Tag Archives: enterprise software

Should I pay my sales commission on bookings, revenue or margin?

Yesterday I was at Chicago running a workshop for TechStars alumni (about 12 companies) on SaaS sales. The companies were largely B2B, selling to mid-sized or larger organizations. Most were trying to go beyond the founder being the primary sales person and were getting ready to build out their sales team. One or two of them even had a couple of sales people on board.

The section of sales compensation generated the most questions. Obviously most of the entrepreneurs were founders who did not have a background in sales, so they were curious as to why it was so complicated. Most were used to paying out salary + bonus or more likely salary + stock options for their engineering staff.

Sales compensation does not have to be complicated, but it can be made to appear so. Obviously it starts out fairly simple – most sales people like cash and are motivated by cash more than anything else. Entrepreneurs should like sales people that are motivated by making as much short term money as possible.

On Target Earnings (OTE) is the term we use for total compensation for sales people. OTE comprises of Base salary (fixed, paid monthly or every other week), which is typically between 40-60% of the OTE and Commission, which is variable making up the remaining amount. Sometimes a bonus is added to the mix to achieve certain objectives the company has – for example, an objective that is important, but does not generate revenue – getting reference customers or supporting a marketing program.

OTE = Base Salary + Commission (+) Optional Bonus

The question, specifically was about when and at what conditions is the commission paid?

1. Early in enterprise software, most companies paid commissions on bookings. When the purchase order has been signed by the customer, the sales person gets paid. That’s usually good for perpetual license deals, where the customer pays an upfront fee for the software and amortizes it over the life of the usage. Since most customers who could afford this were large, the possibility of them defaulting the payment was rare, so it made sense. Most large enterprise software companies did this.

2. Thanks to monthly recurring revenue (sometimes billed and recognized monthly and other times billed annually and still other times billed for 2/3 years), most SaaS companies started to pay commissions on recognized revenue. This aligned the interests of the company with the sales person.

3. Still other companies actually only paid out commissions on income. That is when the money hit the bank. This ensured that the sales person would ensure the customer would actually pay the money, but then puts the sales person in a position to be responsible for some non-revenue generating tasks.

4. Some companies pay out commissions on contribution margin achievement. So, software (high margin) would get X% margins, but services (lower margin) would get less than software margins. VSOE regulations prohibit vendors for arbitrarily charging different customers, different prices (or inconsistent price discrimination as it was known) so this practice is rarely followed.

5. Finally some startups pay their commissions on implementation. This is typical in companies where there is a lot of services to get a customer up and running. Typically, if a customer takes 3-4 (or longer) months to get the software working thanks to customization, then most companies would prefer to pay their sales people after the customer has successfully implemented.

Regardless of when you choose to pay your commissions to your sales reps, the method cant change as often as you’d wish, since it confuses sales people and creates a lot of angst.

I would stick to one method and keep it consistent. Realize though, that the later you choose to pay the commission (closer to implementation) the more time the sales person spends on non new sales opportunity related tasks. The earlier you choose to pay the commission the less the incentive for the sales person to see the customer be successful.

Is there any advantage for an enterprise #startup product company to start in India?

Last night I had the chance to be at the event organized by Helion Ventures on Enterprise product startups. The event itself brought about 50 entrepreneurs and investors in the space. I believe the best part of these events is the quality of individuals, which has a direct correlation on the quality of the conversations. This event brought the best folks building enterprise software companies in India.

As a prelude to the conversations, Helion shared results of the survey they had commissioned. This survey had many CIOs (of Indian companies) and about 50 entrepreneurs building companies in the space.

While the results of the survey will not be surprising to those who live and breathe enterprise software, I thought I’d first highlight 3 most important things I took away from the event.

  1. Over 60% of CIO’s in India, were willing to “kick the tires” or talk to startups, engage with startups, conduct POC’s and look at early stage software solutions, but only 13% were willing to buy. Entrepreneurs selling to Indian CIO’s know this very well. CIO’s cited lack of understanding of enterprise support requirements and deficient customer service as the top 2 items for their unwillingness to purchase. (P.S. I rolled my eyes on this one. My 2 cents, they are just amazingly risk averse).
  2. Entrepreneurs, on the other hand, cited the (in) ability to sell (hiring sales people, delivering strong sales value propositions and building great sales teams) as the #1 issue they faced, followed by hiring and building great product management talent in their companies.
  3. Finally both entrepreneurs and investors were more likely (over 60%) to focus on North American markets as their first (and in many cases only) target, followed by Indian markets or global markets. Another part of the survey was size of the target customer. While many were focused on large enterprise, there was a good mix of SMB targets as well.

The more interesting part was the discussions and key questions that followed, each of which could be a blog post in themselves.

  1. Is building an enterprise company out of India, an advantage or disadvantage?
  2. What should investors in enterprise software do to create a better environment for startups?
  3. Is field sales dead?

There were 2 other questions, but these were the most interesting to me.

Participants gathered into teams of 10 people each and they had to discuss the question and help come up with some potential topics and points to consider for research.

We did come up with a framework for the first question – when is building an enterprise company out of India an advantage and when is it not, and when is it a disadvantage.

I’d love more feedback on the framework we came up with to answer the question #1.

Manju Gowda (from i7 networks) and Sachin were part of the team that presented our point of view. The key framework we came up with was a 2X2 matrix with Cost of the product and Value delivered to the customer on the 2 axes.

If you look at the 4 quadrants, only if the Average Selling Price (ASP) was low and the value the customer got was very high – both in terms of time and the economic benefit, was being an enterprise software company from India an advantage. So SaaS companies that offer an order of magnitude better capability and value at a much lower price point (small enough to buy online without a sales person’s help) then being in India helped.

If however the ASP was high and the value from the product was high as well, then unless you have a field sales team that can help sell, you have a distinct disadvantage being in India.

Similarly, if you had a low priced product and the value that the customer got was low as well, it is neither an advantage nor disadvantage to be in India.

Finally if you the ASP is high and the value a customer got was low, then US enterprise software Product Company would do better.

We gave many examples how this model makes sense, but since this was something we came up with in 15 min, I was curious what the rest of you think?

Except if you have a low ASP and unreasonable ROI (Value) for the customer, I don’t think enterprise startups benefit from being founded in India.