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Developing an ASP Sales Force Compensation Plan
By Daryl Michalik

February 21, 2003

ASPs have struggled to design sales force compensation plans that successfully align sales force objectives with ASP business strategies. Because the ASP value proposition differs from that of traditional enterprise independent software vendors (ISVs), ASPs are unable to rely on compensation best practices used by ISVs.

ASPs, of course, differ from enterprise ISVs in two primary ways:

  1. ASPs provide a hosted software service, not just a software product. ASP hosting services and customer support add to the ASP value proposition by enabling customers to minimize and smooth their internal IT personnel requirements.

  2. ASPs charge recurring fees, whereas traditional enterprise software vendors charge an upfront license fee. Enterprise software sales reps involved in customer acquisition, or “hunting” activities, expect and prefer to receive a commission when the customer signs the contract. But if ASPs were to pay sales reps a large commission when the customer signed the contract, then ASPs would be forced to finance customer acquisition with working capital. Furthermore, ASPs need to offer incentives to either the sales rep or the account manager to “farm” existing accounts to ensure that customers renew their subscriptions. However, ASPs must prevent these farming sales activities from compromising the quality of their customer support.
Some ASPs have successfully responded to ASP sales force compensation challenges by employing pricing policies that encourage customers to sign long-term contracts. (This approach typically “encourages” customers to sign long-term contracts by charging premiums for monthly subscriptions and shorter contracts, and/or by providing discounts for volume purchases of service units.)

These contracts may require customers to pay service fees upfront rather than over time, as the ASP delivers the service. ASPs that use contract pricing can pay sales reps a larger commission when the customer signs the contract without requiring working capital financing, and risking a loss on customers that purchase the ASP’s services for less than some minimum time period. Thus, by altering the core ASP value proposition with contract pricing, ASPs can solve many of their hunting compensation issues using standard sales force compensation policies employed by traditional enterprise ISVs. Contract pricing does not solve the farming compensation issues, however.

Other service providers have successfully responded to ASP sales force compensation challenges by borrowing compensation policies from outside the enterprise software industry — for example, from the data subscription services and beverage distribution industries. These compensation policies enable ASPs to balance farming activities with providing quality customer support.

Furthermore, our research indicates that some sales force compensation best practices are more appropriate for ASPs targeting enterprises with revenues of about $50 million or more, while others are more appropriate for ASPs targeting small- and medium-sized businesses (“SMBs”). Larger target customers typically require longer sales cycles and more sophisticated sales reps, but enable ASPs to profitably deploy significant sales resources per customer and prospect.

To study ASP sales force compensation policies, we interviewed 12 ASP vice presidents of sales and/or marketing, sales managers, sales reps and compensation analysts. The research included both public and private ASPs located across the United States.

Successful policies from our research include the following:

  1. Pay higher commission percentages for customers that generate more profits for the ASP.

  2. Reduce sales rep commission percentages over the life of the customer relationship.

  3. Pay commissions over time when charging monthly pricing. Or, pay commissions when the customer signs the contract.

  4. Pay quota-based compensation for both new revenues and overall revenues.

  5. Design simple compensation plans.

  6. Pay account managers commissions for incremental revenues only.

  7. Pay account managers bonuses for customer satisfaction.

ASPs have braved these sales force compensation challenges because pricing software as a monthly subscription increases software revenues per customer, and also enables ASPs to successfully serve mid-market enterprises and SMBs by reducing customers’ upfront capital requirements for purchasing enterprise software. Furthermore, industry analysts agree that the future of the enterprise application industry is selling software as a service. To make that future a reality, ASPs will need to continue evolving creative strategies and tactics to cope with the challenges specific to selling software as a service.

Do you have a comment or question about this article or the ASP industry in general? Speak out in the ASP Discussion Forum.

Daryl Michalik is Principal of SCS Solutions. SCS Solutions provides market development strategy consulting services to Internet technology companies at a reasonable cost. It has helped startups and established companies raise capital, launch new products, grow current products and create compelling marketing materials. This article was based on the white paper “Designing Successful Sales Force Compensation Plans for Application Service Providers.”

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