Q&A | September 18, 2013

8 Tips for Selling Subscription-Based Services

By Jay McCall

BSM-Falling Money3

If your business model is or has transitioned to selling any of your solutions via a subscription or “As a service,” we’ve got some great advice for you when it comes to sales. Following are eight tips to consider when selling subscription-based 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 arefocused 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.”
  • Ken Sims, VP of business development at Axcient, recommends this approach if you need to modify your sales compensation model: “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 subscription-based 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.
  • 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.
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