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May 2022


Sacrificing Customers for Profitability

I spoke with a rapidly growing software company last week about their sales compensation practices. Like many software companies, they provide sales incentives on license revenue, but NOT on services revenue. In other words, they want their sales team to sell software, but NOT the services required to implement the software and deliver the ROI for the software. Their rationale is that licenses are 95% profit, whereas services may only be 25-30% profitable.

While I understand why the company might choose to focus on licenses, there is a practical problem with this model. One of two things happens when salespeople aren’t compensated on services:

  1. They don’t take the time to sell services
  2. They give away their time to sell services in hopes of future license revenue

The former scenario forces the customer to beg, implement the software themselves, or go elsewhere. If a company has a very strong & extraordinarily reliable partner community, this model makes perfect sense. But in the absence of such a community, this can be hugely damaging to the customer experience.

In the latter scenario, some of the better salespeople recognize that a good implementation drives further account penetration so they give away their time in selling services to make sure the product is properly implemented, customers are happy, and most importantly, can readily observe the ROI of the software implementation project.

Regardless, I’ve seen this model dramatically limit future license revenue. ROI isn’t achieved, limiting future expansion. As a partner comes in and steals away the relationship, the partner begins selling the licenses, limiting the license profitability. Or worse, given the poor relationship, a competitor finds a crack in the dike and opens it up wide.

Where is the middle ground? Is there room for compensating salespeople on services so customers aren’t sacrificed for profitability? I believe there is.

Partner communities can be certainly be incubated and certified. However, in the meantime, sales people should be compensated for services sales albeit at a lower rate to establish & maintain proper priority. A salesperson shouldn’t be able to make their quota via services alone.

There is no better team to deploy a company’s software than its own employees. Consequently, they should be billed at a significant premium over partners and resellers so that when customers absolutely, positively have to have it done right, they’ll pay handsomely for the peace of mind. Those who aren’t willing to pay the premium are welcome to either do it themselves or hire a partner–which doesn’t matter as much because the focus is still primarily on license revenue.

With this mindset, services profitability can be dramatically increased, good salespeople can be properly and fairly compensated for the work they do, and most importantly, customer relationships, loyalty, and trust can be dramatically enhanced because customers are able to more easily realize their desired ROI.

What do you think? Do you agree? Or not?