In this episode, Mike Meisenheimer and Davis Giedt of the Alexander Group discuss the unexpected costs associated with sales rep turnover and how hybrid software companies are transitioning to the cloud.
From the Alexander Group’s Benchmarking database, the data shows that on average businesses see a 10% drain on net new business due to this turnover. Listen to the conversation to learn how your business can produce better results during this transition and reduce rep turnover.
Mike Meisenheimer: Welcome. My name is Mike Meisenheimer, and I lead the benchmarking and analytics practice within the Alexander Group. I’m joined by my colleague, David Giedt, a consultant in the practice. And our discussion today is focused on the unexpected cost of sales rep turnover in hybrid software companies that are transitioning to the cloud.
Davis Giedt: Thanks, Mike. Sales turnover is an expensive drain on sales productivity. The data from our benchmarking database shows us that on average, businesses can expect about a 10% drain on net new business each year directly related to sales turnover. But the question is, should companies see turnover as a regular cost of doing business and in particular for hybrid software companies transitioning to the cloud, how should the cost of turnover be factored into the transition of what we’re calling their go-to-customer model? We’ll take a look at those questions today.
Mike Meisenheimer: It’s an important issue and one that came up in Alexander Group’s Cloud Sales Index. We just finished up this year’s version of the survey, and we were pleased to have included over 50 leading software companies as participants. One of the things that was really clear in the survey is that the transition to cloud is continuing to accelerate. It’s true there seems to be more and more pure-play born in the cloud companies showing up every day, but the hybrid companies are also setting very aggressive cloud-related goals. This year, hybrid participants told us that within the next four years, they’re actually looking to quadruple the percentage of their business represented by the cloud. In order to meet those lofty objectives, they’re aggressively shifting their go-to-customer models.
Davis Giedt: Yeah, that’s right on Mike. And as an illustration, we’ve seen significant shifts in spend on post-sales to the tune of about a 30% increase in headcount costs and our rising use of inside sales in just the last couple of years. In fact, many pure-plays now have more than 40% of business coming from inside sales reps. In contrast to the average hybrid, which has only about 5%. And if we take a look at the change in turnover rates that software companies across the board over the last five years, we see a pretty big increase from 13% to 17%.
Mike Meisenheimer: And some of that increase is rightfully attributed to what you would expect to be the changing roles and the sales skills required as companies shift to the cloud. As buying decisions move out of the IT organization and companies shift their sales approach to more of a land and expand model where small initial deal is followed by significant upselling and cross-selling efforts. It really shouldn’t be a surprise that reps who are successful yesterday may not be as successful in today’s environment, but there’s a considerable risk in assuming that the cost of turnover goes down once that transition is complete. Those companies that believe that their cost of turnover will go down after they’ve completed their transition to the cloud, we tend to see the most common arguments being: 1) cloud lets me shift to a less expensive resource and 2) with that transition, I get to move more of the revenue retention responsibility to post-sale customer success teams.
Davis Giedt: And looking at the bookings productivity data from this past year’s survey seems to support that argument pretty well. The use of inside sales reps continues to grow across both hybrids and pure-plays, and they’re becoming more and more productive – closing that gap between inside sales and field sales. And on the whole, the net new bookings numbers or a traditional software rep on average is almost three times that of a cloud rep. But the truth is that the real cost of turnover is directly related to a company’s level of customer retention.
Mike Meisenheimer: That’s right, Davis. The data suggests that for those companies retaining less than 85% all the way up to 90% of their customers and having little incremental growth in their accounts, it’s true that the opportunity cost of losing a cloud rep is going to be less than that of losing a traditional perpetual sales rep. And that’s even true if you account for the 30% shorter ramp up times that pure-play cloud participants reported in this year’s Cloud Sales Index.
Davis Giedt: Yeah. And if they’re able to improve that retention rate and show some incremental growth in new logos, the picture really changes. In fact, if you keep your customers more than three years on average, our data shows, suddenly it’s a lot more expensive to lose that cloud rep.
Mike Meisenheimer: Those post-sale teams won’t have it anything to retain if that rep doesn’t close the initial deal. So losing a rep is not just about this year’s bookings, it’s about the opportunity cost of those next three years plus of revenue.
Davis Giedt: So the takeaway is that companies need to recognize that as they change products, messaging and how they access their customers, they need to pay closer attention to the turnover of their cloud reps than they may have expected to previously. And in fact, one company we work with that successfully made the transition from selling perpetual licenses to selling cloud licenses did a few things really well during that transition, including investing heavily in cloud products and messaging training for their reps, aggressively incentivizing selling cloud products in their compensation plans, and also putting vertical specialists in place to drive line of sight into customers use cases. And in general, the companies we’re working with that are ahead of the curve. On their transition to cloud or paying close attention to compensating their reps correctly for where they’re at in their cloud transition, it’s different for every stage of the transition spending above market on training to get reps ready to sell cloud and also putting strong mentoring programs in place to help reps with their future career development as they begin to sell more cloud products.
Mike Meisenheimer: That’s right, Davis. We’re really starting to see a difference in terms of both the company’s ability to manage turnover, as well as accelerate their transition to the cloud when they’re making those kinds of investments. If you’re interested in learning more about what other companies are doing to mitigate the cost of turnover, you can visit our website, www.alexandergroup.com.