December 14, 2016

Paying your Cloud sales team – tips and insights

Photo_Terry Hedden, MarketopiaBy Terry Hedden
CEO, Marketopia

Paying Your Cloud Services Sales Team

As resellers embrace cloud computing, there are hurdles associated with the transition. One of the challenges is creating a services-based sales culture – and that includes finding the best way to pay their sales force. They must devise a new compensation plan for a sales force accustomed to getting paid commissions for selling products and one-time implementation projects.

As an MSP, the right compensation plan needs to be put in place to yield the best results from the sales team. If the compensation plan is incorrectly executed, salespeople will continue to promote traditional IT products and services over cloud services.

The key is structuring an effective cloud services compensation plan that aligns the interests of all the parties involved—the client, the sales rep and the MSP, and how that compensation will be paid—either upfront, over time or as pure commission. That’s the foundation for a successful cloud services sales compensation plan.

Building BlocksCloud Pull quote - Paying your Cloud sales team (2)

In the cloud-service market, the sales force may be conflicted in regard to what is in its best interest. Why is that true? Usually, reseller sales pay arrangements are built around selling periodic client sales of hardware and software. If sales team members 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, it’s easy to understand what they will be motivated to do.

The most effective commission plans err on the side of being simple. The sales team should be focused on selling solutions and making clients happy. Basically, an MSP should want to incent behavior that drives the valuation of the business through the roof. Consider the following building blocks:

  • Revenue Generation: The sales pros should fuel recurring revenue growth by closing new business on long-term MSP contracts.
  • Stickiness: The sales pros should look for upsells into their install base – while not losing the hunger for new customer conquests.
  • Profit Generation: The sales pros should drive profit by selling the cloud service types with the highest gross profit margins on board.
  • Strategy Alignment: The sales pros should aggressively sell new cloud services that are solidly aligned with the business’s cloud services direction.
  • Satisfaction: The sales pros should act with integrity – doing what’s right – to help create a superior client experience.

Up-Front

This compensation plan is made up of a large up-front payment based on the size and term of the client’s agreement, which is also referred to as a front-loaded model. 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. In this approach, the commission is paid before it is earned. This method also incentivizes sales executives to become hunters and specialize in finding net new clients.

  • Example: Base + Commission Compensation Model
  • Base Salary: $30k – $60k
  • Cloud Services: .5 x RMR to 3 x RMR 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 the firm is protected but the salesperson is appropriately rewarded.

Residual

The residual compensation plan pays out sales reps’ commissions as they are earned. It’s also known as the month-to-month model. Each month, the sales rep receives a small payment for the length of the term agreement. This allows the MSP 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, they are not incentivized to acquire net new clients.

  • Example: Base + Commission Compensation Model
  • Base Salary: $30k – $60k
  • Cloud Services: 2-7% of revenue for life of client

Pure Commission

This is the least common compensation package among larger and more successful MSPs. The model offers no base salary, but commissions are double the rates in comparison to the first two models. Some MSPs might believe this is the best method, because it provides the greatest incentive for salespeople to sell, because they have no base salary to fall back on.

As an MSP business grows, there needs to be a good mix that works for the sales team. Most of the time, account executives act as hunters by focusing on gaining new business and generating new leads. On the other hand, the account management team can play the part of the farmer and nurture existing accounts by strengthening client relationships.

Keep It Simple

Here’s an example of a simple cloud services sales rep’s compensation plan that’s in sync with an MSP’s business objectives.

A. New Customer Contracts
Sales rep is paid a commission equal to 5% of the Total Contract Value (TCV).

  • Monthly Recurring Revenue (MRR): $3,000
  • Contract Term: 24 Months
  • Total Contract Value (TCV): 24 months X $3,000 = $72,000 Commission Calculation: $72,000 X 5% = $3,600
  • Note: If the contract is month to month, commission based on the expected retention of the clients.

B. Existing Customer Renewals
Sales rep is paid a commission equal to 2.5% of the Total Contract Value (TCV).

  • Monthly Recurring Revenue (MRR): $5,000
  • Contract Term: 24 Months
  • Total Contract Value (TCV): 24 months X $5,000 = $120,000
  • Commission Calculation: $120,000 X 2.5% = $3,000

C.  New Cloud Services Kicker
The sales rep’s commission percentage is increased by 1% on any contract that includes monitoring and management of one or more cloud instance(s).

Next Steps

It’s a simple model that accomplishes the business goals and aligns the interests of the sales rep, the client and the MSP. Consider the expectations of each building block:

  • Revenue Generation: The core commission calculation and termination for convenience clause drives locked in Total Contract Value.
  • Stickiness and Satisfaction: It’s short sighted not to pay reps on renewals. The sales reps need to be listening for new opportunities and a sounding board for client concerns. Plus, nothing aggravates an MSP buyer more than having their rep drop off the face of the earth after the ink dries. Yet, using a lower percentage multiplier for renewals is a completely reasonable way to make sure that reps stay hungry hunters rather than passive farmers.
  • Profit Generation and Strategy Alignment: Deal kickers are a great way to drive sales of higher margin services, and a great way to introduce new offerings. Pay the kicker on the entire TCV and sales reps will get higher margin products in the funnel much faster.

Such a plan is simple enough that sales reps stay focused on the client and trust that the commission plan works. It motivates sales reps to bring home more business and keep clients happier than ever.

About Terry Hedden

Terry Hedden is the founder and CEO of Cloud Guru and Marketopia helps IT Resellers, vendors and distributors increase sales of cloud solutions.

 

Editor’s Note: This post was originally published in October 2015 and has been updated for accuracy and comprehensiveness.