As software products and markets rapidly evolve, software companies must continually re-evaluate their pricing strategies. This may be in response to lagging revenue and profit but is often also a response to customer demand and market changes. We have seen the shift from on-premises to cloud-based software, largely in response to customer demand but also to build recurring revenue and ultimately boost valuation. And now, more companies are moving from annual subscriptions to usage- or consumption-based pricing. This allows customers to only pay for what they use while allowing software companies to capture more directly some of the value that customers gain through using their software.
All of these changes impact the sales process and thus the expectations for sales roles. In the case of subscriptions, there must be a greater focus on getting the renewal. Also with subscription pricing, and even more so with consumption pricing, a critical if not primary goal of the sales effort is to ensure that customers are trained on, using, and getting value from the software, particularly for higher-margin and add-on features.
Along with these changes comes a dramatic shift in how revenues accrue and are recognized from the initial sale, extending the timeline of payment, perhaps indefinitely. Furthermore, declining usage can directly and immediately impact company revenue.
If your sales compensation plan has not changed to align with new role responsibilities and revenue streams, you will undermine the effectiveness of the pricing strategy. Salespeople may feel they have less influence over results and may be frustrated that they are not rewarded for their hard work and results with any certainty until months or years after the sale.
Furthermore, if your offerings include a mix, or a menu, of payment options, i.e., permanent license, per-seat subscription, and usage-based pricing, the situation becomes more complex. Certainly, the sales compensation plan needs to ensure that rewards are not more attractive for one pricing method vs. another…or at least do not get in the way of the transition to the pricing model the company wants to promote. But to focus sales effort more optimally, the rate and timing at which the salesperson is being paid should align with the rate at which the company is being paid.
The following are common pitfalls:
Unintentionally favoring offerings with a shorter payment horizon. If salespeople are credited and paid when revenue is received or recognized, they may avoid offerings with a long payment horizon. After all, a $1,000 commission check received next month has far higher perceived (and actual) value than $1,000 received over the next 12 months. Furthermore, immediacy enhances motivational impact.
Now, companies may not want to pay incentives up front for future revenue for at least three reasons:
- The ultimate value of the sale, based perhaps on usage or expected add-ons, is not known at the time the salesperson closes the deal. And if there is truly little certainty about the value of the sale it may be unavoidable to time payment with revenue received. But in most environments, there is a degree of certainty. So, it may be reasonable to pay a portion of the commission up front and pay a second portion after a period during which the company can accurately calculate the value of the sale.
- The salesperson may be integral to driving implementation, training, and usage post sale, and if they are paid up front, they may have no financial incentive to accomplish these tasks. But most software companies value their account executives primarily as hunters and appropriately assign post sale tasks to solutions engineers, account managers, and customer success managers. They generally want account executives to move on to the next sale. So, it may be better to pay the account executives up front and compensate post-sale resources on post-sale results.
- Companies may feel that it is only fair to pay salespeople when the company recognizes the revenue. Of course, salespeople do not share this view and are demotivated by the delay. And if the revenue is largely certain and outside of the influence of the seller, the main additional cost to the company of paying up front is the financing cost of the incentive. From a motivational perspective, this is money well spent.
Not considering alternate measures for certain sales roles. Just as BDRs are often paid on sales-qualified appointments—because that is their primary job and because they are not responsible for the ultimate value of sales—you may want to pay your account managers and customer success team on usage: the volume of usage, the number of users, and even the features that are being used. This may be a good idea even if revenues are not directly tied to usage, because usage indicates value and surely drives renewal. This data is becoming easier to collect, is directly tied to revenue and future revenue, and is better aligned with the job responsibilities than paying on revenue alone.
Overpaying or underpaying for renewals. As pricing models change, renewal dynamics may as well. As a rule, if renewal is relatively automatic, companies should strive to pay as little as possible for renewal revenue. And they often do that by having a separate renewal team, or by using less expensive sales time from non-account executive resources for renewals. However, there may be instances when a renewal is more complicated and may involve price negotiations or even revising proposals. In those cases, it may be appropriate to involve the account executive. But payment for the renewal should be on an exception basis. If an account executive can earn much of their incentives from renewals, they will spend more focusing on renewals than on hunting new business.
Finally, let us not forget that the sales compensation plan serves not only to motivate and reward sales performance. It is also a key tool for communicating the business strategy and directing sales resources to support it. A change to the pricing model is after all a response to a change in business strategy. And that affects the sales strategy. It is painfully common to underestimate the challenge of getting salespeople to fully understand, own, and act upon a new sales strategy. If the sales compensation plan is not designed, and more importantly communicated, to tightly align with a revised sales strategy, the strategy will be less fully adopted.
Companies may spend a lot of time and money carefully revising their pricing strategy. They must not miss the opportunity to ensure that their sales compensation plans fully support it.
Want to dig deeper into this topic? Check out our article on the Forbes Technology Council “Avoid Win-Lose Negotiations: When Discounts Close the Deal, But Crush the Business”
