How to structure your sales compensation plan to deliberately undersell(tomtunguz.com)
tomtunguz.com
How to structure your sales compensation plan to deliberately undersell
https://tomtunguz.com/how-to-deliberately-undersell/
35 comments
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 $$ 6 months in, I literally couldn't do that if I wanted to.
If a vendor purposefully under-quoted / undersold me and then asked me to pay more $$ 6 months in, I literally couldn't do that if I wanted to.
Came here to say this. I'm sure there are situations where this strategy may work, but where I've worked (which is primarily outside of line of business operations) budgets can be inflexible in the short term and just as often trend downward as upward. And people move on. Just because you developed a business justification with my the person who owned a budget before me doesn't mean I'm going to identify that need as a business priority, particularly if my first interaction with understanding that piece of our operations is that it requires a ballooning cost allocation.
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
This isn't about selling customers what they need, then discovering new value through addon's though.
The article is quite clear that it is intentionally selling a customer less than what they need in order to get them to buy what they actually need later down the line, once they are already committed.
As a simple example, I could sell you a 3-year software license agreement with a 60 day estimated implementation program on a T&M basis. Then after you have signed the software agreement and are committed to licencing we go into blueprinting, I could suddenly say that it's actualy 120 days implementation now, and that will net the vendor an extra $90k revenue in Y1. Then after implementation you realise that you didn't buy the 'Bi-Connector' that was demo'd to you during the sales process because "oh that's actually another license" even though they clearly showed it as core functionality in their demo.
The article is quite clear that it is intentionally selling a customer less than what they need in order to get them to buy what they actually need later down the line, once they are already committed.
As a simple example, I could sell you a 3-year software license agreement with a 60 day estimated implementation program on a T&M basis. Then after you have signed the software agreement and are committed to licencing we go into blueprinting, I could suddenly say that it's actualy 120 days implementation now, and that will net the vendor an extra $90k revenue in Y1. Then after implementation you realise that you didn't buy the 'Bi-Connector' that was demo'd to you during the sales process because "oh that's actually another license" even though they clearly showed it as core functionality in their demo.
I am dealing with such in different clients, fuck them, fuck these people.
Even worse, you are taken hostage to their sales team,what can you do? Break the contract? Penalties when you barely have a working solution? Bring the legal team? Yeah sure, good luck to have anything completed.
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.
That’s why we usually tie you into a 2 year contract with review points for expansion and adjustments, with looots of discounts up front. By year 5 you’re paying sticker price and paying our consultants for integration and Enterprise feature configuration.
Do you have a discretionary budget?
Yes, but I wouldn't be allowed (or I would be questioned) why I wanted to use that budget on this addon/upcharge. We can always fight to get more $$ (there's always money in the banana stand!), but I do have to put myself on the line to do it, justify the need, etc. I would never do that for a vendor 6 months into a new relationship.
> In reality, 'land and expand' is almost universally hated by customers
Honest question but do you have any source for this or is it primarily your personal experience?
In my experience land and experience has been leveraged to help get a foot in the door sooner than later, it was never anything more than that. If we had the ability to walk into a shop and start with 100% of the clients environment we'd have done that but the problem was typically tied to the customer not being ready to rollout from 0-100 overnight. For us the best approach was to start small and work with the customer on gradually rolling out as they were comfortable.
Regarding your other point:
> 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.
I'm in complete agreement, this is the best case scenario and is certainly the best way to build long-term trust and relationships but universally it doesn't happen or when it does it's not transparent. The customer really has to push to make this happen only leading to anxiety, relationship damage, etc.
Honest question but do you have any source for this or is it primarily your personal experience?
In my experience land and experience has been leveraged to help get a foot in the door sooner than later, it was never anything more than that. If we had the ability to walk into a shop and start with 100% of the clients environment we'd have done that but the problem was typically tied to the customer not being ready to rollout from 0-100 overnight. For us the best approach was to start small and work with the customer on gradually rolling out as they were comfortable.
Regarding your other point:
> 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.
I'm in complete agreement, this is the best case scenario and is certainly the best way to build long-term trust and relationships but universally it doesn't happen or when it does it's not transparent. The customer really has to push to make this happen only leading to anxiety, relationship damage, etc.
I think you may be talking about two slightly different things.
Land and expand in the sense of "land a small, right-sized solution for one group within a large company, then leverage that successful deployment to expedite expansion to other groups, and maybe eventually convert to an enterprise agreement" is great, and often the only way to get in the door at a large org. From the org's perspective, being able to adopt an "existing" solution/provider is often much faster and can even skip some RFP processes. I don't think anyone is saying this is bad.
Land and expand can also mean "deliberately undersell/underbid on a large RFP, take an initial loss, then as soon as the customer's locked in slap them with large change orders and annual increases". I don't think I need to elaborate on why this is scummy.
The article isn't very clear about which scenario it's advocating. In the simple case of per-seat licensing, I've seen it both ways. From the customer's perspective: If we're looking to buy your product, and say hey, this has some long-term upside, we think it might be used by 500 people within two years, but our initial group is 20 - that's an undersell of sorts. Typically the concessions we would be asking there are less around unit license cost and more around waiving migration/setup charges or sometimes even negotiating a new license category/SKU. (Hey we use 50 seats right now, we'd like to buy 200 more but they're only going to use this one new side feature you implemented, let's find a discounted rate to only license that feature. It's an ethical undersell because it was done with the customer fully aware.)
But I've also seen some groups get stuck with the reverse. Sales promised them that oh yeah, this tier will work for you, and then hit them with massive usage-based overages. That's "land and expand" too, but it's scummy.
Land and expand in the sense of "land a small, right-sized solution for one group within a large company, then leverage that successful deployment to expedite expansion to other groups, and maybe eventually convert to an enterprise agreement" is great, and often the only way to get in the door at a large org. From the org's perspective, being able to adopt an "existing" solution/provider is often much faster and can even skip some RFP processes. I don't think anyone is saying this is bad.
Land and expand can also mean "deliberately undersell/underbid on a large RFP, take an initial loss, then as soon as the customer's locked in slap them with large change orders and annual increases". I don't think I need to elaborate on why this is scummy.
The article isn't very clear about which scenario it's advocating. In the simple case of per-seat licensing, I've seen it both ways. From the customer's perspective: If we're looking to buy your product, and say hey, this has some long-term upside, we think it might be used by 500 people within two years, but our initial group is 20 - that's an undersell of sorts. Typically the concessions we would be asking there are less around unit license cost and more around waiving migration/setup charges or sometimes even negotiating a new license category/SKU. (Hey we use 50 seats right now, we'd like to buy 200 more but they're only going to use this one new side feature you implemented, let's find a discounted rate to only license that feature. It's an ethical undersell because it was done with the customer fully aware.)
But I've also seen some groups get stuck with the reverse. Sales promised them that oh yeah, this tier will work for you, and then hit them with massive usage-based overages. That's "land and expand" too, but it's scummy.
> If we had the ability to walk into a shop and start with 100% of the clients environment we'd have done that but the problem was typically tied to the customer not being ready to rollout from 0-100 overnight.
On top of that, there's a handful of people, maybe less, who actually have the juice to be able to make this happen even if they wanted to in any given organization. You're likely not talking to them.
Teams who need to get shit done today and are ready to roll out are much quicker to transact and less of an organizational risk (time to value vs. contract amount)
On top of that, there's a handful of people, maybe less, who actually have the juice to be able to make this happen even if they wanted to in any given organization. You're likely not talking to them.
Teams who need to get shit done today and are ready to roll out are much quicker to transact and less of an organizational risk (time to value vs. contract amount)
"hated" doesn't matter unless customers actually change their behaviour. Companies will get screwed over on low cost RFPs again and again and again and do nothing about it but whine.
Customer satisfaction only has value if it drives additional sales, but plenty of orgs do not care.
Accenture and IBM have been doing this for decades. They do it because it works.
Customer satisfaction only has value if it drives additional sales, but plenty of orgs do not care.
Accenture and IBM have been doing this for decades. They do it because it works.
I have never seen anything remotely to your ideal.
Did you forget how competitive and cut throat the world is? You don't sell, you don't eat. Sales is a race to the bottom, a competitor will eat you alive by undercutting or over-promising just the right amount to win the deal.
Did you forget how competitive and cut throat the world is? You don't sell, you don't eat. Sales is a race to the bottom, a competitor will eat you alive by undercutting or over-promising just the right amount to win the deal.
It probably depends on both the market and the cultural landscape.
I'm in the UK, and USA providers are more 'cut-throat' than domestic UK providers in my personal experience when I have tendered enterprise software in the past, and the cultural differences have been massive.
Cut-throat is fine until you get a reputation for cost overruns, get to be known as untrustworthy, and eventually end up with a lack of customers willing to give you positive references. I certainly know which vendors in my industry are known for land & expand and scummy sales tactics (and when I personally see these tactics being deployed I will tell everyone else I know in the industry to avoid them like the plague).
I'm in the UK, and USA providers are more 'cut-throat' than domestic UK providers in my personal experience when I have tendered enterprise software in the past, and the cultural differences have been massive.
Cut-throat is fine until you get a reputation for cost overruns, get to be known as untrustworthy, and eventually end up with a lack of customers willing to give you positive references. I certainly know which vendors in my industry are known for land & expand and scummy sales tactics (and when I personally see these tactics being deployed I will tell everyone else I know in the industry to avoid them like the plague).
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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.
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.
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.
Problem customers just aren't worth it unless that is all you have.
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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.
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.
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?
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?
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.
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.
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.
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.
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.
If the customer is really going be happy with 30K worth eventually, get them there now instead of 18 months later.
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/
>>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.
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.
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.
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...)
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.
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.
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.
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.
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.
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...
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...
Also known as sandbagging... Just a way to game the next round's valuation if you find strong demand.
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?
Why is this stuff still so hard?
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.