[HN Gopher] How to structure your sales compensation plan to del...
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How to structure your sales compensation plan to deliberately
undersell
Author : djhaskin987
Score : 60 points
Date : 2022-07-26 15:34 UTC (7 hours ago)
(HTM) web link (tomtunguz.com)
(TXT) w3m dump (tomtunguz.com)
| adamw2k wrote:
| Also known as sandbagging... Just a way to game the next round's
| valuation if you find strong demand.
| pc86 wrote:
| It's not explicitly mentioned in this way here, but I feel like
| the underlying assumption is something like "If you think they
| need the $20k plan, and you sell them on $10k, they'll increase
| to $20k based on usage then expand into $30k [(this is basically
| the chart in the article)] - but if you sell them on $20k,
| they'll stay there."
|
| I don't see why you would intentionally undersell. How does that
| have any bearing on whether or not they expand into higher tiers,
| or whether or not they refer new customers to you?
| Rastonbury wrote:
| I get the idea behind it, but the numbers have to make sense.
| You forgo revenue now for more revenue later, taking into
| account revenue now can be reinvested and SaaS companies
| typical grow really fast. If you undersell by 20%, you don't
| have that 20% right now to spend on more sales/engineers.
|
| If the customer is really going be happy with 30K worth
| eventually, get them there now instead of 18 months later.
| ColanR wrote:
| I imagine there's a psychological barrier to upgrading a plan.
| Make the customer break that barrier on their own, due to the
| necessities of their current usage, and they'll have less
| compunction to upgrade later on. Psychological barrier already
| broken.
|
| Whether the decreased initial revenue is outweighed by the
| increased number of upgrades later on is a different question.
| Personally, I'm skeptical the strategy pays off.
| toss1 wrote:
| You are underselling _TODAY_ , building satisfaction with the
| purchase and desire to get more, as opposed to resentment at
| having overpurchased and now seeing you as yet another vendor
| who oversold us a bunch of stuff and is now worth less than the
| spend, and is now pinching the budget. The former is likely to
| turn you into a valued provider, and the latter is likely to
| have the customer looking elsewhere in the future.
|
| Typically, existing customers business costs only 20% of
| acquiring new customers. To succeed, you want to maximize
| ongoing relationships, not keep churning for new customers at
| 5x the acquisition cost.
| fishtoaster wrote:
| It's not explicitly mentioned because this is a followup to a
| post where the author does explicitly mention this (linked from
| the first line of the article):
| https://tomtunguz.com/deliberately-underselling/
| toss1 wrote:
| >>There's a trade-off to this commission plan: the company may
| pay both the customer success managers & the AEs for expansion.
| Also, if customers expand by themselves, salespeople may receive
| commissions without expending more sales effort.
|
| Managers often try to minimize these trade-offs, and it is
| insanely myopic.
|
| Just because a customer increases their spend without an explicit
| action by your rep does not mean that you should pocket the
| commission for yourself/dept/company. Even if the rep actually
| did absolutely nothing, allowing an occasional "unearned"
| commission will build loyalty & motivation. More likely, it'll
| get your reps to focus more on customers who are likely to
| eventually expand, and also doing the kind of ongoing 'soft'
| follow-up and account maintenance/monitoring that makes customers
| more likely to up-convert.
|
| Management, if anything, should be about seeing the long view and
| incorporating it into the plans. Why it is so rare to do so
| continuously amazes me.
| notahacker wrote:
| There should be someone tasked with doing the ongoing 'soft'
| followup and account maintenance in most businesses of this
| scale anyway. It's just often a different person. Hence the
| authors' point that compensating two units of the sales team
| _can_ work out if there 's more revenue generated overall
| (otherwise it probably works out by the initial commissions
| offered being smaller...)
| carlineng wrote:
| For businesses where a significant percentage of customer LTV
| is in the expand phase, I'm surprised it's not more commonplace
| to have AEs take on the role of customer success. The AE
| usually has a lot of context about the customer that is likely
| to be lost in the transition to a CSM. Doing this also has the
| benefit of not needing to pay two people for the expansion.
| Closi wrote:
| I think this is a particularly rose-tinted glasses view of the
| sales process, which sells underquoting as a great thing for your
| customers that they will love ('When you tell them they need to
| pay more, they will love you and will recommend you to others!').
|
| In reality, 'land and expand' is almost universally hated by
| customers and this just appears like an excuse to under-quote to
| win the commercial point on an RFP and then screw the customer
| over when there is some lock-in later down the line.
|
| How about neither of these - how about selling solutions that you
| honestly believe are right-sized, being transparent about the
| sizing/requirements assumptions you have made, and then being
| flexible contractually if reality turns out different? This is
| how you _actually_ build trust and consumer satisfaction, not by
| deliberately underquoting.
| mox1 wrote:
| Yea, at my F500 sized company we set budgets year(s) in
| advance. I literally have a line item (that gets reviewed
| monthly!) for each major SAAS product my team uses. We estimate
| like a 5% inflation YoY into these budgets.
|
| If a vendor purposefully under-quoted / undersold me and then
| asked me to pay more $$ 6 months in, I literally couldn't do
| that if I wanted to.
| aaaaaaaaata wrote:
| Do you have a discretionary budget?
| Rastonbury wrote:
| Expansion and addons are really common though, the
| stakeholder has to push for more budget, not too difficult if
| the product really drives business value
| Closi wrote:
| This isn't about selling customers what they need, then
| discovering new value through addon's though.
|
| The article is quite clear that it is intentionally selling
| a customer less than what they need in order to get them to
| buy what they actually need later down the line, once they
| are already committed.
|
| As a simple example, I could sell you a 3-year software
| license agreement with a 60 day estimated implementation
| program on a T&M basis. Then after you have signed the
| software agreement and are committed to licencing we go
| into blueprinting, I could suddenly say that it's actualy
| 120 days implementation now, and that will net the vendor
| an extra $90k revenue in Y1. Then after implementation you
| realise that you didn't buy the 'Bi-Connector' that was
| demo'd to you during the sales process because "oh that's
| actually another license" even though they clearly showed
| it as core functionality in their demo.
| jjk166 wrote:
| There's a big difference between compounding past success
| and ameliorating past shortcomings. If implementing some
| improvement goes well, we accomplish our goals on time and
| within budget, it's easy to say let's do it again. If a
| vendor makes me go in front of my boss and say the budget I
| previously requested was not sufficient and the thing I
| said would get done wasn't, I will never stake my
| professional reputation on that vendor again.
| jehb wrote:
| Came here to say this. I'm sure there are situations where
| this strategy may work, but where I've worked (which is
| primarily outside of line of business operations) budgets can
| be inflexible in the short term and just as often trend
| downward as upward. And people move on. Just because you
| developed a business justification with my the person who
| owned a budget before me doesn't mean I'm going to identify
| that need as a business priority, particularly if my first
| interaction with understanding that piece of our operations
| is that it requires a ballooning cost allocation.
| throwawaysleep wrote:
| "hated" doesn't matter unless customers actually change their
| behaviour. Companies will get screwed over on low cost RFPs
| again and again and again and do nothing about it but whine.
|
| Customer satisfaction only has value if it drives additional
| sales, but plenty of orgs do not care.
|
| Accenture and IBM have been doing this for decades. They do it
| because it works.
| safeimp wrote:
| > In reality, 'land and expand' is almost universally hated by
| customers
|
| Honest question but do you have any source for this or is it
| primarily your personal experience?
|
| In my experience land and experience has been leveraged to help
| get a foot in the door sooner than later, it was never anything
| more than that. If we had the ability to walk into a shop and
| start with 100% of the clients environment we'd have done that
| but the problem was typically tied to the customer not being
| ready to rollout from 0-100 overnight. For us the best approach
| was to start small and work with the customer on gradually
| rolling out as they were comfortable.
|
| Regarding your other point:
|
| > How about neither of these - how about selling solutions that
| you honestly believe are right-sized, being transparent about
| the sizing/requirements assumptions you have made, and then
| being flexible contractually if reality turns out different?
| This is how you actually build trust and consumer satisfaction,
| not by deliberately underquoting.
|
| I'm in complete agreement, this is the best case scenario and
| is certainly the best way to build long-term trust and
| relationships but universally it doesn't happen or when it does
| it's not transparent. The customer really has to push to make
| this happen only leading to anxiety, relationship damage, etc.
| thaeli wrote:
| I think you may be talking about two slightly different
| things.
|
| Land and expand in the sense of "land a small, right-sized
| solution for one group within a large company, then leverage
| that successful deployment to expedite expansion to other
| groups, and maybe eventually convert to an enterprise
| agreement" is great, and often the only way to get in the
| door at a large org. From the org's perspective, being able
| to adopt an "existing" solution/provider is often much faster
| and can even skip some RFP processes. I don't think anyone is
| saying this is bad.
|
| Land and expand can also mean "deliberately
| undersell/underbid on a large RFP, take an initial loss, then
| as soon as the customer's locked in slap them with large
| change orders and annual increases". I don't think I need to
| elaborate on why this is scummy.
|
| The article isn't very clear about which scenario it's
| advocating. In the simple case of per-seat licensing, I've
| seen it both ways. From the customer's perspective: If we're
| looking to buy your product, and say hey, this has some long-
| term upside, we think it might be used by 500 people within
| two years, but our initial group is 20 - that's an undersell
| of sorts. Typically the concessions we would be asking there
| are less around unit license cost and more around waiving
| migration/setup charges or sometimes even negotiating a new
| license category/SKU. (Hey we use 50 seats right now, we'd
| like to buy 200 more but they're only going to use this one
| new side feature you implemented, let's find a discounted
| rate to only license that feature. It's an ethical undersell
| because it was done with the customer fully aware.)
|
| But I've also seen some groups get stuck with the reverse.
| Sales promised them that oh yeah, this tier will work for
| you, and then hit them with massive usage-based overages.
| That's "land and expand" too, but it's scummy.
| nickstinemates wrote:
| > If we had the ability to walk into a shop and start with
| 100% of the clients environment we'd have done that but the
| problem was typically tied to the customer not being ready to
| rollout from 0-100 overnight.
|
| On top of that, there's a handful of people, maybe less, who
| actually have the juice to be able to make this happen even
| if they wanted to in any given organization. You're likely
| not talking to them.
|
| Teams who need to get shit done today and are ready to roll
| out are much quicker to transact and less of an
| organizational risk (time to value vs. contract amount)
| waynesonfire wrote:
| I have never seen anything remotely to your ideal.
|
| Did you forget how competitive and cut throat the world is? You
| don't sell, you don't eat. Sales is a race to the bottom, a
| competitor will eat you alive by undercutting or over-promising
| just the right amount to win the deal.
| [deleted]
| Closi wrote:
| It probably depends on both the market and the cultural
| landscape.
|
| I'm in the UK, and USA providers are more 'cut-throat' than
| domestic UK providers in my personal experience when I have
| tendered enterprise software in the past, and the cultural
| differences have been massive.
|
| Cut-throat is fine until you get a reputation for cost
| overruns, get to be known as untrustworthy, and eventually
| end up with a lack of customers willing to give you positive
| references. I certainly know which vendors in _my_ industry
| are known for land & expand and scummy sales tactics (and
| when I personally see these tactics being deployed I will
| tell everyone else I know in the industry to avoid them like
| the plague).
| ultrasaurus wrote:
| Sales compensation is one of the most interesting, difficult and
| high leverage things a company can get right.
|
| The way I've traditionally thought of "under-selling" is:
|
| - You have multiple teams that could _maybe_ use your product,
| and you can _maybe_ get their common manager to sign off on many
| seats - But you start with the team most likely to be successful,
| sell just those seats. Once they are firing on all cylinders they
| 'll be very helpful training the other teams - Negotiate the
| discounting curve for the extra seats ahead of time and agree on
| expectations for timelines - Co-term the new seats, make it very
| easy to expand - But of course customer cash is king, and if they
| want to do procurement exactly once and are ok with seats sitting
| idle for a while, that's what you'll do
|
| One of the great strengths of the SaaS billing model is how you
| can map the buying process to the the actual use of the tool.
| thisismyusrname wrote:
| Problem is if venture capital is valuing companies as a multiple
| of revenue then management has an incentive to juice revenue
| _right now_ because every dollar of revenue will increase the
| value of their stock by that multiple which is (1) often quite
| high (10-40) and (2) likely a more profitable strategy for
| management than the incremental cost of annoyed customers.
|
| Not to say this sales structure isn't good. It sounds good. I'm
| just not sure it changes one of the biggest incentives to
| aggressively sell with a shorter term time horizon than some
| subset of shareholders might have.
| notahacker wrote:
| I guess the tradeoff is that underselling allows you to juice
| your CLV estimates even more with inflated upsell figures.
|
| From a purely cynical perspective, which is best probably
| depends on the market and maturity of the business and cost of
| sale: can you tell more convincing stories about ability to
| keep doubling the number of new customers walking through the
| door like you did over the last few months, or how your product
| is so good larger customers are going to keep doubling their
| spend every few months like most of them did recently...
| drc500free wrote:
| Off topic, this site is pretty much unreadable on a 2020 iPhone
| SE. The fixed sized header takes up 40% of the screen. On load I
| can't even see the entire headline, let alone any of the article.
| My phone isn't even 2 years old, and my wife still uses the old
| SE that is much smaller.
|
| Why is this stuff still so hard?
| upupandup wrote:
| The reality of this strategy is that as soon as the customer
| realizes you undersold them, they will take their business
| elsewhere unless your offering is so unique and tough to
| reproduce.
| iseletsk wrote:
| I think there are two conversations going on at the same time.
| One is "per project" fee, where charging less upfront to charge
| more later on is just ... wrong. I don't think the article is
| about that case.
|
| Yet, in SaaS world, when you sell per seat to a large company,
| you can either: 1. get a small deal / a few seats, and then
| expand (because your product is great) 2. try to land as big of a
| deal as possible from the get go.
|
| The typical sales comp structure is forcing salespeople to go for
| #2, as they don't get as much money for expansion. My
| understanding is that the article is arguing for changing the
| comp structure to make #1 as exciting as #2 for the sales person.
| And that is the whole point. The chances to get the deal, and
| time to get the deal when sales person goes for #1 are much
| better than in case #2. IMHO: Makes a lot of sense.
| Enginerrrd wrote:
| In my consulting business, I've found the opposite strategy to be
| true.
|
| I, if anything, deliberately slightly overbid/oversell. Then when
| I deliver the product that they asked for less than I quote them,
| I get REAL word of mouth, glowing recommendations.
|
| I also have found that this practice really weeds out the people
| that would otherwise give me endless problems like delaying or
| fighting payment, poorly defining their requirements, changing
| their mind dramatically half-way through, or failing to take my
| advice on things that will give them legal problems or cost them
| an enormous amount of money down the road. (And then come back
| and try to blame me for them not taking my advice.)
|
| I also have the budget to deliver what they actually need at the
| quality they actually want.
|
| Being proud of deliberately misleading people in a way that
| negatively impacts them feels really gross to me.
| sitkack wrote:
| I have given customers discounts because they wrote great docs,
| prepared for meetings, didn't mess around with paying, etc. And
| I tell them, I am giving you a discount of xyz because of zzz.
| Half the time they denied the discount but were thankful that I
| recognized their professionalism.
|
| Problem customers just aren't worth it unless that is all you
| have.
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