Change Your Cloud Compensation Model Now, or Regret It Later

A commission check for on-premises work in the hand is worth 12 cloud payments in the future. That’s how salespeople think. Don’t try to change their minds; change your compensation model instead. By Jason Bystrak

It was Albert Einstein who first defined insanity as doing the same thing over and over and expecting a different result. I know Einstein wasn't referring to selling cloud-based solutions and services when he said this, but it sure fits the bill. The fact is we just can't sell cloud solutions and services like we sold hardware or even software. It won't work. It's not the same discussion. Want a real-world example?

Let's say you've traditionally sold on-premises Exchange servers and email licenses, and now you want to sell hosted Exchange as a subscription. There are two important facts to note: First, selling hosted email servers and services is far more profitable than selling on-premises servers and software licenses. And second, your salespeople play a very important role in convincing your clients to move their Exchange servers to the cloud.

Keeping these two facts in mind, look at your current sales compensation model. A typical sales compensation plan pays the salesperson a percentage of gross profit dollars - right around 20 percent. So, let's say you have a client that needs an Exchange server with 100 seats. The on-premises version of the solution may cost $10,000 and may yield a 10 percent gross margin of $1,000. Your salesperson would earn 20 percent of the gross margin, which translates to $200 in commission, which is normally paid in net-30 terms.

Now let's look at the same scenario using the hosted email model. In the cloud-delivered version, the cost to the client may be $10 per mailbox per month. With 100 seats, that yields $1,000 per month. Let's assume a higher gross profit margin of 20 percent (since cloud drives higher margins!), which brings in $200 in gross profit per month. The salesperson's 20 percent commission is $40 per month for the duration of the contract, which could be one to three years, paying up to $1,440 from one sale! But, it is paid on a monthly basis as the profit is realized, and not upfront as with the on-premises solution.

Even though the math makes perfectly good business sense, here's how most salespeople think: “I can earn $200 right now, or I can earn $40 a month. I'll take the $200.” More often than not, a salesperson will take the option that provides the greater amount of immediate gratification. You can show them the math and why it's better to take a longer term view of sales, but that's just not how they're wired.

The real tragedy in this example is that not only does the salesperson turn away $1,240 in lost commission, but the MSP loses $4,760 ($160 net profit per month x 36 months) during that same period. It's a lose-lose situation!

Fortunately, there is a way to solve this problem, and it's quite straightforward: Instead of paying your salespeople $40 per month, pay them 12 months' worth of commissions upfront and do not pay them on the annuity. Now, the salesperson earns 12 months of $40 commission checks upfront, so the cloud version allows him or her to earn $480 instead of $200. Sales incentive problem solved!

But, what about cash flow for your business? How can you afford to pay up front on profit that you haven't recognized yet? Here are a few ideas you can use to offset your cash-flow burden:

  • Add professional services to your cloud solution. In the email example, you can charge for implementation and data migration. You can also charge to wipe and recycle the company's old email server that has been decommissioned. These high-margin services are typically paid up front.
  • Manage the cloud. Add managed services such as help desk and remote infrastructure management to the project, thereby creating additional profit streams.
  • Leverage cash flow from the on-premises business. Not everything is moving to cloud, so maintain a healthy business of on-premises-delivered solutions, and subsidize the cloud commission with this up-front profit.

Remember the email example: There is nearly $6,000 in additional profits at stake here over the course of a three-year period that your business stands to gain if you're willing to change your sales compensation model and align it with the typical salesperson's motivation. It might seem like you're giving up too much to make this switch, but if you really think about it and examine the math, not making this switch is a mistake you're going to seriously regret down the road.

JASON BYSTRAK is director of sales for the services division of Ingram Micro Inc., North America, in Santa Ana, Calif.