Aligning Sales Compensation With Bottoms-Up Sales Motions In A Covid-19 World
By Dharmesh Thakker and Chiraag Deora
As the Covid-19 pandemic started to take hold in the U.S. in March, we found a silver lining—in the cloud.
That month, we launched our “Cloud Native Entrepreneur’s Playbook,” a series of blog posts here offering advice for entrepreneurs starting cloud-native companies. These companies typically leverage open-source software and “bottoms-up”, high-velocity sales models to sell their cloud-based technology. The economic dislocation from Covid-19 actually increases demand for these types of products, we wrote four months ago. And we’ve only seen that trend accelerate as companies try to reduce costs, securely manage remote workforces and innovate more rapidly to stay competitive in today’s challenging market.
In our first post, we discussed how entrepreneurs should structure their sales organization and go-to-market strategy; next, in May, we wrote about how to set prices for products. Our advice was focused on providing a framework for how to best position your product externally to your customers. But it’s also important to spend time figuring out how to best incentivize your own, internal sales teams to sell—as even a bottoms-up model is only designed to get your foot in a customer’s door (you will need salespeople eventually). More specifically: How do you transform your GTM comp structure to align with a high velocity, bottoms-up sale while still compensating all salespeople the right way?
Historically, enterprise-software companies have spent 60-70% of their revenue on sales and marketing. Enterprise sales reps take nine to 12 months to ramp to full capacity (not very efficient), and they spend their time pursuing large, lumpy, top-down sales to CxO buyers. Meanwhile, more-modern cloud companies such as Atlassian and Twilio have spent about 17% and 25% of revenue, respectively, in the last twelve-month period on sales and marketing (on a non-GAAP basis, according to company reports). This has allowed their compelling products sell themselves, at least in the early days, and led to faster sales cycles.
This dichotomy has become much more evident in the current environment as top-down sellers are encumbered by tight budgets and extended procurement cycles, giving an advantage to more-nimble competitors.
So how should you be thinking about sales comp if you’re a cloud-native entrepreneur? It’s helpful to think about it in terms of the type of customer, or sale, you’re going after.
The small fry: customers with less than $100 million in revenue
The most efficient way to tackle smaller businesses is basically a self-serve method of procurement. With these customers, who typically have less than $100 million in annual revenue, front-line users can swipe their credit cards to buy your product and get up and running quickly. This method of selling also leads to an organic expansion path, so customers don’t need to interact with sales reps to bump up their usage.
From an internal staffing standpoint, sales reps aren’t really needed to sign up or grow these accounts. Instead, customer-success managers (CSMs) or support reps can stay engaged with these accounts to ensure that they’re receiving maximum value and continuing a natural expansion path. Companies such as Atlassian, with its JIRA product, and Slack have been very successful at growing small/medium business (SMB) usage this way. As we noted in our first cloud-native playbook blog post, CSMs can be mapped one for every 50-100 accounts.
We have seen junior CSMs be paid about $90,000 to $130,000 on-target earnings (OTE), with 75% base salary and 25% commission on expansion and renewals.
Selling to an SMB should be a quick and efficient motion that enables you to gain loyalty for your product—and won’t dent your sales-and-marketing budget.
Stuck in the middle with you: customers with $100 million to $1 billion in revenue
As you go after these somewhat larger customers, their ability to pay increases significantly. With smaller customers, you may be looking at deal sizes of four to five figures; however, medium-sized businesses often pay six figures and can add significantly to your book of business. Given this dynamic, more sales attention is required for this tier of customers. However, you still need to lead with your product.
Our recommendation here is to leverage inside sales reps (ISRs) to field inbound requests and gather data about customer usage to convert these accounts into larger-paying contracts. ISRs generally have technical capabilities and can work closely with customers to get them up and running. MongoDB used this approach to help customers get their first applications up and working, while others relied on this model to get into new accounts and help those customers grow usage over time. This approach allows you to benefit from the loyal community you’ve created, while also scaling your business in an efficient manner using less expensive sales resources.
In our experience, ISRs are usually paid around $150,000 to $200,000 OTE, with 50% base salary and 50% commission. We have seen annual quotas in the range of $600,000 to $750,000, generally measured quarterly; however, given many software companies’ reliance on monthly recurring revenue (MRR), it may make sense to measure sales output monthly as well. To minimize reliance on CSMs for this cohort of companies, you may also consider structuring commissions on renewals and expansions for annual contracts to incentivize ISRs to continue to grow accounts, just like a CSM.
The big kahuna: customers with more than $1 billion in revenue
The essence of bottoms-up selling, of course, is to engage directly with users to create loyalty and community, bypassing slow and more-expensive sales cycles with CxOs. But once your product has proliferated within a large enterprise, you will need to engage with executives at the senior level to expand usage. The difference between this motion of enterprise selling vs. a more traditional, top-down motion is that the sales cycle already started a while ago; the product has already been validated by user advocates inside the enterprise.
While more-efficient sales resources like CSMs and ISRs work for smaller customers, large enterprises will require the strength of your enterprise account executives (AEs). It is important for AEs to have a Rolodex of senior-level contacts, just as in top-down selling, to push sales forward; however, it is equally as important that they have strong knowledge of how to navigate the complexity of today’s large enterprises, and their procurement cycles – especially given the greater deal scrutiny in a post-Covid world.
Enterprise AEs can be paid in the range of $250,000 to $320,000, with 50% base salary and 50% commission from annual quotas in the range of $1 million to $1.4 million. In our prior blog post, we discussed usage-based, pay-as-you-go (PAYG) pricing models along with annual contracts, and we would suggest allowing AEs to retire quota equally against either of these types of deals. For PAYG, you may plan to retire AE quota up to the semi-annualized or annualized amount of usage consumed, thereby incentivizing AEs to spend time selling the way the customer wants to buy while driving higher usage to eventually lock them into annual or multi-year deals sooner than they would have otherwise.
This may mean landing smaller deals in the shorter term. But PAYG allows for natural usage expansion over time, versus forcing you to become stuck in six- to nine-month enterprise sales cycle, which can lead to larger sources of revenue (and commission for AEs) over the long run. Snowflake has performed very well with this model, with base pricing based on PAYG compute usage, allowing customers to expand significantly—but then locking customers into large annual deals once usage grows. Another way to efficiently drive PAYG usage is through cloud marketplaces, which we have discussed in previous columns.
As your business grows to beyond $50 million, and Fortune 500 companies are paying you $1 million to $10 million a pop, it is time to hire strategic, named account reps specifically tasked with handling one to two major accounts and driving expansion to $10 million per deal and beyond. These reps can have an OTE of $500,000, split 50% base salary and 50% commission, with a quota of $3 million to $5 million depending on the accounts they are supporting.
There is no one-size-fits-all mold for any go-to-market or sales compensation structure. But in today’s cloud-native world, focusing on different sales strategies and comp models for small, medium and large customers often brings the biggest payback.
In our next blog post, we plan to dive deeper into CSM best practices, discussing how to optimize for gross and net retention as you work closely with your customer base to ensure their success.
Dharmesh Thakker & Chiraag Deora are investment professionals at Battery Ventures, a global investment firm.
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