It’s a given, these days, that cloud adoption is skyrocketing. According to Gartner, cloud spending is expected to reach $216 billion in 2020, up from $111 billion in 2016.1 So it makes sense that resellers want to capitalize on this lucrative opportunity. But before you rush in, make sure you create the right sales strategy. Otherwise, you won’t be able to grow a successful, sustainable cloud business.
This is easier said than done, of course, especially for the many resellers who built their businesses on the traditional product/transactional model, which is very different from recurring-revenue cloud models.
So what’s the best way to go about building highly effective cloud sales teams? Follow these best practices for planning, hiring, training, compensation and execution:
Check your urge to rush into the cloud marketplace. The more upfront planning you do around sales, business and pricing models, the larger dividends you’ll reap down the road.
Your existing sales model could be an impediment to cloud and recurring revenue services sales. Organizations focused and incented on generating transactional revenue won’t alter their behavior in ways that allow recurring revenue sales to flourish. Sales management, sales professionals and sales support won’t be interested in anything that distracts them from achieving their income objectives.
Unfortunately, many organizations experience false starts when they try to change their model using the old approaches, which, time-and-again, don’t work:
- Assigning cloud quota to existing sales professionals
- Shifting to an overlay model – which results in too much conflict
- Trying an integrated sales model – which falls apart because once sales reps make their core numbers, they’re not concerned about the cloud miss
Resellers that have successfully built cloud sales teams overwhelmingly say, don’t distract your performers. Keep them focused on driving legacy transaction-based revenue. And go directly to a dedicated cloud sales model. Any other path tends to be a road to nowhere, or worse. It will disrupt your core business and could cause costly internal churn.
Remember to align sales with marketing. It won’t do to have them at odds with each other. Marketing needs to generate a certain quantity of high-quality leads per month, while sales needs to close a certain number of those leads.
Develop a business plan that has cloud and recurring revenue as strategic priorities. To help accomplish this, answer the following question:
Will your strategy be focused on deriving recurring revenue from your existing customer base or will you secure net-new customers to ensure you don’t inadvertently corrupt your core pipeline?
Focusing on net-new customers is preferred. However, whatever you choose, the most important thing is to be committed and serious about adding a significant recurring revenue component to your business.
Pricing and Packaging
Put quality time into creating a cloud services pricing and packaging model that is meaningful. If you don’t, you won’t be able to derive the blended gross margins you need to support your business plan. The model should stem from your value proposition, market needs and your company’s expertise in meeting those needs.
Many organizations deviate from blended gross margin objectives when crafting cloud and recurring revenue services solutions. This usually happens when you take an opportunistic, rather than strategic, approach – i.e., using a sales opportunity to resell an offering without having a sustainable, repeatable-sale solution.
In these cases, pricing is done in an ad-hoc manner without proper analysis or financial modeling. Keep in mind that the underlying cloud component (i.e., cloud storage) is only a piece of your solution. Create solution sets that include your core services (architecture, design, implementation, migration, support and operations) to ensure the desired blended gross margin is achieved.
Many companies hire mainly on “gut feeling,” but this isn’t scalable. Instead, develop a process of scoring applicants based on, for instance, prior success, intelligence, work ethic and coach-ability. And don’t be afraid to allow your cloud sales team to work remotely. It’s a great way to expand your team, but not your office space, allowing you to grow easily and at your own pace.
Train new hires in a consistent, measurable way. Don’t fall into the common trap where training is just shadowing someone who has tenure with your company. That can be a formula for failure if different hires shadow different employees and end up with completely different ‘lessons.’
The best cloud sales teams work for resellers that have comprehensive, repeatable training programs. If you are strapped for resources on how to get started, reach out to your cloud distributor to discuss their training curriculum programs.
And although it may be an anathema to some sales people, encourage peer mentoring. Ambition is great for pushing individuals to close sales, but you need a collaborative atmosphere to grow a cloud business.
First things first... Your sales team should be focused on selling solutions and making clients happy, not on figuring out complex compensation plans. Keep them simple. They should be easy to understand and, most importantly, easy to track and manage.
A recurring-revenue sales compensation plan has the same core dependencies as any sales plan:
- Acknowledging that sales planning is not a standalone activity
- Ensuring the plan is integrated into the business framework
- Supporting the organization’s revenue objectives
- Creating and adding new products and solutions that align with the sales behavior you want to drive
That being said, one of the key imperatives, and unique hurdles, associated with transitioning to a recurring revenue sales compensation plan is creating a services-based sales culture – including figuring out the best way to pay salespeople. You have to devise a new compensation plan for a salesforce accustomed to getting paid commissions for products and one-time implementation projects. If the plan is incorrectly executed, salespeople will continue to promote traditional IT products and services over cloud services.
Look at this this way. If a sales rep can sell $100,000 of hardware today and get a $5,000 check versus signing a five-year cloud-service subscription for the same total of $100,000 and get a $1,000 check, what do you think they’ll be motivated to do? Probably go for that $5,000 payment.
Six things to avoid when designing your new compensation plan
- Adding “cloud quota” to an existing sales plan
- Only slightly modifying a transaction-centric sales plan
- Not changing or altering your existing sales model
- Not aligning the sales plan with your organization’s business goals
- Creating a sales plan that does not generate sufficient income
- Allowing sales professionals to achieve income objectives without delivering cloud and recurring revenue service numbers
Key questions to answer before delving too deep into the plan
- Will you pay your sales pros on the lifetime value of the contract (LTV) or just Year 1?
- Who will manage and ensure the renewal is captured?
- How will you manage churn and will you implement penalties such as compensation claw-back (recoverable commission) mechanisms?
- Do you have the capability to pay sales pros for monthly recurring revenue (MRR) increases in base contract value?
- Will your plan include a commission kicker for upfront payments?
- Do you have an automated system to track and manage sales compensation (transactional and recurring)?
- Can you provide accurate and transparent output so you don’t spend unproductive cycles proving your sales commission calculations are correct?
- Can salespeople obtain their on-target earnings (OTE) even if they don’t produce or meet their recurring revenue services goal?
The key to structuring a cloud services compensation plan is to make sure it aligns the interests of all the parties — client, sales rep and reseller — with how that compensation will be paid, i.e., up-front, month-to-month or pure commission.
Up-front Pay Plan
This compensation plan, also called front-loaded, is made up of a large up-front payment based on the size and term of the client’s agreement. Commission is paid before it is earned. This approach is advantageous because it discourages salespeople from selling traditional IT products and services. The near-term reward for selling cloud services is far greater. It also incentivizes sales executives to become hunters and specialize in finding net-new clients.
Example: Base + Commission Compensation Model
Cloud Services: .5 x MRR to 3 X MRR based on expected margin, contract term and pre-payment.
If the contract is month-to-month, commission is based on the expected retention of the clients. Be conservative but realistic to ensure your firm is protected and the salesperson is appropriately rewarded.
Residual Pay Plan
The residual, or month-to-month, plan pays sales reps’ commissions as they are earned. Each month, the sales rep receives a small payment for the length of the term agreement. This allows you to match the expense of the commission to the revenue of the sale. However, there is a downside to this approach. Usually, the commission is earned slowly, which decreases the sales reps’ motivation to sell cloud services. With this method, the sales rep is now a farmer and more inclined to continue cultivating existing client relationships to protect the revenue stream. Unlike the first model, there’s no incentive to acquire net new clients.
Example: Base + Commission Compensation Model
Cloud Services: 2 - 7 percent of revenue for life of client
Pure Commission Pay Plan
This is the least common compensation package among larger and more successful resellers. The model offers no base salary, but commissions are double the rates compared to the first two models. Some resellers believe this is the best method because it provides the greatest incentive for salespeople to sell, since they have no base salary to fall back on.
As your business grows, there needs to be a mix of compensation that works for the sales team. Most of the time, account executives will act as hunters by focusing on gaining new business and generating new leads. The account management team can play the part of the farmer and nurture existing accounts by strengthening client relationships.
Here’s an example of a simple cloud services compensation plan for sales reps that’s in sync with a reseller’s business objectives:
A. New Customer Contracts
Sales rep is paid a commission equal to 5 percent of the Total Contract Value (TCV).
Contract Term: 24 Months
TCV: 24 months X $3,000 = $72,000
Commission Calculation: $72,000 X 5 percent = $3,600
Note: If the contract is month-to-month, commission should be based on expected client retention.
B. Existing Customer Renewals
Sales rep is paid a commission equal to 2.5 percent of the TCV
Contract Term: 24 Months
TCV: 24 months X $5,000 = $120,000
Commission Calculation: $120,000 X 2.5percent = $3,000
C. New Cloud Services Kicker
The sales rep’s commission percentage is increased by one percent on any contract that includes monitoring and management of one or more cloud instance(s).
Most-Effective Payment Approaches
The below approaches have proven most effective in producing solid month-over-month gains and a truly sustainable recurring revenue services business:
- Pay entire Year 1 commission upfront as though it were a transaction
- Pay Month 1 revenue as total commission
- Pay a percentage of the deal (i.e., 25 percent) upfront and then the remainder monthly over the term of the contract
- Pay commission on a monthly basis for the term of the contract
This method seems to deliver the most consistent results. It helps keep sales reps engaged and committed to growing their customers’ monthly contract value. Best practice is to decrease the percentage of payout over time. This will incent your reps to grow their book of business. Otherwise, make sure to create a team tasked with retaining and growing the customer.
We also recommend kicking off the new model by providing salespeople a gradual ramp or bridge period, typically no less than six months. This way, they can adequately build a pipeline, convert opportunities and maintain their OTE once the ramp is concluded.
Consistency is key to ensuring your team is scalable – from hiring to actual on-the-job processes. Establish a best practice for what tends to work by analyzing your team and the data in your CRM. For instance, how often should you call a prospect per month? What is the right balance between quantity and quality?
While you can’t predict the future, a sales manager should be able to get a sense of what’s coming and how to prepare. To make this possible, make sure you use a CRM that fits your company’s reporting needs, whether Salesforce.com, SugarCRM, ContractWorld or another proven solution. And then, to ensure you have an accurate pipeline for forecasting, incent your sales team to use the CRM to its full potential.
There is no perfect one-size-fits-all approach to building a great reseller cloud sales team. Success requires a well-though-out, multi-pronged strategy that aligns with your business goals and is executed with passion. It will take you 12 to 24 months to cross the recurring revenue chasm and create a sustainable, blended mix that will enhance your business’ value. The sooner you start, the faster you’ll get there.
For more insights on these best practices, contact Westcon-Comstor at email@example.com or call Matt Karst at 303 704-8719.
Blog by Matt Karst, Senior Director, Cloud Practice, Westcon-Comstor
1 Gartner “Market Insight: Cloud Shift — The Transition of IT Spending from Traditional Systems to Cloud” by Ed Anderson and Michael Warrilow, May 18, 2016