The technology industry is dealing with the most disruptive change it has faced in decades – cloud computing. The driving force behind the disruption is customers’ desire to refocus on core competencies. Customers aim to reduce their total cost of ownership of IT. Cloud computing allows them to outsource activities not core to running and operating their business and reinvest these savings to fuel growth. The challenges are more acute for traditional high-tech companies with outdated strategies and sales teams. CXO’s and sales executives must re-evaluate and adapt their go-to-market models or risk obsolescence. One of the most important questions these leaders must address is, “how can we afford the transition to a cloud-based business model?”

While the transition from an upfront to a recurring revenue model has broad-based financial repercussions for the entire company, one of the areas most affected is the sales organization. Based on The Alexander Group’s 2012 Cloud Sales Benchmarking Study, executives must address the following issues to successfully transition to a cloud model.

  1. Bookings / Revenue Predictability. The ultimate goal for hybrid companies is to transition their clientele to annual or multi-year agreements to maximize customer lifetime value. Simply put, bookings and revenue will become less predictable during the transition as companies demand flexibility for licensing models that provide uncertain contract duration (pay as you go) or are based on performance / customer consumption. Adapting quickly to these new contractual arrangements is critical.
  2. Customer Acquisition & Churn. The cost of acquiring new, cloud customers is typically 50 – 75% higher for cloud-based models compared to traditional high-tech. Hybrids must invest appropriately to acquire customers and ensure their, adoption and success. However, higher retention (and lower churn) is often the reward for companies that successfully transition.
  3. Break-even. For cloud sales organizations, break-even is the point at which revenue received equals the cost associated with customer acquisition. For cloud customers, the break-even point occurs when the cloud solution equals the on-premise solution in terms of cost. Organizations are experiencing elongated break-even timeframes from both a customer and sales rep perspective. Alexander Group clients estimate that customer break-even does not occur until month 30 to 36 whilst rep break-even takes as long as 15 months.
    On-Premise and Cloud Pricing Parity
  4. Role Specialization. Today most sales organizations are solving their journey to the cloud by simply asking their frontline sellers to also sell cloud solutions. Frontline sellers are struggling with the elongated, more complex sales process requiring in depth knowledge of security, data sovereignty, the customer’s business, usage patterns and, ultimately, return on investment. To truly succeed, role specialization is a pre-requisite. Roles that drive acquisition, penetration, retention and customer success. A recent Alexander Group mid-market client achieved 8% revenue uplift simply by bifurcating sales responsibilities between customer acquisition and penetration and renewal selling.
  5. Revenue Production. One of the biggest obstacles to overcome in the transition to cloud is the dramatically lower sales productivity per rep. First year revenue production per rep is typically 33-50% lower than traditional on-premise license sales.

Transitioning to the cloud is wrought with peril and potential financial pitfalls. To successfully navigate the journey, organizations must concern themselves with financial predictability, customer acquisition and churn, customer and rep break-even, role evolution and productivity levels.

World-class sales organizations are taking a holistic approach to addressing these challenges starting with developing more robust segmentation models to deploying sales incentives to drive focus and modify seller behaviors. As an executive, what actions should you take as you embark upon this journey? Here are four key actions you can take to start the journey:

  • Refine Your Segmentation & Targeting Models. Enhance your current models by including cloud factors such as customer lifetime value, churn and revenue leakage.
  • Re-evaluate Your Routes to Market. Lower barriers to entry require RTMs that are fast, flexible and adaptable while cost effective.
  • Evolve Your Roles. Map your customer’s future-state buying process and address your role needs across your new, customer contact continuum.
  • Leverage Sales Comp as a Strategic Lever. As your strategy and focus on the cloud morphs over time, utilize sales compensation to drive focus and balance on your cloud offerings.

To learn more about successfully transitioning your sales model, contact the Alexander Group.

Originally published by: Jeff Hersh