Is technology distancing us from the buyer?

The breath and depth of tools in the marketing (and sales) technology landscape is exploding. Many of you may have seen Scott Brinker’s overwhelming Marketing Technology Landscape graphic. Gartner predicts that by 2017 the CMO will spend more on IT than the CIO. There are a number of key drivers for this change.

We have all heard the statistics that an overwhelming amount of buyers do their research online before completing an offline purchase. This means that a major emphasis of growth marketing is focused on being discovered and educating the buyer online, ultimately in the hope of generating a high-value MQL (marketing qualified lead). Just this one sentence represents hundreds to thousands of tech companies focused on marketing automation, SEO/SEM, content management and distribution, predictive lead scoring, and many more categories.  In addition, these systems then need to integrate with the sales IT systems. The CMO today is not only being bombarded from all directions by hundreds of vendors but also has to answer to boards and the executive team on inbound marketing strategies and metrics.

The pendulum has definitely swung from traditional direct and in person marketing towards content and education. Sales leaders are required to deliver detailed, real-time metrics of lead conversions, opportunity creation rates, ASP, yields, pipeline growth, churn, and more. While I believe the pendulum needed to swing, I question whether management teams are not over rotating the other direction and distancing themselves from the buyer by focusing too much of their time on the sales and marketing technology implementations vs. spending time learning from and selling to customers.

Some things to consider:

  1. Lead scoring (predictive or not) tries to ensure sales reps are spending their time on higher quality leads and enjoy higher conversation rates to opportunities. This does not mean there isn’t opportunity in the non marketing qualified leads but there is an assumption that it becomes progressively harder to find the needle (opportunity) in the haystack (raw leads). At Zend we had seen many of our lucrative deals come from leads who had been in our database for quite some time and had just never been qualified in. So while not always possible, it may just be more impactful to dig deeper into the lead pool and find cost effective ways to do so. Less time on tuning the system and guesswork, and more time on picking up the phone and truly qualifying leads by talking to people.
  2. Digital marketing promises an abundant amount of leads at a fraction of the cost of more traditional approaches such as events. I do believe digital marketing is critical but in certain (not all) markets we have seen strong results from in person events. Typically, a prospect’s commitment to a conversation and follow-up is higher in an eye to eye encounter. It also enables the sales reps to much better qualify the tire kicker vs. the prospect who truly has interest and influence to move things forward. So before you abandon in person marketing opportunities think it through carefully.
  3. Meeting customers (new and existing) in their offices is invaluable. The ability to truly understand motive, environment and the various stakeholders goes way up. It also makes it way easier to get honest feedback from customers and build a personal relationship which can contribute at many levels e.g. getting the customer’s help to get a deal in before end of quarter, get a customer’s commitment to contribute time to being a design partner on a new feature and more… We consistently saw that end of quarter deals were more likely to come if there had been some face to face connection with the key stakeholder. Again, the more time is spent in the office tweaking the systems the less leaders are on the plane spending quality time with the customer.

Don’t get me wrong. I am a technologist, very metric driven and I absolutely believe the pendulum needed to shift towards more online engagement and education. I also believe that sales and marketing leaders need to be held accountable for both the forward and rear looking business metrics. But I do believe that sales & marketing leaders are spending less and less time with customers due to the increased overhead of implementing systems and reporting on the metrics.

There is no better way to gain new customers and learn how your existing customers view your value-proposition than human-to-human interaction. My advice to sales and marketing leaders is to embrace technology but don’t let it outright consume you. Carve-out a sustainable amount of your and your team’s time to make systems improvements but ensure that time is well spent and managed. One of my past board members would say “You can report on the news or you can make the news”. I prefer to make the news!

Sales Leader: Underspending To Plan Will Not Be Rewarded!

Does the following sound familiar? Sales fall short at 93% in the first quarter. The leadership team is disappointed, but there’s some good news. Once the CFO closes the books, you see you’ve offset the shortfall with lower spending, and you’re even a bit ahead of the cash forecast. The lower spending and better than expected cash flow falls into a few categories: a couple of backfills in R&D and G&A that have yet to happen, slightly lower marketing spend and customers paid faster than expected. The savings also include a couple of bigger buckets: lower sales commissions and three sales headcount lower than planned. The lower actual spend and the few CFO implemented hedges in the plan resulted in cash flow plans being hit. So there’s concern but not panic. At least not yet.

My recommendation is to treat such scenarios like a fire drill. First of all, the sales leadership, while not happy, feels like the good news on cash helped offset some of the bad news. Some sales leaders forget they will never be fired for over-spending, but rather for under-delivering! This is actually a truth that may sound obvious, but in real life sales leaders often don’t take full ownership of their budget. And to make things worse, the CFO sentiment at that point may be not to push higher spending in sales, but to caution the head of sales to not spend more without being sure it will increase overall yields.

As one of the fundamentals of sales planning is building a plan based on expected sales reps’ yields and number of quota carrying salespeople, being behind on ramped sales headcount (HC) is a problem. The typical sales plan is dependent on having enough salespeople in their seats to compensate for bad hires, attrition, regional issues and a number of other challenges that will come up. In addition, in Enterprise software the true ramp time for a new rep can be 6-9 months (even if we prefer to believe it is 3-4 months). This means in addition to the problem of being under HC, any additional turnover (whether desired or undesired) will compound the problem, and even being only a quarter into the year in the above example, in a 20-25 person sales team you could quickly find yourself to be five ramped HC below plan for the rest of the year.

Needless to say, if you’re spending less on commissions due to falling short of plan, the attrition risk also goes up. While sales rep yields can go up to compensate for some of the lower planned HC, the reality is you will most likely be reducing the margin of error, have less overall activity, go dark on coverage for certain regions where you require specific language skills and therefore, have a high likelihood of missing plan over and over again.

So, in the spirit of preventing the downwards spiral and maximizing spending aligned with hitting the numbers (and keeping your job), my advice to you, the sales leader, is to attack this situation immediately in a number of ways:

  • Make hiring an ongoing priority for yourself and the sales managers. You should always be hiring, even if you’re at planned headcount. You should encourage HR to raise a red flag if any sales manager is not prioritizing hiring which happens quite frequently given the short-term pressures typical to sales.
  • I have always encouraged sales leaders to try and be at least one headcount ahead of plan. Sure the CFO will not like it, but you can clarify to the CEO and CFO in reality you are unlikely to be over budget. That’s because the challenge of finding and hiring the right people and the impact of undesired or desired attrition makes it very hard for sales leaders to maintain “at plan” sales capacity. And in the unlikely case you do end up being one headcount ahead you will most likely see it level out quickly due to either have a low performing rep you can let go or you may suffer some natural attrition.
  • If you’re not able to get to your budget spend on HC, think of how you can leverage those dollars to help accelerate results for the sales organization. You could invest in live dialer solutions to get your existing reps to have a lot more conversations. You can transfer some of that budget for a short-term oriented marketing campaign to bring in more leads or encourage hand raising within your existing market database. Or you could increase travel spend to focus on what’s within reach in the pipeline to grow probability and deal size.
  • Spending HC savings on variable cost as discussed above is not the only solution. You can also spend on hiring initiatives. If you’re doing most of your recruiting using internal resources via LinkedIn or referral programs, you can complement these efforts with paid external recruiters and/or increase the incentive for the internal referral program.

I realize that some of you reading this may not quite agree, believing there are many other factors that may justify not sticking to a spending plan, e.g. not enough leads, fear of reducing yields for existing reps thus risking undesired turnover, and more.

But my point is simple. Being risk averse in the face of underperformance is a guaranteed recipe for further underperformance. It is critical as a sales leader to understand that every dollar not spent on trying to increase yields or ramped HC is significantly reducing the company’s chances on an ongoing basis to hit its numbers. Are there other factors? Sure… Could the CEO and CFO at some point decide to recast the spending and revenue plan? Sure, but until that happens, it is the sales leader’s responsibility to do what it takes to bring in every cent possible. You will not get fired for spending all of your budget to try reverse a trend of shortfall.

Subscription Compensation Plans – Beware The Fine Print On Multi-Year Deals!

It is no news that a well run subscription business will typically focus on MRR (monthly recurring revenue), ARR (annual recurring revenue) or ACV (annual contract value) growth as the basis for growth compensation. What these metrics have in common is that they are closely aligned to recurring revenue growth (monthly or annually) as opposed to bookings or TCV which are too fuzzy when it comes to impact on recurring revenue growth. TCV stands for “Total Contract Value” which is the total customer commitment incl. recurring and one-time payments. There are many articles that discuss how to build SaaS/Subscription compensation plans so I will not elaborate on the basics.

This article means to raise awareness for how multi-year agreements (i.e. TCV or Bookings) tend to be an important, yet not well optimized part of a subscription compensation plan. And by not managing this aspect of the compensation plan well, companies may be driving behavior which is misaligned with their business realities.

In a subscription business the focus is on maximizing ACV and not TCV. Therefore, the assumption is that you’ll always prefer to maximize ACV with a goal to maximizing recurring revenue growth. The thinking is that there is no value in discounting TCV in order to get a three-year deal if you can close at a significantly less discounted rate on ACV (unless cash is in short supply which I will cover later on).

However, we also know that subscription businesses churn and a reasonable amount of that churn is outside of our control (project ended, company gets acquired, company goes out of business, leadership change). As a result there can be value to the company in closing multi-year deals whether those are commitments or prepayments. Knowing that multi-year deals can help counter balance churn (at least for a period of time) subscription compensation plans typically do have a commissions kicker for a 3-year deal. A 20%-40% increase in base ACV commissions is quite typical (we will focus on three-year deals here although the same applies to other terms). Note this is in stark contrast to the days where reps would get 3x the commissions for a three-year deal when they were compensated on TCV (Bookings). Having a moderate kicker tries to ensure the focus remains maximizing ACV while still encouraging longer terms if it doesn’t require a significant discount.

Here’s what a sales rep’s commission would be on a plan with a flat 9% commissions rate and a 20% kicker for a three-year deal (assuming no discounting):

Now where’s the fine print? The very knowledgeable rep will actually dig deeper here and try and figure out if it’s in his best interest to try and spend the time and energy to close a three-year deal. This is where, with not very careful compensation plan structuring, we may find misalignment between the rep and the company’s best interest.

Let’s assume the rep needs to offer an additional 10% discount in order to incent the customer for the three-year deal. Here’s what the above calculation would look like with a 10% discount on the three-year deal:

You can see that the rep only makes a tiny bit more on the 3 Year deal. Is 8% higher commissions enough incentive to make the rep spend time and energy to work through the additional hurdles of extracting 3x the commitment out of the buyer and the procurement team? In most cases the answer is an absolute no. The rep will prefer the path of least resistance, get the easier deal closed and move on… I have observed this happen countless times.

Now let’s test the difference between these two scenarios to the company assuming a 15% annual ACV churn rate which is high but for on premise Enterprise software not atypical (note that ACV churn rates tend to be higher than MRR churn rates because they are calculated only based on what is up for renewal and do not benefit from prior multi-year deals in their non-renewal year):

You can see that even with a 10% discount the company brings in more revenue in the 3 Year scenario than in the 1 Year scenario – in fact almost 15% more. Needless to say that the lower the churn rate the more companies will want to focus on maximizing ACV but the reality is that with non-SaaS based offerings we typically do see higher churn rates and there is also an opportunity cost of spending the renewal reps time on the renewal vs. looking for additional growth opportunities.

This is not just theoretical fine print but I’ve actually seen this play out in such a way and having a negative impact on future revenue growth. In an Enterprise subscription business where the cost of doing business is significant and the ASPs are non-trivial to the buyer ensuring your reps are incented to close the “right deal”, meaning the right balance between discount and term, can make a material impact on MRR growth.

So what are the actions you should be taking to ensure that your comp plan truly drives the desired behavior on this front?

Three things:

  1. Make sure you understand what your churn rate is and how it’d impact the average deal over three years. This would tell you how much you’ll lose on average to churn and what the value of a longer term agreement is to the company.
  2. Make sure you model out what the right maximum discounting incentive should be to drive a customer into a longer term deal.
  3. Put in place a kicker for multi-year deals which ensures the desired deal pays a real incentive over a one-year deal – at the desired discount rate. It should be significant enough to grab the reps’ attention. Don’t forget you can be generous because you’re saving the year 2 and year 3 commission payments!

If you take these factors into account, you’ll typically find that you can create an incentive plan which is good for the company and the salespeople. As long as you ensure to limit the discounts the rep is allowed to offer it will allow you to leverage the “savings” in churn and saved future commissions to create more aggressive incentives for both the customer and the sales rep.

Other facts you should be taking into account:

  • Don’t let a multi-year term customer make you “lazy”. You should be managing customer success on an ongoing basis. If you don’t, you will have an unpleasant surprise at the end of the multi-year period. It will kill the assumption of this article that the churn rate on a 1-year deal is the same over the three years as on a three-year deal.
  • While it can be considered borrowing from the future, in some cases multi-year prepayments can have a dramatic positive impact on short-term cash flow and in certain situations can be the cheapest short-term source of capital. It can be a win-win for both the company and the customer. In such cases you may want to consider additional incentives. This is not a long-term strategy but can be beneficial for short-term requirements e.g. your fundraising is taking a bit longer than you hoped for…
  • Best practices in subscription businesses dictate that new business and renewals are separated (new business team vs. customer success team). Therefore, it’s critical to realize that the salesperson has little incentive to think about the future renewal but rather at closing the deal that will pay him maximum commission today.
  • The buying and procurement process for a renewal of Enterprise software can be quite cumbersome and take up a significant amount of company time even for what would appear to be a simple renewal. Therefore, the benefit of multi-year deals is not purely a question of maximizing revenue on the deal but also lowering the overhead of working on renewals. That time is better spent by your customer success team in focusing on making the customer successful and ensuring they become passionate advocates.
  • The goal of maximizing recurring revenue and new logo acquisition needs to always be top of mind for the company. It is a best practice in subscription businesses to focus quotas on ACV and not TCV. The salesperson should be recognized for hitting their ACV targets. No bragging rights for TCV. The multi-year calculations above are meant to represent commissions only incentives. Only ACV should retire quota and salespeople should only be hitting accelerators when they exceed their full ACV quota.

In summary, multi-year deals can be valuable to your company but there are many details to consider when building them into your compensation plans. While every situation is unique I’ve tried to cover most of the critical aspects of multi-year deals that need to be considered as you work them into your compensation plans in a way which is aligned with your company’s goals.

Good selling!