MSPs need to learn how to incentivize for hardware versus software.

March 19, 2018

3 Min Read
Cloud Billing


Nick Heddy

By Nick Heddy, SVP, Sales and Marketing, Pax8

We all know there’s money to be made in the cloud, but maybe your practice isn’t thriving as well as you’d hoped. It’s tough looking at all the hype about the trillion-dollar market opportunities while you’re still trying to figure out how to become profitable.

Even experienced managed service providers (MSPs) run into common sales-compensation hiccups that can bankrupt their cloud practices. Whether you have a sales organization of 500 or one, the following tips can serve as a good refresher when it comes to compensating your sales team for cloud-services sales.

The purpose of this piece is to set fair expectations around compensation that will benefit your business and your sales team.

As the methodology, per The Rule of 78 demonstrates, one salesperson winning just $1,000 of new monthly recurring revenue (MRR) can generate $78,000 for your business over the course of a year.

Your sales team’s main focus should be closing new business. To make sure that happens, you’ll need to incentivize the right behavior. This could be any series of activities or actions that result in your business earning profitable new cloud contracts.

Not all business is good. Closing a deal at any cost – even if that means cutting 90 percent of the deal’s profit margin – is bad for business. Revenue is important, but profit is where your success is made. Make sure you have measures in place that protect your bottom line.

Learn how to fine-tune your:

Remember, MRR is a different animal from the one-off sale and needs to be treated accordingly.

A recurring-revenue sales structure helps you build predictable revenue streams. With it, you can say goodbye to renewal conversations and your customers are likely to stick with you longer, resulting in capturing higher margins over the long haul.

Mindset matters when shifting from break-fix to as-a-service. With “one-off selling,” your sales team is likely used to getting credit for each deal closed. Recurring revenue needs to work the same way. It’s a single contract paid monthly, and it should result in a one-time credit for the sales rep unless additional business is won.

The trap here is that sales teams often make the case that because they’re generating recurring revenue, they should also be earning recurring credit or incentives over the life of that contract. When rolling out MRR packages for sales to sell, be sure to explain your reasoning and focus on how there’s still a good deal of money to be made by winning new MRR business.

Tips to fix the variable component of sales structure and incentivize the right behavior:

  • Take net annual revenue and divide by 12 (i.e. $1,000 total annual revenue/12 = $83.33 net monthly recurring revenue).

  • Don’t pay out on auto-renewals unless additional business is won.

  • One-time payments shouldn’t count toward quota relief, but reps should still get paid.

Each of these steps can …

… help you better protect the profitability of newly earned MRR.

Keep Quotas Honest — An Accrual Best Practice

Sometimes unicorn deals come through at the last hour of the last day of the quarter to magically help a salesperson go from zero to 100 percent quota attainment. If it comes through, that’s great for the rep and your business. But what if it doesn’t? There’s a simple solution for this.

Keep a running accrual on each rep’s sales quota. This means that if a rep gets incentivized for a larger-than-life deal that helped them reach quota in the first quarter, but that deal falls through a week into the second quarter, they need to make up that difference in the second quarter to hit their full bonus payout.

Nick Heddy is senior vice president of sales and marketing at Pax8.

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