The software industry’s transition to recurring license revenue models has changed the way customers purchase products. In-year revenue per initial deal has shrunk to 20 percent of what it was in the perpetual license world. Expanding relationships with existing customers is now the crucial component of the subscription revenue growth model.
To successfully grow recurring revenue, sales and marketing organizations need to attract, retain and grow new customers via upsells and cross-sells (i.e., “land and expand”). Alexander Group (AGI) research finds that the leading companies see their accounts grow annual expenditures by 60-70 percent from year one to year three. Unfortunately, many companies get stuck after the “land” phase, unable to achieve their ambitious upsell and cross-sell growth goals.
In this blog, we discuss four key changes companies can make to their upsell and cross-sell models to enable future success.
1. Above-the-funnel programs should effectively demonstrate value to customers
As companies look to grow revenue through upselling and cross-selling, the need for well-developed above-the-funnel capabilities (ways for customers to engage with products and solutions and evaluate the impact on business outcomes) rises to the forefront. Existing customers who see value in deployed solutions are more open to hearing about additional solutions that can positively impact their businesses. Software vendors that clearly show customers’ achievable outcomes set the table for highly scalable upselling and cross-selling success.
But in reality, many vendors today do not use above-the-funnel upsell and cross-sell programs to the extent they should. Free trials and freemium versions can help build strong awareness and familiarity with products and solutions, while outcome-centric use cases create a compelling reason to learn more. Sixty-two percent of the participants in Alexander Group’s 2016 Cloud Sales Study indicated that freemium and trial-based programs have a significant impact on their businesses. Sophisticated cross-sellers are also investing heavily in more robust online capabilities to drive awareness, education and engagement.
2. Tailor value propositions to customer needs
Effective upselling and cross-selling requires companies to formulate specific value propositions and then deliver them at the right time, to the right influencers. Poorly defined, generic value propositions can inhibit upsell and cross-sell growth. When shopping for technology, customers look for solutions to improve their competitive advantage. Effective value propositions should accommodate those needs. Marketing’s role in the value proposition development process demands heavy involvement. Marketing must understand how the products address specific business problems or outcomes, thus enabling them to produce more compelling collateral and messaging.
And in upselling and cross-selling, sales representatives require sufficient training to link more of their customers’ business problems with their offerings and solutions. Management should ensure that sellers are not over-reliant on their existing customer relationships and extensive product knowledge (i.e., “speeds and feeds”) to sell new products. Instead, management needs to help sellers create value through consultative discussions with customers, gaining deep understanding of business problems and using that knowledge to craft compelling value proposition messages.
3. Increase investment in upselling and cross-selling resources
A previous blog discussed how the move to subscription is responsible for the proliferation of sophisticated post-sales coverage models. Today, many subscription companies, as they shift away from perpetual models, are doubling or tripling their investment in post-sales resources dedicated to retention and growth. Within the more aggressive companies, post-sale resources can account for as much as 25 percent of sales headcount cost, with some of the most aggressive approaching 40 percent. But a key component of the post-sales model rests on how organizations orchestrate those resources to drive the most value out of upsell and cross-sell opportunities. Organizations with large upsell and cross-sell growth opportunities and diverse portfolios are employing customer account managers to own retention and growth and orchestrate resources (i.e., customer success, product specialists and hunter reps). The customer account manager role helps ensure stronger connections to all of the various influencer points and focuses on long-lasting relationships with customers that span multiple lines of business.
Effective sales compensation plans align with revenue strategy and drive the right behaviors. And in recurring revenue models, those behaviors should heavily focus on upselling and cross-selling. Some recurring revenue companies focus on growth within existing accounts, agnostic as to whether it comes from adjacent or core products. Others are very specific about driving growth through sales of adjacent products. It can be frustratingly difficult to move sales representatives out of their comfort zone, whether it is promoting subscription over perpetual, adjacent products over core, or expand over land. Yet, many companies do not reward sellers adequately for the right activities or results.
Upsell/cross-sell treatment in the sales compensation plan can range from product parity (i.e., reducing or eliminating solution bias in support of customer preference) to separate measurement and linkages (i.e., strong emphasis). For comparison, 38 percent of the hybrid companies in the 2016 Cloud Sales Index provide no treatment for cloud versus perpetual sales, while 12 percent of hybrids use a separate measure. The right level of upsell/cross-sell emphasis in the sales compensation plan should be a reflection of the upsell/cross-sell strategy, sales motions and selling roles.
Keys to success for your upsell/cross-sell model
How important are upselling and cross-selling to your revenue growth goals? What changes should you consider to your model?
Co-author: Davis Giedt is a member of the Sales Analytics team in Alexander Group’s San Francisco office.
Original author: Greg Ketchum.