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How do you compensate a salesforce selling both perpetual to SaaS?

I'm looking for some options for driving a salesforce to focus on a newly introduced SaaS business while the company is transitioning from its legacy perpetual on-premise sales to cloud-based SaaS. One obvious option is separation of quota into distinct objectives within the plan and/or implementing gates to acceleration. But what is best practice for measurements to use for SaaS (ACV, TCV, ARR or MRR)? What are the pitfalls of compensating on TCV at time of deal signing?


Topic Expert
Jeff Chase
Title: Advisory CFO
Company: Hazelcast, Juicebox Energy, and Social I..
(Advisory CFO, Hazelcast, Juicebox Energy, and Social Inertia ) |

This is a pretty long and involved question, but I'll give you some insights into what I did recently to address within a compensation plan:

This example company is a SaaS type model but also the perpetual comes up from time to time. We also have non recurring training and consulting sold occassionally. We want to maximize the SaaS due to valuations are highly focused on MRR these days. We sell normally 1 year deals but also longer (3 or 5 year deals, some prepay, some non prepay)

We compensate using these general ideas. The word multiplier is the % paid of a base commission base rate (which can range from 7% to 12% depending on type of rep, inside or outside, etc.). I"ll assume you have definitions of ACV etc already well understood:

ACV new subscription- we give 100% multiplier and quota credit. This is the business we like to motivate.

Non recurring - only 70% multiplier and 100% quota

Multi year no prepay - 100% of ACV, and then 50% for later years, and 100% of ACV in the year it starts.

Mult year, prepay - $100% of TCV on multiplier and quota credit. This is liked by the sales guys as it moves them towards their quota max and accelerators quickly.

The main pitfall I see on this would be if you had an irate customer that wanted to break the deal after a year and you gave them their money back. Your sales person could be long gone, and he/she would have been paid in full.

Renewals - normal flat line renewal at 1/2 of normal commission rates.

If they sell upsell significantly with renewal (30% or greater upsell) - we comp 100% of the whole deal for multiplier and quota credit.

So - how is perpetual paid? It would fall into 'nonrecurring' so is basically decelerated at 70% multiplier and 100% quota credit. This also would apply to nonrecurring services like training and consulting.

You could, if you risk losing perpetual customers, let sales people have the 'deal desk' option and CEO or CFO approve perpetual deals on a one off basis and could change the payment structure (ala more like normal ACV deal).

Hope this is helpful. For this company the key metrics are ACV New Subscription, ACV Renewals, ACV new Services, Churn, MRR, and TCV.

Although not asked, I thought I would comment for the young start up scenario - I think MRR is being used a lot in valuations as a 'real time' and best measure today, of where the company stands.

For some startups, they may be required to recognize the perpetual license like MRR - over the maintenance period for example (first year if annual maintenance offered with the license), as they may not have VSOE on the perpetual license sold with the maintenance. This may work but would be an item to footnote in in your MRR work. In your case, you sound like you have been around, you have VSOE on your licenses, so I think valuation would be bifurcated - something placed on your perpetual business, and somethin else for your Saas business.

Good luck selling!

Topic Expert
Jeff Chase
Title: Advisory CFO
Company: Hazelcast, Juicebox Energy, and Social I..
(Advisory CFO, Hazelcast, Juicebox Energy, and Social Inertia ) |

One last thought on perpetual - given that folks commonly use a metric like perpetual = 2.2X of an annual subscription, you could 'demotivate' them from selling perpetual, in the following manner - give them quota credit and multiplier value at 1/3 of the contract value or 33% (this would be as though you could sell perpetual at 3X annual).

This is steeper than the 70% credit I mentioned above. You can also give them 100% credit for quota and multiplier on the maintenance fee (usually 20% of list etc.). This will drive them towards the coveted SaaS model, if you are confident you won't lose business or not get 'last looks' if customers are really not interested in SaaS.

The other thing they would do before selling perpetual is go for say a 3 year or longer contract, so at least they get full ACV value per my examples above in first year etc.

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