Overcoming the Challenges of Long Selling Cycles

Overcoming the Challenges of Long Selling Cycles

Based on our clients’ experience, it’s clear that business-to-business selling organizations are increasingly experiencing long, drawn-out selling cycles. Of course, the desire to realize revenues from a sale can make all selling cycles seem excessively long, so we’ll start by clarifying what we mean by a long selling cycle.

For the purposes of our discussion, long selling cycles can be grouped into two main categories:

• A sales cycle in which more than a year passes between the initiation of the sales opportunity and the first realization of sales revenue
• A sales cycle in which more than two quarters pass between the commitment to buy and the realization of final throughput and revenue

These lengthy selling cycles are becoming increasingly common. One reason for this is that companies are developing a growing number of complex or integrated solutions, which leads to more work to make the sale from segmentation through to proposing and closing. Additionally, buyers expect sellers to possess an understanding of their business and value linked to their own revenue cycle because they’re looking for a trusted partner, particularly with sales involving the most critical parts of their business.

We are unlikely to return to shorter selling cycles anytime soon.  Sales leaders must reevaluate their incentive plans in order to better satisfy their salespeople. One of the basic tenets of sales compensation is that payouts should be granted as soon as possible following deal closure to keep results and rewards closely aligned. This breaks down in the face of how companies are buying today:

• Revenue or sales credited to a seller may occur anywhere from several quarters to several years after the sale, effectively resulting in an annuity-style payout for the seller.
• Revenue or volume from a sale is difficult to predict for usage models, SaaS, and other sales that require throughput.
• Strategic sales (a “big win” or new account) may not produce a significant payout for a long time.

While there is no one perfect solution to this challenge, our experience has found that there are some ways to address it. Which method is most applicable, however, depends upon the nature of the sale, the role of your seller, and the economics of the business. We distinguish between three types of sale: those that are part of a heavy pipeline, those involving engineered solutions, and third-party sales.

We term sales as pipeline heavy when they’re part of a robust sales pipeline in which any one sale has a long sales cycle, but the sheer number of opportunities in the pipeline means that a sale is concluding during any given period in time. Of course, there will be times when market conditions and other circumstances lead to fluctuations that can lead to lapses in financial performance when deals aren’t closing, and pipeline-heavy sales organizations can experience difficulties developing and ramping up new sellers.

Businesses that sell engineered solutions need to work through engineering processes to ensure that their product fits the customer requirements and specifications before they can realize income from a sale. Such solutions introduce several challenges, including the multiple functions that have to align to make the sale and fluctuations around the time of sale crediting.

While third-party sales are made through distributors or brokers, sellers often invest their time educating the potential end users. It can thus be difficult to clearly link seller efforts to actual sales for crediting purposes, and sales throughput’s dependency on many factors outside the seller’s control can also prove challenging.

So, how can companies improve their incentive systems to make long sales cycles more palatable to their salesforce? Some of the incentive methods companies are finding success with include:

• Activity-based incentives
• Credit upon booking
• Partial credit upon booking
• Payment as contract value is realized
• Long-term incentives
• Minimal pay at risk

Activity-based incentives work well when the pipeline steps are well defined and predictable, though they also require a disciplined approach to client and opportunity management. However, payments are not directly linked to the company’s fiscal cycle and this method requires ongoing research into the correlation between activities and revenue and margin, which can take several years to determine.

Those that credit a sale upon booking recognize sales at the moment of contracting and make the assumption that throughput will be consistent with predicted value. Doing so introduces risk should the contract not yield its predicted value, and may also increase cost with higher fluctuations.  It assumes that the seller plays a minimal role in managing the account beyond acquisition.

In an attempt to find the sweet spot between rewarding the contract win and linking it with fiscal results, some sales organizations extend partial credit upon booking with the intent of rewarding the seller for the overall contract success. It gives a “pop” upon signing the deal, but it can be difficult to achieve above-target payouts, and this practice may send a mixed message regarding priorities.

Payment as contract value is realized ensures that the sales crediting plan will be affordable since payments are linked to actual revenue received. However, this method distorts the pay-for-performance perception, as a salesperson’s earnings during a given performance period are impacted by other factors. On the company side, payment upon realization can essentially create an annuity that can distract the business from its immediate selling needs.  The assumption is that the seller has significant account management accountability as part of the job.

Long-term incentives reflect the lengthy business cycles companies are currently grappling with while building alignment between sellers and the company. Some shy away from their use because they can complicate incentives, in part because they don’t provide large payouts for above-target performance.  Often, the expectation of the seller is building the business with a few large accounts versus developing multiple opportunities per year.  This may also apply to sellers who are developing new technology or solutions.

Finally, the minimal pay at risk system increases base compensation to reflect the many non-selling activities that salespeople engage in due to long selling cycles. However, high performers typically don’t like this system because it doesn’t provide adequate upside for them, and it also doesn’t incentivize strong business development behaviors across the sales force.  If the seller acts more as a team lead in service to the client, or if there is not a defined selling process, this is the most cost-effective approach.

Companies typically combine two or more of these approaches based on their own unique needs and circumstances.

When addressing long selling cycles and sales incentives, it is important to take a few perspectives into account:

• The role of the seller and impact on the sale
• Consistency of the sales cycle and account management
• Availability of data and its ability to predict business performance

There is no one correct solution to the challenges posed by long sales cycles, but we have found that companies facing them often look outside of their sector to find other ways of compensating their salespeople since legacy models no longer work. They’re more willing to look at the sale from the needs of the customer and the impact of the sales role to determine things like incentive design and crediting rules. Doing so allows for a more innovative approach to address one of the most challenging current issues in sales compensation.

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