ACCELERATED REVENUE GROWTH IN AN EVOLVING MARKET (Part IV)
Remember “Jumpstart:” Leading provider of a specialized application to a specialized vertical market that wanted to propel its national deployment while also attracting new customers from more diverse industries. The steps we took there resulted in profitable revenue growth of 290% in two-and-a-half years of general industry stagnation.
In “Accelerated Revenue Growth In an Evolving Market (Part I),” I outlined Jumpstart’s challenge and the three-step plan the company had for repositioning itself in the market and changing its revenue generation model. “Part II” describes the efforts to re-branding and re-position Jumpstart and stress its expertise in solving its customers’ business problem (as opposed to providing a highly technical tool). The previous post, “Part III,” talked about how the sales organization shortened its cycles by up to 75% by employing a customer-centric solutions approach, including fixing Jumpstart’s service agreement, and actively managing the sales funnel.
That dramatic sales cycle improvement was necessary if Jumpstart was to survive. Its core business model was based on recurring revenue streams, and it had expended significant capital in support of its expansion. A cash flow business, Jumpstart needed to quickly grow incremental revenue to stay ahead of incremental costs while supporting the new, higher depreciation costs.
Changing its compensation plan was a key component to Jumpstart’s efforts to shorten its sales cycle, and this post summarizes how we did it.
Stage Three: Sales Compensation
Prior to the changes, Jumpstart’s salespeople were dedicated to re-signing existing customers to multi-year extensions in order to “lock in” rates. Given that Jumpstart had never lost a customer due to non-renewal (other than those few that had closed their doors or changed their business models), these efforts clearly contributed little to the company’s growth. Thus, the company first stopped paying commissions based on the total value of customer contracts. Six months later, incentive compensation for simple contract renewals was eliminated.
The principles of Jumpstart’s resulting sales compensation plan were simple: Salespeople would earn a base salary representing 50% of their targeted annual earnings, and commissions would not be capped. Although this plan identified several ways for earning commissions, they all stemmed from a structure that paid a percentage of the monthly recurring charges (MRCs) identified in new contracts. This kept the plan easy to understand while providing management with the tools to best focus individual contributors’ efforts on strategic objectives. At plan, individual contributors’ annual earnings were consistent with what they could earn elsewhere at that time.
Jumpstart’s new incentive plan carried monthly “new revenue” quotas and included commission rate accelerators for extended term contracts; the longer the contract, the higher the commission paid on each billable dollar. These accelerators increased base commissions by approximately 35% for each additional year in the contract term, thereby providing an incentive to protect near-term revenues (by not negotiating downward the initial service rate) and secure long-term stability (by aggressively selling term contracts). Thus, if the base commission rate for a 1-year contract was 20% of new MRCs, the salesperson would earn 27% for a 2-year term or 34% for a 3-year term; this accelerator was capped at 5-year terms.
The company’s pricing structure also included non-recurring charges (NRCs) for all contracted services, and individual contributors had pricing authority to waive part or all of these in exchange for appropriate term commitments. Commissions on NRCs were designed to provide additional incentives for the sale of term contracts in two ways. First, NRCs did not retire quota; second, the commission rate on these charges was lower than that paid for MRCs. Combined, this structure made it attractive to salespeople to negotiate term contracts in exchange for reduced (or eliminated) non-recurring charges.
Moreover, the new plan encouraged “hunting” by offering “new logo” bonuses and discouraged “farming” by neither retiring quota nor paying commissions on “pull-through” revenues (i.e., those generated by additional services provided at the customer’s request, whether handled by the salesperson or customer service organization).
Finally, the new plan carried a tiered over-achievement structure that further accelerated commissions in 20% increments for all sales closed in those months when year-to-date quota attainment exceeded 100%. Thus, if YTD performance was between 100% and 110% of quota, commissions were 120% of normal; for YTD performance of 110% to 125%, commissions were paid at 140% of normal; and for YTD performance in excess of 125%, commissions were earned at 160% of the standard rate.
Despite some initial resistance from its legacy salespeople, this new plan – combined with the significantly shorter sales cycles – became a very effective motivator and was quite popular with Jumpstart’s producing contributors. Ultimately, many parts of the plan even were adopted by Jumpstart’s acquirer and incorporated into its compensation program.
Next installment, I’ll wrap up the case study and summarize the impressive results Jumpstart achieved.
In “Accelerated Revenue Growth In an Evolving Market (Part I),” I outlined Jumpstart’s challenge and the three-step plan the company had for repositioning itself in the market and changing its revenue generation model. “Part II” describes the efforts to re-branding and re-position Jumpstart and stress its expertise in solving its customers’ business problem (as opposed to providing a highly technical tool). The previous post, “Part III,” talked about how the sales organization shortened its cycles by up to 75% by employing a customer-centric solutions approach, including fixing Jumpstart’s service agreement, and actively managing the sales funnel.
That dramatic sales cycle improvement was necessary if Jumpstart was to survive. Its core business model was based on recurring revenue streams, and it had expended significant capital in support of its expansion. A cash flow business, Jumpstart needed to quickly grow incremental revenue to stay ahead of incremental costs while supporting the new, higher depreciation costs.
Changing its compensation plan was a key component to Jumpstart’s efforts to shorten its sales cycle, and this post summarizes how we did it.
Stage Three: Sales Compensation
Prior to the changes, Jumpstart’s salespeople were dedicated to re-signing existing customers to multi-year extensions in order to “lock in” rates. Given that Jumpstart had never lost a customer due to non-renewal (other than those few that had closed their doors or changed their business models), these efforts clearly contributed little to the company’s growth. Thus, the company first stopped paying commissions based on the total value of customer contracts. Six months later, incentive compensation for simple contract renewals was eliminated.
The principles of Jumpstart’s resulting sales compensation plan were simple: Salespeople would earn a base salary representing 50% of their targeted annual earnings, and commissions would not be capped. Although this plan identified several ways for earning commissions, they all stemmed from a structure that paid a percentage of the monthly recurring charges (MRCs) identified in new contracts. This kept the plan easy to understand while providing management with the tools to best focus individual contributors’ efforts on strategic objectives. At plan, individual contributors’ annual earnings were consistent with what they could earn elsewhere at that time.
Jumpstart’s new incentive plan carried monthly “new revenue” quotas and included commission rate accelerators for extended term contracts; the longer the contract, the higher the commission paid on each billable dollar. These accelerators increased base commissions by approximately 35% for each additional year in the contract term, thereby providing an incentive to protect near-term revenues (by not negotiating downward the initial service rate) and secure long-term stability (by aggressively selling term contracts). Thus, if the base commission rate for a 1-year contract was 20% of new MRCs, the salesperson would earn 27% for a 2-year term or 34% for a 3-year term; this accelerator was capped at 5-year terms.
The company’s pricing structure also included non-recurring charges (NRCs) for all contracted services, and individual contributors had pricing authority to waive part or all of these in exchange for appropriate term commitments. Commissions on NRCs were designed to provide additional incentives for the sale of term contracts in two ways. First, NRCs did not retire quota; second, the commission rate on these charges was lower than that paid for MRCs. Combined, this structure made it attractive to salespeople to negotiate term contracts in exchange for reduced (or eliminated) non-recurring charges.
Moreover, the new plan encouraged “hunting” by offering “new logo” bonuses and discouraged “farming” by neither retiring quota nor paying commissions on “pull-through” revenues (i.e., those generated by additional services provided at the customer’s request, whether handled by the salesperson or customer service organization).
Finally, the new plan carried a tiered over-achievement structure that further accelerated commissions in 20% increments for all sales closed in those months when year-to-date quota attainment exceeded 100%. Thus, if YTD performance was between 100% and 110% of quota, commissions were 120% of normal; for YTD performance of 110% to 125%, commissions were paid at 140% of normal; and for YTD performance in excess of 125%, commissions were earned at 160% of the standard rate.
Despite some initial resistance from its legacy salespeople, this new plan – combined with the significantly shorter sales cycles – became a very effective motivator and was quite popular with Jumpstart’s producing contributors. Ultimately, many parts of the plan even were adopted by Jumpstart’s acquirer and incorporated into its compensation program.
Next installment, I’ll wrap up the case study and summarize the impressive results Jumpstart achieved.
posted by Ken Boasso at 06:32
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