Your sales plan won't work in a recurring revenue world for two reasons. You’ve taken your transactional-based sales plan and perhaps altered it slightly. No matter how good the mechanics of the plan are, it will not provide incentive for your sales professionals to change their current way of doing business. Who would give up the "Big Bang" for a bit of variable compensation, paid out over time?
It’s important to determine a sales model framework prior to redeveloping your sales plan. With your sales model set, it’s time to create a sales plan that will drive the results you desire. Based on the hundreds of plans we’ve reviewed, we have found key attributes common to a sales plan that yields one basic objective: sustainable, growing results on a month-over-month basis.
Recurring Revenue Sales Plan Tenets
It’s all about reducing churn. As always, any plan needs to be straightforward, easy to understand and most importantly, easy to track and manage.
The major points of a good sales plan:
- Focuses and drives the company’s business objectives. Don’t deviate.
- Fits within your current business model. If your model sets the sales cost as no more than 7.3% of revenue, design your plan accordingly.
- Don't create a plan that turns you into a bank. Investing over the short-run (6 months) is fine, but if you need to overcompensate and pay way ahead to create interest, it’s a bad plan, and you need to look to other people to drive your objectives.
- Drives the sales professional to build a book of business that expands, month-over-month. Recurring revenue is a marathon that does not end at 26.2 miles. Keep running and keep growing the pie.
- The plan must provide incentive for the sales professional to stay engaged and attached to the client. It ensures that monthly revenue expansion occurs over time within each account to counteract churn and grow each customer's annual contract value (ACV).
Recurring Revenue Sales Approaches
Using the fundamental beliefs listed above, let’s look at the various types of sales plans that can be deployed. In addition, we'll talk about what we’ve seen work and what we’ve seen become an albatross or anchor. Again, we’ll assume you’ve come to terms with the proper sales model for your organization.
Potential recurring revenue sales plan approaches include:
- Pay entire Year 1 commission upfront as though it were a legacy transaction. Don’t become a bank.
- Pay Month 1 revenue to sales professional as commission on the deal. It's clean and easy, but usually shunts growth.
- Pay a percentage of the deal (e.g., 25%) and then the remainder monthly over the term of the contract. This is typically positively received and spurs growth.
- Pay commission on a monthly basis for the term of the contract. This is our preference if the sales professional has a ramp or bridge to move smoothly towards on target earnings (OTE).
Obviously, you can come up with several variations in the way of a pay plan. However, at the end of the day, the approaches above tend to be the most common methods we see within our assessment platform.
Things to Consider
Once you’ve outlined your business objectives and are ready to align the sales plan with a recurring revenue-friendly business model, there are several things you need to think about as you finalize your sales plan. Some things you should ponder include:
- Will you pay your sales professionals on the lifetime value of the contract (LTV) or just Year 1?
- Who ensures and manages the renewal?
- Who suffers or is penalized if there is churn?
- Will your sales plan include a claw-back mechanism to ensure sales professionals are not compensated for contracts that churned out?
- Can you effectively manage claw-backs?
- Do you have the capability to pay sales professionals for monthly recurring revenue (MRR) increases in contract value?
- Will your plan include a kicker for upfront payments?
- Do you have an automated system that deals with sales compensation (transactional & recurring) and provides accurate and transparent output so that you don’t spend unproductive cycles proving your calculations are correct?
I have a very strong opinion on what a great recurring revenue sales plan should look like and we always recommend that the plan be totally focused on generating recurring revenue. Don’t allow the sales professional to make their nut in any other way, other than by going through the recurring revenue gate.
You need focus, you need results and you need a sales plan that will deliver the recurring revenue that meets your business objectives.
The preferred approach and framework we prescribe (and have seen work at the highest clip-rate) is to first provide a bridge that ensures the sales professional has a six-month period to build an acceptable recurring revenue run-rate that ensures they can hit their on-target earning (OTE) threshold.
Second, pay your sales professional on the life time value (LTV) of the contract.
Third, once they are on plain (they’ve crossed the bridge or chasm) they should be paid monthly if you’re getting paid monthly, or quarterly if you’re getting paid quarterly.
Lastly, you should have no problem paying a sales professional for years on a contract. However, you should ratchet down the percentage payout in the out years. In other words, pay the full commission percentage (%) in Year 1, a smaller % in Year 2, an even smaller % in Year 3 and then hold that % constant for the balance of the remaining years of the contract. The notion that sales professionals get lazy if they keep getting paid on a deal is nonsense. It’s all about building a huge book of business (a portfolio, if you will) and then continuously growing that pie over time.
Life insurance sales people are not slugs. They’re business-generating machines.
In closing, there is no perfect approach or one-size-fits-all solution. Rather there is a framework, critical thinking, some hard work and execution against the plan. If you use some of the approaches presented here, you’ll have removed one of the leading inhibitors to creating a long-lasting business with recurring revenue.
Now’s the time to begin building a sustainable, profitable and growth-oriented recurring revenue cloud services business. Remember even if you’re not moving, your customers are.