Loyal, long-term customers are usually more valuable and more profitable than new customers that may churn frequently. Yet, we pay much higher rates of sales commission for new business than we do for renewals. Why is that so?
Here are some pointers to think about when designing compensation plans for salespeople (e.g. account managers and customer success managers) that are responsible for retaining existing business:
1. What role do salespeople play in customer retention?
As always, before you design a compensation plan, get clarity on role definitions. Do you have dedicated customer retention people such as customer success managers, renewal managers, account managers? Or do you have hybrid roles where salespeople need to close new business as well as manage the renewal process?
Under the dedicated model, it should be relatively straightforward to design a plan for these sales roles so long as you can measure and assign targets to their performance.
Things get a little bit more complicated when you consider hybrid sales roles. The weighting you place on renewal business versus new business for this role is one of the more contentious design decisions. One school of thought assumes that the base salary should cover the effort required to retain customers, while the sales commissions should be paid for new business only. Our view is that a true hybrid role will need to have a balanced approach to compensating for renewals. We have provided some pointers below (#3) on how to do this.
2. Reward new business salespeople for customers that renew
Most often, sales teams are organized with a clear separation between new business and renewals. In other words, the classic categorization of “hunters” versus “farmers”*.
But even in this case, you might want to carefully consider how you recognize and reward your new business salespeople for customer retention. All things being equal, if Jenny consistently wins new business that renews at a higher rate than Bob does - Jenny should earn a higher commission, right? Yet, most plans don’t factor in what happens once the customer is handed over to the customer success team.
*note, be careful using this terminology with sales management. I recall a conversation with a seasoned sales director early in my career who suggested I try ‘farming’ in the hotly contested enterprise channel that he was carrying a large quota for - “you might end up with a pitchfork up your arse.” Hi, Bob if you are reading.
3. Some ways to think about designing compensation plans for renewals
Assuming you want to reward a sales role for renewal activity, here are some pointers on how to do it in practice:
Renewals Recorded as a "Product"
This means that the renewal (typically an opportunity in Salesforce or other CRM/ERP) is compensated in the same way as new business, except the commission rate is usually much lower (e.g. 2% instead of 10%). You might also see some tweaks - perhaps the original account executive on the new business gets credited with the renewal as well as the renewal salesperson. This rewards account executives for signing up quality new business that consistently renews.
Why a lower rate when renewal business is more profitable? Renewal business should require a much lower sales effort. Hence, a customer success manager should be able to cultivate a revenue base of $3.5M compared to a new business AE who might be targeted at $700,000.
Renewals Recorded as a "Product" with a Quota
A variation on the above is that you can set a specific renewal quota and assign an on-target commission (OTC) amount for achieving this quota. Using this model you can define a pay curve as appropriate (e.g. 50% of OTC at 80%, 140% at 120%, etc.)
Renewal Value Baked into the Original New Business Deal
This means that new business salespeople are incentivized to sign up customers on to longer-term contracts, e.g., 24 or 36 months.
You might use an accelerator (e.g., extra 3%) for a 3-year deal. And maybe a clawback if the renewal doesn't proceed at the end of year 1.
Naturally, you will need to model these plans so that the commission cost for the renewal component is factored in. This is normally done by reducing the new business rate from what it would have been without the multi-year accelerator. Sometimes companies will calibrate the kicker as a real bonus with claw-back provisions.
Renewal Unit Metrics
You sometimes see different plans that compensate for the "number of renewals." So, renewals are measured more as a Key Performance Indicator (aka KPI). This would apply in businesses with large consumer bases, e.g., "hundreds of customers" to renew each quarter.
When you don’t take the time to properly court renewals, or worse, when you don’t create the proper incentive around retention for your sales team, you run the risk of losing customers who might otherwise not have churned out.
One of the biggest challenges is finding a compensation model that works best for your specific circumstances. Because every company has a different culture and process, a good way to figure out the best approach is to talk with your team. Having a conversation with those involved in the process will help you determine which compensation model will work best. It can also help you determine who the superstars are within your organization when building and maintaining relationships with existing customers.
A little bit of relationship building can make a huge difference when it comes to increasing retention.
David Marshall - Founder
David Marshall has spent his entire career immersed in the world of sales compensation. As a sales comp professional, he found the existing Incentive Compensation Management platforms diabolically difficult to use. He founded Performio to provide sales compensation professionals with a powerful sales comp solution that was also easy to use.