Sales Compensation in a Product-Led Business
In the era of product-led growth, sales compensation is a confusing and hot topic. But it doesn’t have to be.
This article is authored by Sara Archer, Director of Sales & Marketing at ChartMogul, the leading subscription analytics platform. Prior to ChartMogul, Sara was a Sales Director at InfluencerDB and Sales Operations Manager at Synaptic Advisory Partners. Sara lives & breathes product-led sales and — we must say — is an expert in sales compensation. We're lucky to have Sara guest write a piece on sales compensation in PLG to help you navigate what can often be a confusing topic!
I suppose my first sales quota was self-determined and measured in boxes of Girl Scout cookies sold. My competitive nature wanted to be the top seller and I knew to achieve that, I’d need to canvas more houses and neighborhoods than all my fellow troopmates. The ‘quota’ itself was mostly arbitrary, but, despite their tasty nature, the cookies don’t sell themselves.
Now I’m not sure if you’ve polished off an entire box of Samoas in one sitting but if you have, you don’t need a 9-year old pigtailed Sara elucidating the value of Thin Mints and Tagalongs. What you do need, though, is this moment: the doorbell ring and money exchange. You already know what cookies to buy. By the time you engage the salesperson, you’re already most of the way through the purchase decision.
In fact, according to recent Gartner research, "B2B buyers spend only 17% of the total purchase journey with sales reps." (Gartner 2020). That 17% is critical. If I don’t ring your doorbell, I don’t get the sale and I miss my first ever sales quota.
At the risk of intensifying cookie cravings, let’s transition back to the world of software. Here’s the first important point: The rise of product-led growth does not eliminate the need for a sales team nor an appropriate compensation scheme.
Why PLG needs sales
In a product-led business, prospective buyers realize the value of your product by experiencing it — whether via a free trial or a freemium offering. Some (or maybe many buyers) will be able to evaluate, configure, and make a purchase decision on their own. Some won’t. Some think they will, but won’t.
That’s where your sales team comes in. Your buyers have never purchased your product or a product like yours before, so even though the product-experience drives sales, you likely still need a sales team to help customers realize the value of your product and how it can help them accomplish their intended business objectives.
It’s very unlikely you can (or should) automate the art of selling. You need a sales team to navigate difficult conversations about technical configuration, price, or contract negotiations. This will create trust and buy-in.
Why that sales function should be appropriately compensated
If I’ve convinced you to hire a salesperson or team, great. You now need to figure out how to fairly compensate those individuals based on fair market value and based on performance. Sales should always be a profit center.
Sales is an outcome-based role that needs to deliver under pressure month after month, quarter after quarter. Traditionally, variable compensation models have been built to incentivize high outcomes, with attractive earning power for salespeople who consistently meet or exceed targets. Many (but not all) sales professionals are attracted to roles with high and almost always uncapped earning potential. This means that they’re willing to put in the work to increase your yield.
That’s the crux of sales compensation: it is designed to consistently incentivize the right outcomes for your business. We must keep this in mind when designing compensation in a product-led business.
How to pay salespeople in a product-led business
To figure out who and how to pay your revenue generating product-led team, start here:
1. First, determine what “sales” functions exist in your product-led business. Who owns them and how critical they are to producing the revenue results needed to propel your growth? Those functions might include:
- Sales development: generating interested and engaging new leads (especially relevant if you don’t have a steady stream of inbound leads or a full-fledged marketing strategy)
- Account executive: e.g. qualifying leads, demoing the product, negotiating, and closing
- “Sales assist”: reactively answering OR proactively anticipating product and usage questions about the product experience with the customer’s business outcomes top of mind
- “Self-serve”: monitoring on-trial leads to see key activation steps and keep them on track to paid conversion. Note: this is often owned by product, marketing, or growth; not sales
- Sales operations: introducing and iterating on measures to improve the PLG funnel and customer experience
2. Next, determine who does these activities. Generally speaking, when lead volume and capital permits, I’m a fan of focused efforts. I wouldn’t recommend one employee managing sales negotiations AND sales assists. These functions require different skill sets and if you can, you should hire the right people for each function.
3. Once you determine the coverage model (who is doing what in the sales process), decide what you want those individuals to focus on. Matt Haller from CaptivateIQ recommends choosing no more than 3 areas of focus:
“When designing a sales compensation plan, it’s important to ensure that the goals you set are objective, measurable, and aligned to the company’s business objectives. Are you looking to increase MRR? Then it would be a good idea to put that into your plan. This is where the art and science of sales incentives come into play. There is often a balancing act about what measures to include in the plan and how granular to get.”
Here’s some examples:
- You can (and almost certainly should) incentivize revenue goals like a quarterly MRR target — after all, sales should be a revenue-generating profit center that allows the business to grow and make strategic investments
- You can also incentivize strategic projects and experiments — e.g. introducing a new onboarding workflow
- When designing variable compensation plans, keep in mind your non-revenue goals as a PLG revenue leader. As long as salespeople have had variable compensation plans, they’ve thought them unfair. Changes to compensation plans are a big reason salespeople change jobs. To do this, you might ask yourself questions like, “How can I increase the average tenure of my team while meeting these other goals?”
4. Then, determine the correct OTE and base-variable split for the defined, critical functions. This is a complex topic that varies by region, industry, and role, but generally speaking:
- The variable can be made up of quota or goals as you see fit
- The variable plan should include rules for things that are important to your business model. For example: a minimum achievement threshold; incentives for selling longer agreements with attractive payment terms; incentives for selling to new customers that contribute expansion MRR; ‘recovery’ for customers that churn or contract within a defined time period (e.g. 90-days); PLG project completion to diversify working time, mature sales organization, and increase salesperson tenure. These can be measured by MBOs or OKRs
- For further reading, check out CaptivateIQ’s white paper on setting, designing, and deploying sales quotas
5. Decide how reliably a salesperson can produce these results given what you know about your customers and their buying behavior.
6. Set reasonable targets and be flexible with the plan if you anticipate needing to make changes.
7. Encourage going above and beyond. There are very few reasons to have a capped variable compensation plan — and having one will be an inhibiting factor when hiring salespeople.
Some practical examples
Imagine, for simplicity, that your product-led business looks something like this. You run a $3M ARR business. Maybe you may have 2-3 sales reps. On average, let’s say that:
- 30% of your new business MRR is self-serve
- 30% of your new business MRR is sales-assisted
- 40% of your new business MRR is ‘sales-led’
If you don’t know where your growth comes from, you can track in something like ChartMogul.
That said, it’s likely that your prospective customers might vacillate between tracks, and your acquisition model should be flexible enough to support this.
Your self-serve business can be managed by your marketing, growth, or product teams. What’s important here is to set objective, aligned goals that drive the self-serve user to a purchase. This can include top of funnel goals traditionally seen in marketing (e.g. number of trials created in a month) and activation goals (e.g. number of activated trials in a given month).
It can also include an MRR target.
For sales-assist cycles, PLG businesses like Vidyard and Guru compensate individuals and teams more like support or customer success than traditional sales. Ideally, whoever owns sales-assist cycles are responsible for one metric that is key to product activation (e.g. x views, setup y). Then compensation can be tied to this metric. I won’t discuss this extensively because we’ve chosen a different strategy, which I’ve outlined next.
Sales compensation gets much more interesting when we look at the sales-assisted and sales-led funnels. Especially because it’s likely your average sales price (ASP) and/or average revenue per user (ARPU) are higher when sales is involved. Imagine you’re trying to decide how to structure your product-led sales team of 2.
You could split your inbound leads by a reliable variable, like geography. Those two reps could work leads from trial to close. You might incentivize the sales reps to work larger, more challenging deals that yield more revenue by crediting ‘sales-led’ deals at a higher value than ‘sales-assist deals’.
This is a good strategy when you have seasoned, maybe even enterprise salespeople — capable of managing a territory and building relationships with different kinds of buyers. This is also a good strategy when you don't have an immediately reliable way of identifying which leads fall into which category: sales-assist vs. sales-led.
If you are able to easily identify which leads fall into which category, then you might consider routing the leads by category. There’s no “right” way to do this, necessarily. You should look at the inputs available, your in-house sales talent, and the outcomes you want to incentivize.
So, for your North American AE, let’s call her Jen. Jen manages all ‘sales-led’ and ‘sales-assist’ leads in her territory. Her plan might look something like this:
1. $200k OTE breaks into a $100k base with $100k variable compensation based on a quarterly MRR target of $25k MRR where the $25k is calculated as a net MRR movement
2. New business MRR + Expansion MRR within first 3 months - Recovery MRR
- New business MRR for all deals worked by the AE
- Expansion MRR for all accounts that expand within the first 3 months. Example: If Jen sells to ACME in January at $100 MRR and ACME’s usage expands to $300 MRR in February, credit $200 towards Jen’s quarterly target. This encourages reps to sell to good-fit customers who are retained and expand
- Recovery MRR for contracted and churned accounts within the first 3 months. This dissuades Jen from selling to bad-fit customers. For most product-led businesses, the full value of acquiring a customer is realized over many months. So we ‘recover’ a % of the MRR based on when the downgrade or churn event happens. Here’s an example:
3. Minimum achievement of 30%
4. Accelerators for hitting 115% of quota and uplifts for selling annual agreements with attractive, upfront payment terms
It’s true that product-led growth means major changes for sales teams and sales compensation plans. But in SaaS, every incremental improvement can result in massive changes in outcome. So it’s in your best interest to optimize the process where 17% of the buying experience involves sales, and to also optimize the details of your sales compensation strategy. Just ensure your compensation plan and incentives are clear, aligned with your buyers, and financially sensical.