Are you having trouble figuring out how to compensate your sales team? You’re not alone. Even experienced MSPs have difficulty trying to wrap their heads around the fine details of the recurrent revenue model. The fact is resellers who embrace the cloud really struggle to switch from traditional IT sales –, where a single deal can guarantee substantial cash for the rep –, to a subscription-based model where the rep is required to make more deals to earn the same revenue. Churn and retention are two new challenges that add complexity to this equation. While some of you may fail at the first attempt, you’ll find that in the end, it’s just a matter of perseverance.
Many of our partners have asked us a lot of questions about compensation. While there’s no magic equation to find the best plan for your team, there are good practices you can follow to stay competitive, keep your sales team interested in cloud services, and thrive. In our new white paper, we’ll show how to do this. Here are a few excerpts of the topics we’ll cover.
Getting Familiar with the Cloud Revenue Model
In the cloud industry, sales reps are compensated based on the amount of product consumed or used, the amount of bandwidth sold, or a defined unit of time (e.g., a daily, monthly, quarterly or annual contract or commitment).
So, an MSP compensation plan model will typically include a quota for:
- The amount of monthly revenue generated
- A possible upfront, prorated lifetime contract value
You’ll need to use metrics to know how much monthly revenue is generated by each sales rep.
Want to make more revenue? Read our article Why SherWeb Has the Best VoIP Reseller Program.
Measuring Sales Performance
The 3 keys to success in the cloud industry are: acquiring customers, retaining customers, and monetizing customers. They help define the following three metric categories for your monthly revenue:
- Bookings, which represent a customer’s commitment to spend money with your company.
- Revenue, which happens when the service is actually provided.
- Billings, when you actually collect your customers’ money.
People will also refer to these as booked, installed and billed revenue.
Choosing Your Metrics
Keep your compensation plan simple and stick to a maximum of three metrics. The actual list of metrics is long. We’ll stick to the most commonly used, but here’s a sample.
Source: Alexander Group
Note also that you should always use the same recurring revenue time frame throughout all compensation plans.
Finally, the kind of cloud business you have will determine the right metrics to use.
- For cloud businesses that primarily use monthly contracts, with some longer-term contracts, the primary metric will be MRR.
- For cloud businesses that primarily use annual contracts, with some multiple-year contracts, the primary metrics will be ARR and ACV.
We take a closer look at these metrics in our white paper.
Building Your Pay Strategy
- A few companies will choose to pay their sales reps on commission only
This is the least common compensation package among larger and more successful MSPs. Some MSPs might believe this is the best method, because it provides the greatest incentive for salespeople to sell as they have no base salary to fall back on.
- Many cloud companies will choose to pay their sales reps based on gross profit vs. total revenue
The compensation plan would then involve a commission on the margins.
- The common method is to make your compensation package include a base salary and a commission
Match the Right Commissions to the Right Role
Let’s talk about Churn. Churn can be defined as the number of customers who discontinue their service subscription. This metric is essential in the cloud business. It splits your sales rep profiles into two roles: “hunters,” who focus on acquiring new business and “farmers,” who work on maintaining and renewing existing business. Consequently, hunters and farmers will be compensated differently:
- Farmers will be offered a monthly commission on the MRR deal
- Hunters will be offered a generous and unique up-front commission on the first MRR.