Bessemer SaaS Law # 4. Separate your “hunters” and “farmers” and pay them all on
CMRR growth. As soon as you have climbed the Sales Learning Curve and have a sizeable customer base, you should supplement your sales force with renewal-oriented account managers.
When a SaaS company starts to hit the sales inflection point, it is important to keep the new business reps (the “hunters”) busy with finding new deals, while a team of account managers (the “farmers”) tends the established customers. Both teams are critically important for the health and growth of the business because CMRR is a function of new sales net of churn from your existing accounts, so you should have dedicated experts for each of these two revenue groups as soon as is practically possible. Once a company has a few sales reps achieving quota and a significant customer base, it is time to hire dedicated account management experts who are compensated to focus exclusively on customer service, renewals, and up-sells. As all good sales VPs will tell you, the compensation plans of the sales team will drive behavior, so it is critically important that you structure the sales and account management plans to align with the key metrics of your business: CMRR, Churn, and Cash flow.
For sales, they should be paid on new CMRR with a standard deal structure (such as a one year deal, with quarterly pre- payments), and incentives for more favorable cash flow terms (such as multi-year pre-payments). The CMRR incentive should be logical, because you are paying for new business added which is similar to the traditional “bookings” comp plans. To give you a concrete example with easy math, let’s assume your enterprise sales reps are on incentive plans at $120,000 base and an additional $120,000 bonus at quota. Let’s assume their quota is $120,000 MRR. In simple terms (and simple is good for sales comp plans), the rep gets to keep every dollar of new MRR they bring in for the year – and the business gets to keep the other 59 months of revenue in a five year customer relationship. You can play with minimum thresholds ($60k MRR to be eligible for a bonus) and accelerators (you get to keep 2x the MRR for every dollar above quota), but the core idea is critical. In addition, although compensating sales reps for cash flow may seem a bit unusual, it’s actually very logical.
As a private company, you have a VERY high cost of capital (well above 10%), whether you raise venture capital, angel money, friends and family investments, bank financing, or all of the above. You are taking money from outsiders already at expensive terms, so why not get it from your customers for “free” instead? If your customers are larger than you, they likely have a relatively low cost of capital and long term budget cycles that are already accustomed to large licensed software purchases. As Board members, we would strongly encourage a company to offer a customer a 5% + price discount for a multi-year pre-payment, and we would happily give the sales rep a modest incentive for pushing this option. It can be one of the rare win-win- win (company, customer, and sales rep) situations in life!
You should think of account management as a sales function, and they should be compensated in a similar fashion – but modeled on your CMRR and churn assumptions instead of a new CMRR sales quota. Each account manager should have a portfolio of existing customers, and you should model the expected CMRR from this group net of up-sells and churn. These numbers will vary widely based on your line of business and corporate focus, but a “typical” account manager may start the year with 20 customers and a starting CMRR of $200K. Your model will suggest that they should end the year with only 18 of these customers (churn of $20k), but that the average account should grow by 15% with up-sells and additional seats (net up-sells of $180k * 15% = $27k), so their net CMRR quota might be $207k or $210k for the year. While the up-sells are equivalent to new CMRR and can be compensated at the same level, CMRR renewals are typically compensated less (we often see 1/3 of new CMRR comp).
“I like to see SaaS comp plans where the commission dollars paid are not percent based but rather directly tied to the MRR. When a customer tries to negotiate a contract from $10k to $9k MRR, the sales rep feels the pain of $1,000 out of his or her pocket, and suddenly becomes much more effective at holding prices!”
Gary Messiana, Bessemer Entrepreneur-In-Residence and former CEO, Netli