Co-authored by Marc Metzner, Vice President at Alexander Group.
For hybrid software companies, the importance of selling Cloud products is growing rapidly. Customers want more agile products and are also seeking solutions for a more diverse set of business applications, driving the need for customization and flexibility. Customers also want to pay as they go, transitioning away from upfront capital expenditure. These trends have investors buzzing over the prospects of Cloud as an incremental source of revenue growth for big software companies.
However, the transition from a perpetual to a Cloud license model is not an easy one. In fact, despite sizeable resources and scale, many big software companies are stuck in their Cloud transition and losing share to smaller, born-in-the-Cloud competitors.
This article outlines four stages of sales model transition to effective cloud selling, including the typical roadblocks and critical success factors at each stage. Be aware that this transition has a significant Darwinian dimension to it; only those companies that quickly identify how to become Cloud-ready will survive!
Cloud Sales Evolution Stage 1: Dabbling
Companies in the “Dabble” stage have relatively small Cloud businesses (typically less than 2 percent of their overall revenue). They’re unsure of their commitment to Cloud because they worry about the revenue cannibalization effect of shifting upfront revenue to ongoing revenue for existing and pending deals. They’re also reluctant to invest in extensive Cloud enablement and post-sales, or to move away from their implementation-focused partner model.
Dabblers are fearful of over-investing and spiraling into years of low profitability and high expense. When transitioning to Cloud, Dabblers try to push reps to close more deals, and thus offset the drop in first-year revenue per deal that can accompany a shift from upfront to subscription revenue (see figure below). As a result, they scrimp on the necessary role, comp and cultural investments to jump-start Cloud selling.
Takeaway: To move to the next stage, winning Dabblers have to commit to investing in the change and not try to get their reps to fund it out of their own pockets.
Cloud Sales Evolution Stage 2: Adapting
In the “Adapt” phase, hybrids begin to focus on active learning, i.e., they evaluate what works and make ongoing changes to accelerate the adoption of Cloud-selling behaviors. For example, they move reps towards a “land & expand” selling motion by modifying quotas and compensation. They also test out new above-the-funnel programs and value propositions to communicate Cloud benefits, and new post-sales account management roles to grow out-year revenue.
While Adapters’ focus on selling Cloud has increased, they are only partway there. At $100-250K Cloud ACV Bookings/rep, they have a long way to get to a sustainable figure ($800K-1MM/rep).
Takeaway: Winning Adapters spend time learning how to upgrade their pre- and post-sales models to convert customers to Cloud and help them grow their usage in future years, thus getting more customers and revenue per customer.
Cloud Sales Evolution Stage 3: Scaling
In the “Scale” stage, companies see how they can build on their successes and grow them to get scale. Scalers typically deploy a mix of cloud-focused selling roles (e.g., hunters in the wild, hunters in the zoo, and quota-carrying customer success managers). Their Expense to Revenue ratios fall towards 50 percent; the majority of reps are now well-versed in articulating Cloud value propositions; and Marketing and Sales are building out web programs for prospect self-learning.
Scalers still have some problems to overcome. They have high costs due to lingering legacy sales models that are not Cloud-ready (e.g., they are too heavy on field sales resources and pre-sales engineers, versus lower-cost inside sales with broader reach). Scalers also lack a strong Cloud channel sales development function (e.g., referral and app development) and therefore must originate most of their Cloud deals via the direct organization.
Takeaway: Winning Scalers focus on taking what’s working and growing it to increase efficiency, e.g., modifying their sales motions (closing small and mid-size deals with inside sales), and building out Cloud-specific channel relationships.
Cloud Sales Evolution Stage 4: Engaging
Companies in the “Engage” stage are “stepping on the gas” towards long-term Cloud profitability, driven by a high ratio of out-to-first-year revenue from accounts (i.e., post-sales account management is efficiently driving adoption, upselling and cross-selling). Their ratio of sales expense to net new annual Cloud bookings may still be high (near 100 percent), but out-year retention and upsell revenue drives sales expense to revenue below 35 percent.
Engagers have robust “above-the-funnel” customer engagement models, including strong try-and-buy capabilities, prospect self-learning resources and technically savvy lead generation. Customers are well-informed about the Cloud product’s capabilities and offerings before they ever talk to a rep. Engagers also extensively leverage partners for referrals and app development, further broadening their market reach. As the Cloud product suite grows, Engagers also move to cross-sell new products effectively, thus driving even more stickiness and revenue per account.
Takeaway: Winning Engagers focus on enhancing their post-sales account management to drive higher out-to-first-year revenue ratios, minimize churn and capitalize on cross-sell opportunities as they roll out more Cloud products.
The four stages of Cloud Sales Evolution help organizations understand the challenges they face along the road to Cloud-selling optimization. How fast a company is able to move through the stages depends on its commitment to building Cloud-specific capabilities and its ability to overcome strategic, tactical, and cultural roadblocks. To learn more about the four stages of Cloud Sales Evolution and how to ready your organization for change, contact the Alexander Group Cloud Sales team.
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