiallywithcreditingupticksformulti-yearresultscanstillworkquiteeffectively.ACVandSaaSsalesoftengohand-in-hand.

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OverallImpacts–“BeCarefulWhatYouWishFor”Inmostcaseswe’veencountered,strongearlyenthusiasmtomovetowardsubscriptionbaseddealsendsupwaningabitasrepercussionsareassessed.Thereareusuallysignificantrevenuerecognitionimpactsinthecurrentyear.CompanieslikeAdobehadtoprimethemarkettounderstandthatneartermrevenuemaydroptogainthebenefitofsteadierandlonger-termresults.We’veseenthiseffecteveninprivatelyheldcompaniesasnoonewantstomissoverallfinancialtargetsorseeneartermincreasesintheexpensetorevenuerelationship,evenwhenconsideringthefuturebenefitsthatsubscription-basedresultscanoffer.Patienceisrarelyavirtueintoday’smodernworld.Asonerecentclienttoldus,“Wecan’tshakeouraddictiontoend-of-yearperpetualdeals!”.Wehearthisquiteoften.Therearecaseswhereacompany’sleadershipmaysimplyneedorwanttohaveadealtakenperpetuallyversusstickingtothesteadysubscriptionstrategy.Insuchcases,havingadealagnosticsalescompensationplancanensurethesalesrepresentativeiswillingtofollowwhateverdirectionsheorsheisgiven.Therightplancanalignoverallstrategicvision,pragmaticin-yearrevenuerecognitionrequirements,andtheresultingsalescompensationpayouts.Itcanalsoworkforthecustomerswhoareallowedtopurchasethewaytheydesire.Ultimately,webelievethebestsalescompensationplansworkforthecompany,thesalesrepresentative,andthecustomersaswell.

Biography Clinton Gott co-founded Better Sales Comp Consultants with Ted Briggs in 2009. Over nearly two decades of industry experience, Clinton has helped hundreds of clients assess, design, and communicate better sales compensation plans. He avidly believes in the power of an enabled sale force driven by motivational and cost-effective sales compensation plans, crafted through an effective, efficient, and collaborative design process. His design solutions leverage cross-industry best practices, with recent experience in general high-tech, software (SaaS and traditional), consumer products, financial services, logistics, distribution, and many others. His prior experience includes senior roles at Towers Watson and Sibson Consulting, and Clinton earned an MBA with distinction from the UCLA Anderson School of Management.

Contact Information Clinton Gott Principal, Better Sales Comp Consultants [email protected] 310-968-3408 www.bettersalescomp.com

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