The Alexander Group (AGI) recently conducted a third Cloud Sales Index (CSI) study. About 50 companies participated through data and management interviews with the objective of learning how technology companies are meeting the challenges of delivering infrastructure, platforms and software-as-a-service. Among the multitude of interesting findings was the near unanimity around the need to build enhanced post-sales capabilities to drive expansion revenue.
A thriving subscription or consumption model depends on the ability of the vendor to retain and expand customers. Broadly stated, expansion revenue manifests in two forms: upsell revenue (selling more or getting the customer to consume more of the existing solution) and cross-sell revenue (selling a new solution or to a different set of buyers). AGI’s Cloud Sales Index data indicates that for every dollar of an initial as-a-service booking, best-in-class companies are deriving $8-$10 additional dollars of revenue over the subsequent four years. Put another way, companies get 88-91 percent of the total five-year contract value on a deal after the initial booking event (excluding one-time charges such as professional services or migration fees). This new reality creates an increasing dependency on making substantial investments in post-sales capabilities, skills and resources to capture potential revenue.
In the past with the on-premise perpetual license model, legacy tech companies focused on the booking event, which is where nearly all the revenue associated with a deal exists. “Born-in-cloud” startups understandably focused on driving acquisition in order to demonstrate the growth potential and viability of their technology. Not surprisingly, neither legacy nor “born-in-cloud” companies adequately invested in the post-sales support resources needed to drive effective subscription/consumption revenue growth. That historical reality is changing rapidly and dramatically. Consider that the mature tech companies in our Cloud Survey Index are moving from about 5 percent of their total sales expense on post-sales resources today to 40 percent within two years. Such rapid migration creates opportunities for both great success–if the transition is smooth and successful–or significant disruption and revenue erosion if the new coverage model is conceived or executed poorly.
How should companies transitioning to an as-a-service model think about building out a viable, growth-oriented post-sales engine? Here are the areas AGI recommends companies consider:
1. Understand and Document Your Customer Use Cases
- Understand how customers are using your solutions. How do usage patterns differ across vertical and functional buyers?
- Understand how customers view your technology. Is it essential or nice-to-have? Differentiated or commoditized?
- Examine customer history to determine the most likely paths to expansion. Is your best expansion path upselling the solution you initially landed or adding additional capability after the sale (cross-selling)?
2. Build and Align Post-Sales Roles to Viable Expansion Scenarios
- Map your viable expansion paths to the right resource types. If your expansion revenue depends heavily on customer adoption, consider post-sales adoption specialists or project managers. If cross-selling additional functionality through add-on solutions is the right play, think about post-sales product specialists that can drive incremental value to your accounts. If your organization needs solution assurance and maintenance, consider customer success managers. Tech companies continue to develop an increasingly wide array of roles to support specific post-sales scenarios; aligning the right job to the right set of activities is critical to driving post-sales success.
- If you utilize the Indirect Channel, consider roles that business partners may be able to provide to supplement post-sales capabilities. Keep in mind that many traditional partners are also struggling to navigate the as-a-service space. You should take care not to unwittingly cause channel conflict with your legacy fulfillment and deployment partners by supplementing your own post-sales capabilities.
3. Identify, Align and Build the Enablers to Support New Post-Sales Roles
- Post-Sales Competency Models
- Revamped Rules-of-Engagement (ROE) Models
- Training and Enablement Programs
- Sales Compensation and Quota Programs
- Enhanced Analytics and Tools to Harvest Post-Sales Data
The economics of the as-a-service business model mandate a more explicit, resource-intensive focus on post-sales activities. Vendors that cannot effectively retain and expand their existing customers will be increasingly unable to drive enough revenue to realize sufficient returns on customer acquisition investments. More importantly, as-a-service companies must continue to drive value to customers after the initial sale in order to keep competitors out and revenues expanding. These realities point to the need for significant recalibration of existing sales models: the good news is, AGI can help.
Read part 2 of this blog series.
Contact us for a briefing on how tech companies are thinking about building expansion revenue engines.
Read more about Alexander Group’s approach to sales transformation for technology companies.
About the Author
Sean Ryan is a principal in the Stamford office. He co-leads the firm’s Technology practice on the east coast. Sean focuses around leading software, hardware and technology services companies through the difficult challenges of sales transformation, from traditional selling models and building the sales effectiveness and sales compensation structures required to effectively transition. Sean works primarily with technology clients in areas such as sales and marketing strategy formulation, sales transformation, direct, indirect and inside sales channel management, and sales compensation. Increasingly, Sean’s focus has centered around working with companies attempting to establish a presence in Cloud/XaaS markets for both traditional technology players and “born-in-the cloud” companies. Sean has significant experience working with both large companies and start-ups, with all forms of ownership including public, private equity-funded and privately held companies.