6 ms·

How to structure your sales compensation plan to deliberately undersell

69 points by djha-skin 4y ago

adamw2k 4y ago
Also known as sandbagging... Just a way to game the next round's valuation if you find strong demand.
pc86 4y ago
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?
- ColanR 4y ago
  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 4y ago
  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 4y ago
  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/ https://tomtunguz.com/deliberately-underselling/
- Rastonbury 4y ago
  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.
toss1 4y ago
>>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.
- carlineng 4y ago
  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.
- notahacker 4y ago
  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...)
Closi 4y ago
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 4y ago
  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.
  - Rastonbury 4y ago
    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
    - jjk166 4y ago
      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.
    - Closi 4y ago
upupandup 4y ago
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.
Enginerrrd 4y ago
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 4y ago
  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.
- deleted 4y ago
  [deleted]
ultrasaurus 4y ago
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 4y ago
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 4y ago
  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 4y ago
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?
iseletsk 4y ago
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.

69 points by djha-skin 4y ago

Also known as sandbagging... Just a way to game the next round's valuation if you find strong demand.

pc86 4y ago

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?

ColanR 4y ago
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 4y ago
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 4y ago
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/ https://tomtunguz.com/deliberately-underselling/
Rastonbury 4y ago
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.

toss1 4y ago

>>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.

carlineng 4y ago
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.
notahacker 4y ago
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...)

Closi 4y ago

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 4y ago
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.
- Rastonbury 4y ago
  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
  - jjk166 4y ago
    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.
  - Closi 4y ago

upupandup 4y ago

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.

Enginerrrd 4y ago

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 4y ago
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.
deleted 4y ago
[deleted]

ultrasaurus 4y ago

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 4y ago

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 4y ago
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 4y ago

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?

iseletsk 4y ago

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.