Sales Incentives and Structure Concerns for VSaaS OfferingsBy John Honovich, Published on Jul 15, 2010
An underlying challenge for integrators/dealers adding managed/hosted video solutions is constructing the correct incentives and structures for their sales organization. An interesting example of this comes from a July 2010 admission by managed access provider, Reach Systems, over problems they are experiencing in channel adoption. Reach claims, “The owner of the company will sign up in a snap but getting their people to sell it is a whole different story. Do they change their compensation structure? That’s not easy, and they’ve still got to support their other lines."
The practical problem comes from two factors: (a) sales people are usually paid a percentage of revenue immediately after the customer pays and (b) SaaS solutions cut the up-front payment significantly (by 50% or more), transferring the balance to ongoing periodic payments. Keeping the normal pay-out structure in place, would mean that the sales person would get less money up front and would have to wait longer for their 'total' commission. An additional concern would be the potential amount of compensation a sales person would lose if they decided to switch jobs (normally, you leave, you lose all future commission payments).
The motivation for the owner is different primarily because investors value recurring revenue significantly higher than they do project revenue. Recurring revenue is considered more stable and dependable than project revenue which can disappear quickly due to macroeconomic issues or company problems (i.e., less lock in). Because of this, the valuation of a company with recurring revenue can be 2 to 3x that of a company with the same amount of project based revenue.
To resolve this tension (owner benefits but sales person problems), companies can consider:
- Front loading commission payments for SaaS projects: pay commissions on the projected 'total' project value up front (or at least a disproportionate amount). This would eliminate or minimize sales people getting less up front, increasing the incentive for sales to sell SaaS. The downside of this is the high cash outlays the owner needs to make relative to the lower up front cash received (compared to traditional projects).
- Emphasize the greater stability and steadiness of incremental payments from SaaS projects. Instead of paying a lump sum commission upfront, pay smaller amounts each month on an ongoing basis. This will reduce the 'feast or famine' phenomenon for sales people generating income from projects. With this payout structure, a bad month, a missed deal or a weak economic period, will not reduce salesperson's incomes as much. The downside of this is that most aggressive salespeople ('hunters') will not like this approach as they tend to be more confident and driven to close (and get paid) on big deals.
How this will play out will be interesting. There are many who believe security integrators contracting mode will continue to hinder rolling out SaaS offerings. Indeed, as we examined in February 2010, we believe many SaaS providers will choose not to use integrators.