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.

Page 2

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

Page 3

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.

Page 4

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 gott@bettersalescomp.com 310-968-3408 www.bettersalescomp.com

www.xactlycorp.com

– Matt Hodges, Mid-Market Account Executive

I’m now selling more strategically because I’m confident that the numbers will always be accurate.

1-866-GO-XACTLY