Challenges with XaaS Subscription Models
Implications on Sales Compensation Plans
Executive Interview: Joe Morrissey, Chief Revenue Officer, Segment
As with most industries, the tech space is in a state of constant evolution and tech companies are increasingly making the move to XaaS and subscription models. However, there are some common unforeseen challenges that arise, including the additional implications to consider with designing your compensation plans to align.
Listen in as Joe Morrissey, chief revenue officer at Segment, joins Ted Grossman, principal and co-leader of Alexander Group’s Technology Practice, and shares Segment’s recent success story of aligning sales compensation plans to match their rapid growth and what the outcomes were (along with some unintended results) to leave Segment in a positive place for continued growth.
Ted Grossman (TG): Hi, this is Ted Grossman. I’m a principal and co-lead of the technology practice at the Alexander Group, a go-to-market revenue growth consulting firm. We’re here today to talk about some issues that many companies face in the tech industry as they move to XaaS as a service and subscription models and the additional implications to consider with designing your compensation plans. Joining me in the discussion is a friend and former client, Joe Morrissey, Chief Revenue Officer at Segment Software.
So Joe, thank you for joining us. Thanks for having me, Ted. I thought maybe what would be a good way to start is to take us through a little bit about the situation that you were in about two years ago when we were brought in. What was going on at the company and what types of things you were trying to solve and specifically hopefully trying to solve with the compensation plan design?
Joe Morrissey (JM): Thank you. So yes, a segment was experiencing rapid growth, but we also had a number of very serious headwinds, although our new acquisition was really strong, both in new logo and an expansion. We faced significant challenges around retention and turn in particular, so we knew that that was something that we needed to tackle. Additionally, we knew we wanted to move upmarket into mid-market accounts and also enterprise accounts and accelerate our growth in all segments. We have transitioned from very much a product-led growth motion to a sales assistant and even sales-driven motion as we start to move upmarket. So we knew we needed to recruit the best salespeople. We needed to build great process and have World-Class sales execution, and we realized we needed to pay for performance. So there were two priorities that we had in terms of being able to meet our goals overall of accelerating growth further and improving retention and expansion.
TG: You know a little bit about the comp plan design that we both agreed to and work with to come up with. Tell us what we did and how that was a change from what had been in place before.
JM: Certainly. So we put in place a pay-for-performance comp plan that we felt would attract the best A-players in the market and allow for significant overperformance on comp with overall performance on quota. That was an important part of the comp design. Of course, we wanted to make sure that we did that in an efficient and scalable manner. So all along, we were very focused on improving our magic number. So landing that comp plan within the confines of an overall budget was also a big priority. The biggest challenge for us, however, was retention. We had found a situation when I joined where although we were growing our new logo acquisition very rapidly and our expansion rates in certain accounts were also very strong. We had very challenging renewal rates in all sectors. You know, we’re a SaaS business and many of our products are consumed by our customers in a consumption-based, usage-based fashion. And so when you have a model like that, it sometimes can lead to negative consequences in terms of maybe overselling at the outset. We wanted to avoid that. We wanted to make sure that reps were incented to right-size the customer. We also wanted to ensure that reps were incented for customer success, that they were incented to ensure that there was a good renewal situation at the renewal point and that the customer was set up for success and would expand further. So we knew that we needed to create a comp plan that created that incentive in addition to an org structure and a go-to-market structure that also reinforced it.
TG: This always comes down to one of the most important things which is – OK, what is the measure then that we ended up using for sales compensation or measures? How did we actually implement the desired goal?
JM: Absolutely. So we knew we wanted to continue our focus on new ACV, both new logo ACV and expansion HCV, and that that was going to be the primary measure that drove a reps compensation plan. So that didn’t change. However, we also wanted to ensure a focus on the renewal. So in addition to having reps be responsible for the renewal and the expansion throughout the customer lifecycle, we paid an above plan component for the renewal. And that certainly gave an incentive for the rep to stay focused on the actual renewal and hopefully create a situation where the customer got the success and would expand in the following year. So that was a carrot, so to speak. On the stick side, we wanted to ensure that if we turned a customer, that there was an impact to the sales rep. And so where we ended was putting in place a penalty whereby if a dollar of ACV churned, there was a 50 cents impact to the rep on their comp plan.
TG: Yeah, I mean, in effect, you made a net recurring revenue measure or partially net recurring revenue measure because you for what you brought in, you were also responsible for the churn and it hit you on your ability to hit your accelerators, for example, and hit your goal. You know, a lot of companies deal with this question. You know, should I have two measures, one for renewal, one for new? Should I mix them in some ways? You know what ended up happening? How well did it work out?
JM: So certainly we saw a pretty notable increase in our renewal rates and we certainly got attention on the right things. We found that reps were now right-sizing the customer at contract signature. They were mindful of ensuring that they aligned our products and solutions to customers’ pain points and the outcomes they were trying to achieve because they knew that they would own this customer post new logo acquisition all the way through renewal and expansion. And that definitely led to a number of notable improvements. However, there were also some unexpected negative consequences of this change. It turns out there was actually more going on than just the sales, execution and sales organization issue. Very often we had not sold the product in such a way that it aligned with customers’ intended outcomes. And so we needed to do a lot more work to ensure that we were effectively onboarding customers and aligning those customers with the right intended outcomes and required capabilities.
TG: Yeah, interesting. So all good intentions, thoughtful, I think, in terms of what to do. You know, let’s align the compensation plan to what we want to have. But it sounds like, you know, and this is always the trick, you try something new and the stick that you put in place. Well, they didn’t have everything completely under their control in a lot of cases, so a lot of noise was created in some cases and some unintended consequences. So what did you end up doing?
JM: So in the second year, we knew we had to address some of these concerns. We still wanted to keep the focus on new logo acquisition and expansion. We still wanted to keep the focus on the renewal. So our headline measure stayed the same. We continue to pay the above client component for the renewal because that had been successful. But we changed the churn measure. And what we did was we made some portion of the reps variable assigned to an overall renewal rate. And we wanted to ensure that there was both a carrot and stick component to that. So we gave the rep a renewal rate target for their territory if they hit that target, they made 100% of that portion of their variable that was aligned with renewals. Typically, that was no more than 15% of their variable. If they beat that number, they had the opportunity to earn accelerators. And if they did not hit that number and they experienced churn below target, they obviously earned less than their target for that component of their variable.
TG: So results have things been going well?
JM: Things have been going really well. So certainly, I think we have a sales team now that feels like incentives are appropriately designed for them and for their business. We have very high quota participation rate. But most importantly, growth as re-accelerated overall. But our retention rates have dramatically improved somewhere in the order of about 15 points over two years.
TG: Wow. That’s really exciting. Hey, Joe, I want to thank you. I mean, this interview and what you’re talking about right now is, as I said, it’s sort of one of three or four or five different classic problems that SaaS companies face when they’re designing their comp plans. I think this is a sort of a great story of good intentions with some results, but some unintended results. How do you fix it and how do you end up on the other end in a very, very positive place?
If you and your company have a XaaS subscription or consumption model and you’re interested in learning more about redesigning your sales compensation plans, please feel free to visit our website and we’d love to talk to you more about how the Alexander Group can help you.