We’ve recently worked with a number of companies who needed help redesigning their sales incentive programs to drive sales of Monthly Recurring Revenue (MRR) through XaaS, Cloud and Managed Services, rather than traditional CapEx IT. While there may not be a single perfect incentive model for all organisations, there are certainly some valuable lessons you should consider for rewarding monthly recurring revenue (MRR).
1. Check for Alignment
The first universal check for any sales compensation scheme is – “Does it drive the intended behaviours and associated outcomes aligned to the corporate strategy”.
Sales peoples behaviours and activities are nearly always driven by the reward and recognition scheme, beyond just the monetary incentives. While this article is focused on the XaaS sales incentives, we have previously covered the broader scope of “You get what you reward” in a previous article.
While it might be a bit cheeky to say that sales people are “coin operated”, many top performing sales people are very target driven, so setting the right targets in the first place is paramount.
Consequently, it is important to check the design of any commission structure is absolutely aligned to the business strategy, customer segmentation, overall value proposition, the supporting business model, system capabilities and customer expectations.
As a best practice, if you are holding management off-site to update/discuss your business strategy, then this must include an incentive alignment check. If your sales incentive scheme is not updated to match the updated strategy, then the new strategy is doomed to failure.
2. Growing MRR… But Which Component of MRR?
Assuming the business is focused on growing recurring revenue, then the basic annuity revenue equation should be front and centre of any sales plan.
MRR = Existing Run Rate + New sales – Churn
However, there are subtleties to this simple equation that need to be taken into consideration in the design of the compensation scheme and the supporting organisation structure. For example, who does what in the customer lifecycle journey to grow the MRR, what is most valuable/important to you right now, and what should you be rewarding?
- Value of MRR. The existing run rate of monthly billing could be made up of contracted and/or non-contracted products and/or customers, as well as renewals. How do you “value” each of these variables?
- Source of MRR. New sales can come from new customers, a new business unit within an existing customer, an up-sell of an existing offering, a cross-sell of a complementary product, an extension of the base product or service, or a brand new offering. Each of these will have a differing Cost of Sale (and hence margin) associated with the MRR.
- Type of MRR. New MRR sales can be product sales such as a SaaS subscription or services, which will undoubtedly be at different margins, but probably a mix of both.
- Cost of MRR. With any new sale listed above it is only truly valuable to the organisation when it finally gets billed to the customer and paid. Therefore, what is the provisioning lead time and what is the “turn on rate” i.e. for every dollar of sales order what percentage actually gets billed.
- Churn of MRR. MRR is only valuable if customers continue to use your offering. Churn could be either voluntary (where the customer decides to leave) or involuntary (where you decide to terminate the service or agreement).
In our experience the lack of analysis (or awareness) of these points is the cause most challenges and conflicts between field salespeople, inside sales, technical and product specialist teams and management with any sales incentive program. Achieving clarity around the value and relative importance of each element is a critical first step to designing your compensation plan.
3. Setting the Right Mix of Rewards
Assuming you now have a better insight into aligning the sales teams focus with the business strategy the next step is to provide simplicity and transparency of any incentive scheme to the salesperson. No “smoke and mirrors” no hidden “gotchas”, and definitely no caps for over achievement.
Here are some metrics to consider in designing your incentive scheme:
- OTE Multiplier. The field sales quota to OTE multiplier should be a minimum of 4, depends on other variables in the program. For example, if the base salary is $75K with a further $75K commission (ie. OTE of $150K) the sales target needs to be at least $600K in new Annual Contract Value i.e. MRR x 12
- Commission Rate. A common MRR commission rate is often equivalent to the first month’s revenue or margin, depending on what you are focused on. However, you should consider uplifts for 24 or 36 month contracts, or a reduction to half the value if uncontracted.
- Services vs product MRR. Services tend be more profitable and also make the client “stickier”, so contracted MRR services revenue should have a higher multiplier than contracted MRR product revenue.
- New Customer Versus Renewal. Given that acquisition is more diffcult than retention, you may choose to use the base rate of the first month for new customers/contracts, but (say) halve the formula for a renewal. How you recognise renewals will of course depend on your sales customer lifecycle team structure and resources.
- Reversal of Commission. With any recurring revenue commission scheme, churn or negative revenue does need to be factored in. Therefore any reduction in the monthly run rate needs to be deducted using the same formula you rewarded the rep. If a client defects however, the reversal of commission may not apply if the rep is not responsible for client retention.
As we said at the start, there is no “one size fits all” commission scheme for companies focused on selling subscription or monthly recurring revenue solutions. However, we hope the guidelines we outlined above will help you design a comp plan that drives the desired behaviour rather than generate unintended consequences.
One final thought… if you are a company that is transitioning from a traditional CapEx style sales compensation scheme to a recurring revenue scheme, please analyse the cash flow implications – firstly for the business overall, and secondly for the sales person’s take home pay. Both scenarios need to be carefully modelled to assess the impact before implementation.