Two of the biggest predictors of success with any subscription-based IT service are whether your salespeople embrace it and if they know how to sell it.
As you consider adding new IT services and recurring revenue streams to your business, you’ll need to be mindful of potential pitfalls along the way. One of the primary culprits for managed services failures — cloud backup in particular — is that salespeople simply don’t sell it. So, why wouldn’t a salesperson want to earn recurring commissions, you wonder? Simply put, a larger, one-time commission is just too tempting to pass up in lieu of smaller, monthly commissions.
I spoke with industry experts from three BDR (backup and disaster recovery) vendors to get their advice on overcoming challenges associated with selling cloud backup. Their advice is worth heeding before you begin selling any subscription-based IT services.
The first step you need to take, according to Jamie Brenzel, CEO of KineticD, is to segment your sales team into two categories. “The first group is your ‘hunters.’ They are focused exclusively on bringing in new business. The second group is your ‘farmers.’ They nurture existing customer relationships, helping ensure customers renew their contracts each year, and they’re also responsible for meeting upsell quotas.”
Adjust Your Sales Compensation Model
One key suggestion from the experts is to not use the same sales compensation model you use for your on-site backup solutions. Ken Sims, VP of business development at Axcient, recommends this approach: “Pay salespeople on the first-year contract value of what they sell. Then they will be indifferent between the on-premise or cloud solution and focus on customers’ needs.”
Eran Farajun, executive VP of Asigra, concurs with Sims, and adds, “If the objective is to grow by signing on new customers, then salespeople should be paid commission on the first-year value of the contract. Typically this amount is 3 percent to 6 percent of the overall contracted amount. And then they receive zero commission for years two, three, four, and five.” This approach incentivizes subscriptionbased sales, plus it keeps salespeople incentivized to continue bringing in new business.
Sims’ advice to start-up MSPs (managed services providers) that don’t already have a legacy of nonrecurring- revenue sales is a little different, however. “You can pay salespeople based on a quarterly target for new MRR [monthly recurring revenue]. This more closely aligns with how the company is trying to build its cumulative MRR base.”
Even though your salespeople are on the hook to bring in new business and renew existing customers’ contracts, KineticD’s Brenzel advises that you make their jobs a little easier. “Accepting credit card payments is one way of doing this,” he says. “For instance, by ensuring your EULA [end user license agreement] has an auto-renewal clause, it makes renewing your customers’ contracts less of an event for you and your salespeople and allows everyone to focus on customer service and finding new business.” Plus, by accepting credit card payments, it’s easier for the customer to set up automatic payments so you don’t have to waste time tracking down unpaid invoices each month.
Make These Changes First
If you follow Sims’ and Farajun’s advice and pay your salespeople up front for the first-year value of the contract, there’s a new obstacle you’ll need to address: How are you going to pay them before your customers pay you? “This challenge requires the MSP to have sufficient funds and to make sure those funds are built into its financial model,” says Sims. “While this has a near-term impact, it’s important to remember that recurring revenue sales are more lucrative for the MSP in the long run. Most contracts are for one year. The MSP will pay upfront commission to a salesperson, but with reasonable churn rates, the MSP will keep the vast majority of its customers for four-plus years. An MSP’s margin increases significantly after the first year, since most customers autorenew, and salespeople have already been paid.”
Another suggestion to keep in mind is to continue offering some on-premise IT solutions and services that generate immediate capital gains to help offset the expense of selling subscription-based IT services and paying salespeople commissions up front. The trap you don’t want to fall into is turning off your traditional project-based implementations too prematurely and shrinking your cash flow too much. Remember, it’s normal for a new MSP to experience flat or even reduced monthly revenues for the first year or two.
According to Farajun, there’s another change MSPs need to beware of besides cash flow, which is the skill required to sell managed services. “MSPs will need to hire sales talent who are familiar with selling services under a recurring revenue model and are focused on the business outcome rather than only the technology. For starters, salespeople will need to cut the geek-speak and leverage their business skills and talent to deliver value to the customer. Additionally, salespeople need to be comfortable selling to business leaders, not just IT people.”
Brenzel advises MSPs to pay particularly close attention to salespeople who have historically thrived on the quick payoff and have closed deals by overpromising services. “This tactic has the potential to damage an MSP’s reputation and hurt its renewal percentage in the long run,” he says.
While these suggested changes in sales strategy may seem minimal, research from Gartner suggests otherwise. In fact, Tiffani Bova, VP, distinguished analyst at Gartner, had this to share while addressing a group of VARs at a conference earlier this year. “You want to get into the cloud? Fire all your salespeople.” Bova later clarified her statement by citing that Gartner research showed that only about 30 percent of salespeople will be able to make the transition from the type of selling they did with traditional IT sales and the type of consultative selling required for selling recurring revenue solutions and services. While such advice can be alarming, it is good to know up front what you’re getting into. Farajun suggests MSPs can add the necessary skills to their existing teams. “MSPs should consider adding a technical operations team if they plan to sell cloud-based solutions,” he says. “They will need the right technical individuals who are focused on customer satisfaction and maintaining above-average service levels to manage, monitor, and maintain the services for their customers.”