Compensating SaaS Sales: Turning Hunters Into Farmers

Software as a Service was designed to be a more convenient way for businesses to implement enterprise applications. However, on the vendor side, the new distribution approach complicates matters in the sales department.

Traditionally, a salesperson would sell clients on-premise software packages that might cost in the neighborhood of $250,000. The client would use the application for several years before buying a new product or upgrade. With SaaS, customers can enter a variety of subscription contracts, paying a fraction of the total cost — $7,000 a month, for instance.

Try explaining this to a salesperson who has for years relied on big, fat commissions from large deals. The shift toward realizing commissions based on low-revenue monthly subscriptions could have many sales staff worrying if they’ll be able to make their next mortgage check. Furthermore, instead of being big game hunters looking for a handful of trophies each year, sales staff need to sell a high volume of products to earn the same amount of income.

No Perfect Solution

A recent webinar hosted by Makana Solutions addressed this dynamic among vendors that had recently added SaaS products to their offerings. About 70 percent of SaaS salespeople ranked their satisfaction with their compensation models as moderate or lower, according to a survey conducted by the firm.

The webinar presenters — Jeff Kaplan, founder of THINKStrategies; Tom Wilson, president of the Wilson Group; and Liz Cobb, CEO of Makana Solutions — agreed on one thing: There is no perfect compensation formula, but there are plenty of benefits to subscription service sales.

Monthly commissions are piddly at first but promise to add up to bigger numbers over time. Provided the client renews the subscription, salespeople could view the regular commission as an annuity, similar to profit made on insurance products, suggested Wilson. For SaaS products requiring almost no further interaction from the salesperson, this is ideal.

Perhaps a vendor wants to keep its sales staff chasing after new business. In that case, the vendor can pay the salesperson a lump sum upfront, based on what the life of the contract is worth, Wilson suggested. The risk here is that the client may not follow through with the contract, and the vendor loses money on the deal.

Cobb suggested a more radical approach that calls for a sales department makeover: For large accounts with heavy demands, she envisions teams of four splitting up the workload: one to generate leads, another to close deals, a third to manage the details of the account, and a fourth to provide customer service. Makana has developed a CRM program to organize the responsibilities of the newly formed crew.

Instead of big game hunters, SaaS salespeople can take on the role of farmers, Cobb said, working hard to renew their income source from the same clients year after year.

A Starting Point

Before any restructuring is done, the best way to design a compensation structure, Wilson explained, is to start by answering five questions:

• What are you paying for?
• How much are you paying?
• How will you make payments?
• Who gets paid?
• When will you pay them?

Of all these questions, Wilson underscored the last one as being the most important driver of behavior.