Over the last year most B2B subscription software and data businesses have had one aim in common: carry out inflation-linked price increases on their customer base. For many years this hadn’t been a focus of conversation and organizations had lost the institutional know-how for executing deserved (and often, necessary) year-on-year increases. So, our clients came to us and asked ‘how’.
Most of their questions were around how to decide whom to target, how much to target them with and how to communicate the increases. But one other ‘how’ came up frequently: how do we get our sales team on board with going after the increases? On face value this seems like a fair question. A price increase conversation is a difficult one to have with a customer, especially after years of relatively low year-on-year price increases. But should it be a fair question? Shouldn’t the sales team’s organizational structure & incentives be set up in a way that the team feels equipped & excited about the prospect of growing customer ACV through price increases?
We decided to dig deeper. We had a series of conversations with sales leaders to understand why in many of these recurring revenue businesses there was concern that sales wouldn’t be motivated to raise prices. We found two consistent themes: 1. Insufficient differentiation and specialization in existing business roles, and 2. Misalignment of new business and retention prioritization.
- Insufficient differentiation and specialization in existing business roles
Many software organizations have a role titled Customer Success Manager or similar. What that means can often vary substantially but is always somewhere on the spectrum between being a User Success Manager (typically responsible for improving customer’s user experience and primarily measured on account retention, onboarding speed, increased usage metrics and improved satisfaction metrics) and being an Account Manager (typically responsible for the commercial relationship with the customer and primarily measured on net revenue retention, including upsell/cross-sell). This spectrum is the first common issue we found. Instead of having two roles (one focussed on user success, and one focussed on commercial success) many organizations had one role that was meant to do both.
The practical implication of this was that on the User Success Manager end of the spectrum they were asked to go for price increases that they were neither trained nor incentivized for. They were asked to have potentially difficult conversations that were more likely to negatively affect the metrics they were measured on (retention and usage). This has implications outside of just the recent price increases and suggests broader issues around organizations not adequately emphasizing and incentivizing upsell and cross-sell.
On the Account Manager end of the spectrum there were less price increase issues as they were typically both trained and incentivized to go after them. However, for these individuals it is typically harder to build a fully transparent and genuine relationship dedicated to improving the skills of the client, as the client is often hesitant to share their true thoughts on the product in the fear of losing any future negotiation leverage.
Now some organizations have different needs or requires change as the organization evolves. More transactional organizations with easy-to-understand services may not need someone devoted to user success. In the cases where it truly makes sense to have a single role responsible for both user success and account management there can still be prioritization and incentives issues. Organizations should ensure that activities are proportionally prioritized and incentivized according to the balance of organizational goals and the difficulty of performing those activities.
- Misalignment of new business and retention prioritization
When designing your sales organizational structure, there are several factors to consider when deciding whether to adopt a ‘hunter vs farmer’ approach or a ‘singular sales contact’ approach. These factors range from current market share, size of target client, complexity of product, specialist industry knowledge requirements, simplicity of price model and several additional factors. Furthermore, there is often a time component for when it makes sense to switch from one approach to the other. We will address these considerations in greater detail in a future blog, however in the context of this conversation we often see that software & data companies overwhelmingly prioritize new business in the early years.
The primary sales role in the early years are typically new business account executives. When these companies grow a book of business the account executives are then in some cases put in charge of recurring business. So, organizations have the same person responsible for new business, retention and upsell/cross-sell. It is difficult for organizations to then balance the degree to which they incentivize each activity to align them with the organization’s broader aims. In organizations where price increases were not sufficiently prioritized or weighted then it was only natural for sales people to be unmotivated to pursue them in favor of going after new business. This could be rectified in the short-run through a SPIF (special sales incentive sitting outside of their standard package), however in the long-run it’s important to carefully balance new business and retention prioritization on a consistent basis when you have the same role performing both functions.
The main takeaway from our research was to carefully align roles and their incentive metrics with the business objectives you want them to achieve. What they were originally hired to do, and what they are expected to do today are often very different. If you want someone to go have a difficult price increase conversation with their customers, they should believe it’s part of their job, they should feel equipped and confident, and most importantly they should be getting paid to do it.
This blog is part of the Simon-Kucher Sales Excellence for technology businesses series, where we review, discuss and share the latest insights about designing your sales organization for success. Through this series we will be covering a range of sales related topics such as sales strategy, organizational structure & processes, target & incentives, KPI’s, sales collateral and tools.