When differentiating between maintaining Gross Retention Revenue (GRR) and driving Expansion Annual Recurring Revenue (ARR), building incentives around it is tricky.
For firms navigating multi-year contracts with predefined services, this differentiation can significantly impact roles, incentives, and organizational focus. Read on to learn the complexities and valuable insights from industry leaders on how different SaaS companies approach this.
Expansion ARR vs Maintaining GRR
Consider a scenario: A company commits to 20 seats of CRM software for three years. The sales team has a natural turnover rate of 10% annually, backfilled to maintain 20 active users. The question arises: Should account managers (AMs) or customer success managers (CSMs) be rewarded for processing the activation of new credentials for replacements, ensuring 100% utilization?
Here are two takes on it:
Take 1:
Incentives are license-based and usage-agnostic. Teams are typically incentivized on the net licenses billed to the client, with possible kickers for multi-year deals or cross-sells.
This suggests that SaaS firms prioritize billing over utilization for incentive structures. However, nuances emerge when distinguishing roles.
Take 2:
You pay AMs for ACV growth on the account and allocate a portion of their Total Incentive (TI) to GRR. CSMs focus on adoption, filling provisioned seats, and being consultative partners.
Here, AMs drive expansion, while CSMs ensure retention. This role clarity is needed to be focused on specific role-based goals.
How Incentives Align With Organizational Focus
The percentage of TI linked to GRR depends on retention priorities and expectations from the role.
- >80% GRR: 20% of TI suffices.
- 70-80% GRR: 30-40% of TI may be needed.
- <70% GRR: Up to 50% of TI might be allocated, though this feels aggressive.
This way, you tailor incentives based on organizational retention performance and role specificity.
Compensate towards what’s most important for the organization. If retention is a focus, pay more on that with a spiff on total book expansion. Avoid incentives at the contract level as they may misalign with broader organizational goals.
Role Bifurcation and Change Management
As SaaS organizations scale, defining clear roles is important for operations to happen smoothly to attain the goals.
Historically, Account Managers (AMs) often juggled multiple responsibilities, from renewals to expansions making it challenging for them to be consistent. However, as businesses grow—especially beyond milestones like $500M or $2B in ARR—the need for dedicated roles, such as Customer Success Managers (CSMs), becomes evident.
The transition to role-specific accountability is more than just reassigning tasks to teams. You should align the entire organization, from product roadmaps to training programs to enable each function to perform its best and deliver maximum value .
For instance, AMs goals can be driving ACV growth and expansions, while for CSMs it can be on customer retention and adoption metrics. Such bifurcation enhances clarity and reduces overlap.
Leveraging Technology for Compensation and Role Optimization
Tools like commission automation software streamline calculations, ensuring that AMs and CSMs are accurately compensated based on their specific contributions to GRR and ARR.
Use advanced analytics platforms to identify opportunities for expansion or potential churn risks based on performance. For example, predictive analytics can flag underutilized licenses or highlight accounts with strong growth potential, enabling AMs and CSMs to act proactively.
CRM systems when integrated with incentive management software makes tracking of performance metrics easier for leadership to align compensation with their goals.
Practical Takeaways for SaaS Leaders
- Role clarity: Define responsibilities between AMs (expansion and ACV growth) and CSMs (adoption and retention).
- Tie incentives to strategic goals: Balance TI allocation based on retention priorities and account performance. Use spiffs to drive desired outcomes.
- Flexibility in incentives: Have different compensation structures for hunters (new business acquisition) vs. farmers (account growth and retention).
- Account-level metrics: Avoid incentivizing solely at the contract level; focus on account-level retention and expansion to align incentives with broader goals.
- Change management for scale: Transitioning roles and responsibilities at scale requires strong alignment across senior leadership and significant investment in training and enablement of employees.
