It takes different skills and a different focus.
From the Magazine (March–April 2021)
Spotlight Series / How Leaders Can Drive Sales
When Satya Nadella became CEO of Microsoft, in 2014, the company relied on a tried-and-true sales model that had helped make it one of the world’s most valuable companies. The amount of money Microsoft charged organizations for its products was based primarily on head count. Every computer-using employee needed a seat license, and Microsoft’s salespeople wrote up contracts (typically for three years) that multiplied the number of seats by the annual cost of the software. Once a deal was signed, the salesperson collected the commission and moved on to the next customer. Many B2B tech firms use a similar model, which some describe as “thank you and see you in three years,” since salespeople have little reason to call on a client again until the account is up for renewal.
As the new CEO, Nadella wanted to transform Microsoft’s core business and the way it priced and sold its wares. Instead of selling licenses and relying on Microsoft’s traditional “Windows first” strategy, he envisioned a “cloud first” model that would convert many of the company’s products into software as a service—known by the now-ubiquitous acronym SaaS. The SaaS model bases fees on consumption, similar to how utility companies charge households for water or electricity. The more the customer uses, the higher the bill. Nadella recognized that this transformation would require not just a change in strategy but an entirely new mindset about the sales function.
In my classes, I teach that most sales strategy and management decisions revolve around three issues: how to sell what to whom. The shift from selling products to selling services requires leaders to rethink not just the what (services instead of products) but also the who (the types of customers the sales force pursues) and the how (the way salespeople engage with customers before and after the sale, the new skills necessary for the job, and how they are trained and compensated). That’s a tall order, and many tech firms have seen waves of sales force reorgs and downsizings as they struggle to fill it.
Drawing on my research, on interactions with industry veterans who attend my executive education classes, and on an in-depth case study I did with Microsoft, I have identified the steps companies must take to successfully move to a consumption-based model. Although tech companies are the most prominent examples, the guidance applies to any organization making this leap. Daimler Trucks, for instance, is shifting from leasing vehicles to large companies, such as UPS, for set periods of time to charging them for miles driven. The prescriptions—which involve resegmenting the customer base, rethinking the sales organization’s structure, and changing the way salespeople interact with customers and targets on a day-to-day basis—enable companies to transform their sales forces to most effectively support the new strategy.
Step 1: Rethink Customer Segmentation
Among large B2B companies, the most common way to organize a sales force is by the size and potential of the customers. Enterprise accounts are typically the customers with the highest head count (and the largest number of seat licenses); as such, they are the highest priority and are handled by the best salespeople. Small and medium-sized enterprises (SMEs) are often seen as less-attractive targets and thus have fewer resources devoted to them. Sales organizations may spread a single salesperson across many SMEs, for example, or assign the accounts to inside salespeople (who work by phone and online instead of making in-person visits).
The shift to SaaS can upend that logic. Consider a simple example involving Netflix. The streaming video company has 8,600 employees—a fraction of the head count of truly large enterprises. In the old world of B2B selling, Netflix’s size might make it a less-attractive prospect. But imagine you’re selling cloud services, which are priced according to data usage. Storing thousands of movies and streaming them to millions of customers requires enormous data capability; during the first half of 2019, for example, Netflix accounted for 12.6% of all internet traffic. When it comes to consumption of cloud services, Netflix, despite its relatively modest head count, is a behemoth.
To effectively shift to selling a service, salespeople and their managers must rethink the metrics that identify a potential enterprise client. This is more difficult than it may seem. Judging how large a company is by traditional metrics is fairly easy; assessing how employees use (or might be persuaded to use) services such as cloud storage and software isn’t. But new metrics for software-as-a-service are emerging: Some companies, for example, look at the number of cloud engineers employed by a target client (which can be estimated using resources such as LinkedIn); others focus on the potential cloud usage of the target client’s end customers.
Step 2: Restructure the Sales Organization
Rethinking customer segmentation focuses on the question: Who are the company’s target customers? Once they are identified, the sales organization must focus on how to sell to them. The traditional sales process typically involves generating leads, qualifying prospects, demonstrating products, and closing sales. Many salespeople have spent decades learning and implementing that routine. A consumption-based model requires a different process. “Closing the deal” becomes an interim step because the contract will generate substantial revenue only if the client subsequently uses the service at high volume. The industry’s euphemistic term for this is “customer success,” and it has begun to dominate the way companies think about selling. As Microsoft’s chief financial officer, Amy Hood, puts it, “Ultimately, in a consumption-based business, customer success is all that matters, because it builds on itself over time.”
Although salespeople still must be skilled at building relationships, the new approach requires them to have far more technical expertise.
To drive that success (that is, to increase customer usage), salespeople must stay engaged after the contract is signed. They become quasi consultants to their clients, helping them grow adept at using (and finding new ways to use) the metered technology. Although salespeople still must be skilled at building relationships, the new approach requires them to have far more technical expertise. Many companies, including Microsoft, have supplemented their sales teams’ technical prowess by creating “customer success teams” and “technical sales teams” to drive consultative work after a customer signs a contract. Companies have always provided after-sales service as a cost of doing business; these new functions illustrate how this unglamorous task has become a vital part of generating revenue.
The benefits of having highly skilled cloud engineers as part of the sales organization go beyond increasing revenue, however. One result of the shift from selling products to selling services is that the relationship with customers becomes both closer and more continuous. That gives sales teams deeper, ongoing insights into customers’ pain points, product features that might add value, and new ways to use products. This is valuable feedback that companies can use to spark innovation—a source of information that was rarely tapped in the old “see you in three years” model.
Step 3: Use Sales Force Management Instruments to Drive the Right Behavior
Setting a strategy, segmenting the customer base, and creating the right organizational structure are big-picture requisites to a successful transformation of the sales function. To influence how salespeople interact with customers and targets on a day-to-day basis, sales managers must use the set of tools I call sales force management instruments: Hiring the right people, training and managing their performance effectively, and compensating them in a way that aligns their incentives with company strategy. Managers must also create a culture of performance and collaboration that reflects the change in strategy.
Hiring. Under the old models, engineering was an internal-facing role. As cloud engineers become an integral part of customer success and technical sales teams, hiring managers must identify applicants who have both technical skills and the emotional intelligence to succeed in a customer-facing role. Sometimes this requires dramatically revamping a company’s talent strategy. In its early days, Qualtrics, a Utah-based company that provides online survey tools, hired mainly young graduates from nearby Brigham Young University and put them through a sales-training program. As it shifted to a SaaS model and began selling more-sophisticated solutions to enterprise clients, it needed to recruit seasoned salespeople with the right blend of skills.
Companies typically worry about whether their technical employees are adaptable enough to make the shift to a customer-facing role. But the problem tends to lie more with salespeople, who often struggle to master their increasingly technical job requirements. “It is necessary and inevitable to terminate people who cannot or are unwilling to transition to the new sales model,” says one Microsoft executive. “It’s a leadership call.”
Compensation. Companies spend about $200 billion annually on sales compensation (approximately the same amount they spend on advertising) for a simple reason: A well-constructed comp plan significantly improves salespeople’s behavior. To make the most of those dollars in a services model, firms should peg quotas to the outcome of interest—for instance, cloud consumption. As sales roles become more differentiated, pay plans should too. For instance, at Microsoft, customer success and technical salespeople’s incentive pay are more closely linked to consumption, whereas traditional field salespeople still receive incentive pay for closing deals. Deciding how frequently to reset quotas and finding the right ratio of fixed to variable pay are also issues managers should consider. (For best practices on this subject, see my 2015 HBR article “How to Really Motivate Salespeople.”)
Most of us do not like change, and salespeople are no different. In the absence of a major upside, they prefer the status quo. A company should refine its compensation model to give salespeople the incentive to change their behavior so that it aligns with the firm’s new sales strategy. Companies that do not sufficiently rework their pay plans when they shift to selling services will see reduced motivation and effort from their sales teams.
Training and performance management. Research by Thomas Steenburgh and Michael Ahearne shows that most sales training focuses too much on product demos and not enough on consultation, problem-solving, and case studies of how other customers are successfully using a product. These aspects of training become even more vital in a consumption-based sales model, because the back end of the sales process (after closing) drives the lion’s share of revenue. Salespeople need to have the skills to identify cloud-usage potential and show customers how to add value by using the service. This type of training is more complex than coaching salespeople on how to counter objections or close.
In my experience advising sales organizations, the most common training problem I’ve witnessed is that managers, overburdened with administrative duties, don’t spend enough time with salespeople in the field observing their performance. Managers must realize that asking salespeople to be responsible for how a customer uses a product after a deal closes requires a radical shift in how they do their jobs. Amid this type of change, having a manager alongside to coach and offer feedback will increase the odds of success.
Culture. There’s a well-known saying “Culture eats strategy for breakfast.” Because people tend to be averse to change, leaders must remember that culture typically works against any shift in management strategy. This is certainly the case when companies move from selling products to selling services. It’s extremely difficult to change established norms of day-to-day behavior; in addition to using the levers of hiring, compensation, and training, managers must put in considerable effort to change employees’ fundamental mindset.
At Microsoft, Nadella emphasized a growth mindset, inspired by Carol Dweck’s book Mindset: The New Psychology of Success. The transformation focused on creating a dynamic learning environment—one in which the sales force shifted from a “know it all” to a “learn it all” culture with help from others. The corporate mission statement was also reimagined to reflect the new culture. For decades, Microsoft’s goal had been to place “a computer on every desk and in every home.” Under Nadella, the focus shifted from the product itself to helping people use it: “To empower every person and every organization on the planet to achieve more.”
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In developing a new offering, a company needs to first identify the potential customers’ pain point. Only then can it determine whether the customers’ pain is sufficient to make the company’s value proposition viable. These calculations are important, but they are not enough to create sustainable profit: The firm must also find the right sales strategy to effectively pair with the innovation to engage customers.
As more organizations shift their sales strategy toward consumption-based pricing and SaaS models, they must recognize the complexity of the transformation they are attempting. They are changing all the variables in the formula “how to sell what to whom.” To increase their odds of success, firms must be ready to rethink their sales management and strategy the same way they reengineer their products.