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When companies want to change and optimize their engagement model, the first places they often turn to are the familiar standbys of training and compensation.
We’ve all heard the old adage that “compensation drives behavior,” and many companies believe that if they simply train their existing salesforce or delivery teams on their new offerings or modified roles, then success will follow. However, as we’ve said before, the motions of Land, Adopt, Expand, and Renew (LAER) aren’t just things people do. These are organizational capabilities that companies have to build.
Success in LAER requires organizational transformation and development of these critical capabilities. Training and compensation are important, but they come last in the process, not first. Otherwise, you’ll be training your people to do the wrong behaviors, and compensating them for succeeding on the wrong metrics.
You’ll have much better luck if you leverage the steps in the graphic shown below, starting with real, genuine alignment, and coming to compensation and training only when you’ve taken significant steps to be ready for them. These steps are also outlined in The 7 Levers of LAER Transformation paper.
Instead of starting with compensation and skills, you need to start by getting everyone on the same page, and figuring out how aggressive you want to be in your transformation, and how much risk you’re willing to take to get there. If you skip this step, you’ll have different parts of your company (Sales, Finance, Services, Leadership) on different wavelengths. It’s like having a car where all four tires are each moving at different speeds.
So, how does this alignment (or lack thereof) affect sales compensation? In his outstanding paper XaaS Compensation Models (available to TSIA members), Thomas Lah outlines four strategic postures around XaaS compensation, as shown in the figure below.
TSIA will often hear from executives that their company wants to boldly move to a subscription-based revenue model, and if you asked them to place their companies on the chart above, they’d probably say they were XaaS Aggressive. But, if the compensation plans across the organization–especially the sales compensation plans–don’t reflect this position, then these same executives are fooling themselves.
So, what would an XaaS Aggressive compensation plan look like? Well, first, you can’t give sales the choice of selling the XaaS offers vs. the legacy transactional offers. If you do, then sales (including renewals sales) will take the path of least resistance and sell what they know works and how they get paid for it.
Does your sales team (again, including renewals) get paid for the full contract value of the purchase, even for multi-year deals? If not, then they won’t push for the full-term subscription contract. XaaS Aggressive companies generally pay upfront on at least one year of subscription revenue (and usually on the total contract value), and don’t wait until they get paid by the customer to pay the salesperson.
If you want to aggressively move your revenue streams to subscription and recurring revenue economic engines, these are the types of moves you’ll have to make. Yes, it’s expensive to do this, but if you don’t, you can’t say you’re XaaS Aggressive and mean it.
When it comes time for the renewal, does your account team make the decision as to whether to renew the customer on the same-old support and maintenance contract? Or is the decision on which accounts to move set by company policy, based on a real strategy? According to TSIA research, setting and adhering to that sort of policy is a critical practice for migration success. But, if your account team gets to decide what they sell and who they sell it to, you can’t call yourself XaaS Aggressive.
Remember too, it’s not just sales who have to align around compensation. Another one of TSIA’s core principles around compensation is “Everybody wins when the account grows.” That’s not just a nice saying or some sort of metaphor. It means that when Annual Recurring Revenue increases within an account or a set of accounts, everyone–from the initial salesperson, to the customer success manager, to the services teams–should receive financial benefit.
Now, not all of those benefits will come in the form of a commission based on a percentage of contract value. In some cases, they might come in the form of achieved MBOs or cash SPIFs. In any case, when you align around Annual Recurring Revenue, everyone has to be rowing in the same direction and rewarded for doing so. When the account grows, everyone needs to see material benefit.
But, if you’re worried about giving targets to your Customer Success teams around revenue growth and renewals, the data suggests that it’s something you should consider. When Customer Success managers have targets around ARR growth (and we don’t mean quotas – just MBO-focused targets), not only do growth rates improve (account-by-account and overall), but renewal rates also increase double digits.
To get more information on this topic, watch our presentation from the recent TSIA Interact conference. And remember these 5 Core Principles of XaaS compensation, all covered in that video:
Align the plan with strategic priorities
Keep the plan as simple as possible
Create flexible levers to modify behavior
Design Cross-Functional Compensation around LAER
When the account grows, everybody wins
For more information about Subscription Sales and how membership can help you solve your most pressing business challenges, contact us today!
July 15, 2021
Steve Frost is the vice president and managing director of revenue research and advisory for TSIA. He also serves as TSIA's vice president of subscription sales research. Throughout his career, he has held various leadership and business development roles at companies like Google, Netscape, and Loudcloud, helping them define their go-to-market strategy and business development tactics. Steve is dedicated to helping technology organizations grow their services, subscription, and XaaS revenue by optimizing their practices for growth throughout the customer lifecycle.
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