Sales tiers are the filthiest secret in the software industry.

In case you’re not familiar with how these tiers work, essentially a tier is a sales quota established by a software company. Pretty much all software companies have these. It’s the way they “incent” their channel partners (aka resellers) to sell more.

If a consulting firm sells $ x of software per measurement period – they earn a corresponding commission on each sale.

The more software a consulting firm sells per measurement period (typically a rolling quarterly computation) the higher the commission rate for subsequent periods.

The problem with a sales based tier structure? Resellers earn this reward whether the sale produces a happy customer or not. It becomes tempting to push deals that don’t fit just so that sales volume can increase to maintain a commission structure. Do you see why sales tiers potentially do nothing but hurt the customer, the vendor and ultimately the reseller?

In the struggle to make a certain dollar volume of sales during a measurement period, software resellers are pushed to take on deals that may not be good fits for customers. Sometimes these deals are sold without any services so that the customer flounders trying to install the software and either abandons the product or leaves to find a reseller better qualified to help.

The key problem is reward is linked to one action – selling – and NOT customer satisfaction

Tier is not linked to customer satisfaction. That’s why it’s an outdated tool in an era when everyone who needs accounting software has it.

Within the last six months I’ve noticed a disturbing trend of users who’ve “lost” their original reseller and are looking for someone else to assist with the installation of their software.

The story  is usually the same. Customer buys software at quarter end for a fantastic big bargain discount. Consultant eagerly bundles together not only  software but three or four add-ons  they claim will integrate perfectly and do exactly what customer wants.

Fast forward six months and I start receiving the emails (below is an actual email). While this particular user describes an experience with an add-on product – it’s typical of ones that I’ve received (several times per month). As you read – ask yourself why a consultant would sell a complex software program they could not install?:

Dear Wayne,

I have been a subscriber of yours for quite a while and have found your newsletters informative and entertaining.
We are a large service center that provides service to retail equipment for numerous different product lines. For example, we would service the paint equipment at your local Home Depot, Lowes or your local hardware store, or register belts at the nearby Wal-Mart. We are located in approximately xx states and are closing in on xx technicians to provide this service. As you can imagine, our volume of service calls is quite substantial. We have been a MAS90 user since approximately xxxx. We began with 3.71 and have just upgraded to 4.2 this past summer. In late xxxx, we added the xxxxx module from [removed] to the MAS90 to help in managing our service calls. Currently, we are at a crossroads with our customer needs. Many of our larger customers would like equipment repair reports and online status of their placed service calls. At the current time, we are beginning to build our customer’s equipment file under the [xxxx] module.
Our current reseller is not necessarily equipped to provide specialized help in obtaining what we need. We would like to find someone that knows Automated Service inside and out, and would also take the time to understand our needs to give us direction, input and guidance in obtaining it. Do you know of any consultants in our local area that would be able to help us?
I would appreciate any suggestions or help that you may be able to provide.

Thank you,

Here’s my proposed solution to the tier problem (which plagues all software companies)

Get rid of tier based on sales goals – and instead reward maintenance renewal rates  which are the true measure of satisfaction

You can take all the surveys in the world. Run infinite focus groups. Get bunches of your top resellers together to have fancy dinners and play golf serve on advisory boards.

There’s only one statistic that matters, is easily measured and all parties have an equal control over (software vendor, reseller and customer).

That statistic that matters is whether the end user customer renews their maintenance for another year.

Period. Done. Stop Reading. End of Story

Maintenance renewal is a vote of confidence. It’s the customer saying “I approve”, “I’m happy”, “The software met my needs”.

This is a win win for customers – because they’re using a solution that’s working efficiently and was sold to them by a reseller who made damn sure the solution would work – or they wouldn’t sell it. Under my proposed model a reseller wouldn’t sell a solution that was less than a great fit. Because if the customer were unhappy (didn’t renew maintenance) – the reseller’s commission structure would be significantly impacted.

Doesn’t that sound like a little saner way to do business?

Reward a sales channel for creating satisfied customers!

Wait – wouldn’t software companies lose out because of all the sales resellers wouldn’t make?

Not necessarily. As I stated earlier – the lions share of of a software company’s revenue is made these days from RECURRING SOFTWARE MAINTENANCE.

Therefore – this method of rewarding resellers for satisfied customers is a long term win win for software companies who see a much more predictable maintenance revenue stream.

What about resellers? This is a win win for VARS/Consultants/Resellers who no longer must push bad deals through hustle to meet some arbitrary tier goal by some arbitrary quarter.

The dirty secret of reselling that most people don’t talk about is how small the profit can be on an initial sale. Back out the now enormous overhead of prospecting, lead generation and proposals – and you’ve be surprised how little a reseller makes selling a new system. Many systems are actually loss leaders against future consulting work.

So where’s the profit for the reseller? In the recurring revenue. In the happy customer who renews maintenance and engages the reseller for projects and upgrades year after year after year…

Am I starting to at least make a little sense here?

By measuring the percentage of clients who renew  ongoing maintenance plans you  get a rough idea of customer satisfaction. Require VARS (aka consultants, business partners, resellers) to maintain a 90% renewal rate or drop their commission rate drastically.

This will have several side effects (all positive for the customer).

• Resellers will spend more time up front making sure that the software is the right solution for a customer.
• Bad resellers who have a steady stream of dissatisfied clients will be driven out of business.
• Resellers will no longer sell deals that don’t fit. They won’t want to have a customer come on board that ultimately leaves because that may negatively impact their future commission percent.
• Resellers will pay more attention to those add-on solutions they sell but “never get around to installing”. You’ll see less add-ons sold unless they’re truly needed and the reseller has experience enough with them to know they can be successfully implemented.

Sage takes the right first step and holds tier at current levels

Kudos to Sage who sent the following email to their partners announcing what I hope will be the start of a trend:

From: Sage Team
Date: Monday, Apr 6, 2009 12:39 pm
Subject: Good News! Product Tier Protection Announcement
To:

Sage North America

Good News! Product Tier Protection Announcement

Dear Valued Partner,
In recognition of the current market conditions, we have changed the April 1 tier measurement period, to be a “move up” only calculation for your product tier. This means that your product tier will not move down and can only move up. Partners who reach a higher product tier hurdle will enjoy the benefits of a higher product margin. This will protect your product tier until the next move up and move down measurement period that will take place on October 1. Note that this does not apply to maintenance and support margins.
We understand the current market conditions are making it more difficult to close new business. However, it is critical that we continue to focus on adding new customers to the family. New customer acquisition is key to the long term success for both our partners and for Sage. As a result, we are protecting your product margin as a way to thank you for your ongoing partnership and to encourage and reward you for focusing on closing new customer sales.
Please feel free to call on the Sage sales team who stand ready to assist you with any of your prospects.
Again, we appreciate your commitment and support. I look forward to seeing you at the Insights conference next month. If you haven’t done so already, please visit the Insights Web site to register and get the latest updates.
Best regards,
Jodi Uecker-Rust, President
Business Management Division
Sage

Sage’s move to hold tier steady is a move in the right direction. Hopefully by late 2009 or 2010 will see the elimination of sales based tiers from all accounting software companies and an adoption of a more customer focused measurement of renewal percentages.

Removing sales oriented goals forces everyone to focus not on moving a  box of software but on establishing long term relationships.

P.S.: Congrats to Jodi Uecker-Rust on dropping the “Interim” title and her promotion to President of Sage BMD!