There’s no doubt that solution providers are expanding into cloud computing and managed services at a rapid rate. While there have been technological hurdles associated with that transition, one of the biggest challenges has been creating a services-based sales culture – and that includes finding the best way to pay your cloud sales force.
Solution providers face challenges when trying to adapt to the recurring revenue streams that come with services-based business models. Gone are the days of simple commission for selling products with one-time implementation. A new compensation plan for this sales force has to be formulated.
How does this impact the business?
Compensation plans impact how overall strategic objectives are set. It also affects hiring – getting sales compensation right is critical to getting top-notch salespeople to join your organization.
Should sales representatives receive a one-time commission when they sign a customer to a services contract? Or should they be paid monthly, quarterly or annually? Should they get rewarded for renewals? And should commissions be based on revenue, gross profit or some other metric?
One option some companies are considering is paying sales representatives a percentage of monthly income from contracted services or some kind of up-front commission equal to two or three months of subscription fees. The main problem, however, is that with PaaS and SaaS services, the money from the transaction isn’t there immediately.
It all boils down to (1) how often sales reps are paid (2) what that compensation is based on.
Other channel companies’ approaches include:
- Paying a commission up front based on the full-year value of a services contract (may have a problem keeping the rep fully engaged with customer)
- Paying a percentage of monthly billings (provides regular, but smaller commissions)
- Paying a combination of commissions and base salary
- Paying a one-time commission equal to a percentage of the first month’s revenue from a services contract
- Paying a commission based on a percentage of the monthly recurring revenue, paid up front (can be problematic for smaller solution providers with tight cash flows)
Fostering customer engagement
One potential problem with paying sales commissions in an up-front lump sum is that sales representatives could fail to maintain ongoing engagement with customers. A solution to this might be offering “accelerators,” or higher percentage commissions for sales reps who exceed their quota, encouraging reps to go above and beyond. Offering some kind of residual for service contract renewals is another option.
Keeping things simple
What further complicates this dilemma is when a solution provider wants to take a hybrid approach that combines an old and new business model or transitions entirely to an all-services model. This can mean maintaining two sales compensation plans, temporarily or permanently, for one sales force.
To try to fix this, some solutions providers create separate sales forces with separate compensation plans: one for traditional IT product and project sales, and one for cloud and managed services. However, with this separated solution, you run the risk of two sets of sales teams calling on customers, creating not only complexity for the solution provider, but possibly confusion for clients – not to mention unhappy sales reps who have trouble with an overly complicated compensation plan.