Managing a Sales Org: Revenue Composition | Summary and Q&A

Summary

In managing a sales organization, it is crucial to consider revenue composition, which refers to the different components that make up the total revenue over a period of time. Rather than paying salespeople on all revenue, it is important to normalize how they are compensated based on how revenue is generated and reported. This includes focusing on annual revenue, distinguishing between total contract value and annual contract value, and understanding different components such as new business, upgrade business, repeat business, and churn.

Questions & Answers

Q: What is revenue composition?

Revenue composition refers to the additive components that make up the total revenue generated over a specific period of time. It involves understanding the various metrics and factors that contribute to revenue, such as total contract value, annual contract value, and annual recurring revenue.

Q: Why is it important to manage revenue composition in a sales organization?

Managing revenue composition allows for effective compensation strategies for salespeople. It ensures that salespeople are paid based on the revenue they generate or contribute to, rather than being compensated for all revenue. This helps align their incentives with the company's goals and focuses their efforts on generating new business and upgrading existing customers.

Q: How can revenue be reported differently in SaaS businesses?

In SaaS businesses, different metrics such as total contract value, annual contract value, and annual recurring revenue may be used to report revenue. It is important to standardize and normalize how revenue is reported in order to have consistency and accuracy in compensation calculations.

Q: What are the components of annual recurring revenue (ARR)?

Annual recurring revenue (ARR) consists of new business, upgrade business, repeat business, and churn. New business refers to revenue generated from acquiring new customers, upgrade business refers to revenue generated from upselling or upgrading existing customers, repeat business is the revenue generated from customers who renew their contracts, and churn represents the loss of revenue due to customers not renewing their contracts.

Q: How should salespeople be compensated based on revenue composition?

Salespeople should primarily be compensated based on new business and upgrade business, as these are the drivers of growth in a company. These components represent the revenue generated from actively acquiring new customers and upselling existing customers. Repeat business can be handled by a service group that services this revenue at a relatively low cost, without the need for high commissions. Churn should be inspected to understand customer behavior and identify possible actions to increase repeat contracts.

Q: What would happen if salespeople were paid commissions on all revenue components?

Paying commissions on all revenue components, including repeat business and churn, would result in little benefit in terms of growth and productivity for the sales organization. It would lead to unnecessary commission payouts and neglect the importance of actively pursuing new business and upgrade opportunities.

Q: What is the significance of managing churn in revenue composition?

Churn, which represents the revenue lost when customers do not renew their contracts, is an important aspect to inspect and analyze. Understanding the reasons behind churn can help identify ways to improve customer retention and increase the likelihood of repeat contracts.

Q: How can revenue composition impact the growth of a company?

The growth of a company is heavily dependent on new business and upgrade business, which are the drivers of increasing annual recurring revenue (ARR). By focusing on these components and properly incentivizing salespeople to acquire new customers and upsell existing ones, a company can experience sustained growth over time. Neglecting these components or paying commissions on less impactful revenue components would hinder the company's growth potential.

Q: What role does service play in revenue composition?

Service plays a crucial role in revenue composition, specifically in handling repeat business. A service group can be responsible for servicing customers who renew their contracts. This can be done relatively inexpensively, allowing for efficient allocation of resources. Having a separate service group enables the sales force to focus on generating new business and upgrading existing customers.

Q: How should revenue composition be managed in a sales organization?

Revenue composition should be managed by focusing on paying commissions to salespeople based on new business and upgrade business, while having a separate service group handle repeat business. Churn should be closely inspected and analyzed to understand customer behavior and identify opportunities for increasing customer retention. This approach ensures that salespeople are motivated to actively pursue growth opportunities and generate revenue, while also maintaining customer satisfaction and minimizing costs for servicing repeat business.

Takeaways

Effectively managing revenue composition in a sales organization is crucial for aligning salespeople's incentives with company goals. By compensating salespeople based on new business and upgrade business, while having a separate service group handle repeat business, companies can drive growth and optimize resources. Inspecting churn helps identify opportunities for improving customer retention and increasing repeat contracts. Properly managing revenue composition is key to sustained growth and productivity in a sales organization.